Last August, the chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, shocked plenty of people when he declared that "the single biggest threat to national security is the debt." As zero hour approaches for the government to default on its debt, experts from both sides of the aisle are echoing Mullen's warning that fiscal matters pose a more immediate threat to national security than terrorism, rogue nations, or foreign wars.
By refusing to raise the debt ceiling, argues Bruce Bartlett, an economist who worked in George H.W. Bush's White House, conservative members of the House are undermining the country's ability to defend itself. In a post in a post titled "The Constitution and National Security Trump the Debt Limit," he writes, "Republicans are playing not just with fire, but the financial equivalent of nuclear weapons." That's not an idle metaphor. Politicians and economists can debate the effects a debt default would have on credit and stock markets, but there's little doubt that any default would make a mess of military operations. Something similar already happened in 1995, when the federal government shut down during Bill Clinton's budget battle with then-House Speaker Newt Gingrich.
In a recent survey by the Association of Financial Professionals, which represents treasury and finance executives, half of the 305 respondents said failure to reach an agreement by the Aug. 2 deadline would have a detrimental impact on their access to capital and short-term investment strategies.
Half of the respondents planned to take defensive actions, such as a freeze on hiring, reducing capital spending and drawing on credit lines to build cash, the AFP said....A quarter of the companies surveyed that hold U.S. Treasury securities said they would sell at least some of them if Congress and the White House failed to reach a deal.
....Corporations are worried about a default because the consequences for the financial system are unknown. Treasurys serve as the basis for companies' borrowing costs, are key holdings for banks and money-market funds and are used as collateral in short-term lending markets.
I'm still flummoxed about this. If we run out of money, the federal government will stop paying some of its bills. That's bad, and it will quite likely have a negative effect on the economy. Corporations are right to be apprehensive about this.
But that's all that will happen. Treasury bonds will continue to roll over and interest payments will continue to be made. That means there's no reason to sell Treasurys; no reason they can't continue to be used as collateral; no reason that access to capital should dry up; and no reason that companies will need more cash.1
At least, that's how it seems to me. What am I missing here? I feel like I must be an idiot or something. Is the answer something so obvious that no one ever mentions it, or something so arcane that it never gets explained in lay terms? Or is everyone else crazy? Or what?
1And, by the way, no tangible reason that ratings agencies should downgrade U.S. debt. We're going though a political dispute, not a crisis that impairs our ability to service our debt.
Dan Drezner says he's been "flummoxed" by the lack of market reaction to the stalemate over the debt ceiling. He suggests that it might be because U.S. bonds are mostly held by central banks and sovereign wealth funds who aren't likely to sell them in a panic regardless of what happens. So default isn't as big a deal as we think it is.
Maybe. But I think it's because we're throwing the word "default" around too casually. There are two ways people have been using the word lately:
That the United States will actually stop making interest payments on outstanding bonds. This would be a disaster, but it's also pretty much out of the question, since Treasury will prioritize coupon payments over everything else even if Congress stays stalemated for a while. So markets are quite rationally not very worried about this.
That the federal government will stop paying some bills on August 2nd. This is much more likely, but Wall Street has seen this movie before: it's roughly the same thing that happens whenever the government gets shut down because a budget hasn't been passed. It's a bit of a mess, but when checks stop going out and offices start getting closed, the political pressure to get things moving goes up exponentially and before long the stalemate ends one way or another. From the point of view of the bond market, it's nothing to get in a tizzy about.
Beyond this, there's the idea that bond markets should be troubled by our long-term financial problems. But they haven't been in the past, they aren't now,
and Standard & Poor's to the contrary, nothing happening now really suggests they should be much more troubled about it than they've ever been. Maybe someday they will be, but that day is a ways off.
In other words, maybe there's just not much reason for bond markets to be panicking yet. A downgrade by the ratings agencies would be a more serious thing, especially since it would have knock-on effects on state and local bonds, but I suspect investors are treating that as a completely separate issue. Not: are U.S. bonds in trouble? but: what are S&P's analysts going to do? And for the moment anyway, investors
think their downgrade talk is just bluster. Perhaps they know something we don't?
Stieg Larsson is the best-known novelist of the past decade, his Millennium Trilogy read by tens of millions of people worldwide. The Girl with the Dragon Tattoo and its two successors are beloved for their thrilling plots and compelling title character. But Larsson also embedded in his novels the abiding cause of his life: his crusade against the far-right movements that he saw as the scourge of Scandinavia and a threat to modern European society. Yet this part of his message never quite got through. Instead, the world stood in shock this weekend as Norway fell victim to precisely the kind of extremist violence Larsson had warned about.
The trilogy that has been met with such an enthusiastic but curiously apolitical response was written by a consummately political man: Raised by a grandfather who had been imprisoned during World War II for his anti-Nazi views, Larsson was in his youth a member of the Communist Workers Party and editor, for a time, of the Swedish Trotskyist journal Fjarde Internationalen. He later became the Scandinavian correspondent of Searchlight, the British anti-fascist and anti-racist magazine, and in 1995, amid an uptick in neo-Nazi violence in Sweden, he founded its Swedish equivalent, Expo—the model for the Millennium magazine featured in his trilogy. In the US, both Expo and Searchlight have maintained ties with another group that tracks the far right, the Institute for Research and Education on Human Rights. As an expert on the neo-Nazi movements, Larsson was once invited to lecture on the subject at Scotland Yard.
