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Morning Jay: There's a Bad Moon On the Rise

6:00 AM, May 27, 2011 • By JAY COST
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Looks like we're in for nasty weather.
One eye is taken for an eye...
There's a bad moon on the rise.

-Creedence Clearwater Revival

Have you noticed that the economy is slowing down once again? The data of late has been pretty unequivocal on that front. In the last few weeks, we've seen monthly reports from Fed regional banks that show local economic growth stalling. Industrial production for April was flat. The housing market is in a double dip, despite the fact that mortgage rates are at bargain basement levels. Weekly jobless claims have bounced back up. And while the top-line number of April's unemployment report showed somewhat good news, though it also revealed clear signs that wages are not keeping pace with inflation, which is bad news, considering how dependent the economy of today is on consumer spending. Looking ahead, the major firms are already starting to cut their growth forecasts for Q2. Japan's economy slowed more than expected last quarter, and the sovereign debt crisis of Europe is back with a vengeance. Belarus just devalued its currency, Greece remains in very real danger, and China's now thinking of bailing out Portugal.

The economy is relevant to the political discourse in so many ways, and I've reviewed its impact on this page regularly over the last few months. One element that I have touched on just briefly is the fact that slower growth could have significant, deleterious effects on the nation's budget deficit. Over the previous decade (2001-2010), economic growth averaged just 1.7 percent per year, yet the CBO projects an average growth rate over the next decade (2011-2020) of 2.9 percent. If we come in closer to the last decade rather than CBO's projections, federal revenue collections will inevitably be hampered, as the tax code is highly progressive and a lower rate of growth will keep people out of the higher income brackets. Meanwhile, federal spending would not fall at a corresponding rate, as appropriations are set by the political cycle and not the business cycle.

All told, weak growth -- the kind that we've been stuck with since 2001 -- could produce a 10-year budget deficit that is trillions more than what CBO currently projects as the baseline. And that baseline is already at about $7.5 trillion, plus it assumes away many important spending/revenue adjustments like the Medicare "doc fix," the unlikelihood of Democrats getting their tax hike (they call it, "repealing the Bush tax cuts," but there is no real difference from an economic standpoint), the extreme unlikelihood that Obamacare will reduce the deficit, and more.

In other words, when we take a sober, fair-minded look at what the baseline budget would be under realistic political and economic conditions, we are faced with a terrifying truth: the status quo in American fiscal policy is no longer sustainable.

The bulk of political commentators, and the political class in general, have yet to wrap their minds around this fact, although there are several notable exceptions to the general tendency. These farsighted few now see the bad moon rising over the nation's capitol, and they know it portends a dramatic, painful change in the way things work in D.C.

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