As Expo grew, the neo-Nazis in Sweden targeted it, threatening Larsson (who died in 2004) and his partner of 30 years, Eva Gabrielsson. According to Gabrielsson's book, "There Are Things I Want You to Know" About Stieg Larsson and Me, both of them were placed on hit lists and were in enough danger to barricade their apartment doors and arrange for special police protection. "Stieg would receive bullets in the mail, and once someone was waiting for him outside the entrance of the TT building [where he worked]. Warned in time, Stieg slipped out a back door," Gabrielsson writes.
"Our answering machine was set permanently on 'record' to keep evidence of the threats we received," she continues, "and they were always in the same vein: 'Piece of shit, you Jew-fucker…Traitor, we'll tear you apart…and we know where you live.'" At the sign of the slightest provocation on their apartment block, police cars would descend on the street. The danger was undeniably real: Two journalists who once worked for Expo and were later employed by Aftonbladet, one of Sweden's largest newspapers, wrote an expose of the neo-Nazi black-metal music operations. One of them was seriously injured when his car was bombed. A labor union leader who revealed neo-Nazi names was shot dead.
Furthermore to Kate Sheppard's excellent post last month... The National Climatic Data Center's (NCDC) latest Billion Dollar Disaster Report finds the US has racked up more mega-expensive natural disasters in 2011 than ever before. So far we've suffered more than five times the huge disasters typical at this time of year. Already d amage costs have reached nearly $32 billion . Compare that to the first half of the average year— prior to the onset of "big" hurricane season— between 1980 and 2010, where disaster costs typically run $6 billion.
Billion-dollar-plus natural disasters between 1980 and 2010, using a GNP inflation index.
All told the US has suffered 99 weather-related disasters over the past 31 years, where overall damages and economic costs reached or exceeded $1 billion. The normalized losses (that is, the numbers adjusted for the GNP inflation index) add up to more than $725 billion for those 99 disasters .
So far, nine natural disasters, each totaling more than a billion dollars in losses, have befallen the US this year. Here's the NCDC list:
Groundhog Day Blizzard Jan 29-Feb 3: Insured losses were greater than $1.1 billion. Total losses (insurance, state and local snow removal, business interruption) were greater than $3.9 billion. Thirty-six deaths. A picture of the EF3 tornado that struck Tushka, Oklahoma, 14 April 2011. Gabe Garfield and Marc Austin/NOAA
Midwest/Southeast Tornadoes April 4-5: An estimated 46 tornadoes caused more than $1.4 billion insured losses, total losses greater than $2 billion, 9 deaths.
Southeast/Midwest Tornadoes April 8-11: An estimated 59 tornadoes caused more than $1.5 billion insured losses, total losses greater than $2.2 billion, numerous injuries, no known deaths.
Midwest/Southeast Tornadoes April 14-16: An estimated 160 tornadoes caused more than $1.7 billion insured losses, total losses greater than $2 billion, 38 deaths .
Southeast/Ohio Valley/Midwest Tornadoes April 25-30: An estimated 305 tornadoes caused somewhere between $3.7 to $5.5 billion (the numbers are still being accounted), total losses approaching $10 billion, 320 deaths.
Midwest/Southeast Tornadoes May 22-27: An estimated 180 tornadoes caused between $4 and $7 billion insured losses (the numbers are still being accounted) , total losses may exceed $7.0 billion, 172 deaths— including the EF-5 tornado that struck Joplin, MO, killing 141, the deadliest single tornado in the US since record-keeping began.
Wildfires in Texas as of 30 April 2011. At this point more than two million acres/809,371 hectares had already burned. Jesse Allen/NASA Earth Observatory
Texas Drought and Wildfires, Spring-Summer 2011: drought and wildfires across Texas, New Mexico, and western Oklahoma racked up fighting/suppression costs of about $1 million a day. Total losses to agriculture and cattle were estimated between $1.5 and $3 billion, as of 16 June. Expenses are likely to rise as the drought continues.
This map depicts rainfall for the Midwest from April 19 to 25, when rainfall totals ranged from 150 millimeters/5.9 inches to greater than 525 millimeters/20.7 inches, prompting, major flooding. Jesse Allen/NASA Earth Observatory
Mississippi River flooding Spring-Summer 2011: Estimated economic loss ranges from $2 to 4 billion. Below are more detailed preliminary stats—the floods are still unfolding—as of 16 June :
$500 million loss to agriculture in Arkansas
$320 million in damage to Memphis, Tennessee
$800 million loss to agriculture in Mississippi
$317 million loss to agriculture and property in Missouri's Birds Point-New Madrid Spillway
$80 million loss for the first 30 days of flood-fighting efforts in Louisiana
The Missouri River floods have not made it onto this list, since their onset was near the end of the compilation period.
In twenty of the past twenty-four years, the U.S. has experienced at least one weather-related billion-dollar disaster.
The only years without at least one billion-dollar disaster were 1981, 1982, 1984 and 1987.
Since 1988, at least one disaster occurred each year, with only one such event in 1988 and 1990, and seven billion-dollar events in 1998. Two of the 1998 disasters were caused by hurricanes.
Overall, hurricanes and tropical storms account for 16 of the 58 events and 28% of the monetary losses (normalized to 2002).
The ten major droughts/heatwaves which have occurred since 1980 account for the largest percentage (42%) of weather-related monetary losses.
The technical report concludes:
Although some studies suggest that trends such as population increases, population shifts into higher risk areas, and increasing wealth have been the key factors in weather related disasters (as opposed to historical trends in the frequency or strength of such events), there is evidence that climate change may affect the frequency of certain extreme weather events. An increase in population and development in flood plains, along with an increase in heavy rain events in the U.S. during the past fifty years, have gradually increased the economic losses due to flooding. If the climate continues to warm, the increase in heavy rain events is likely to continue. While trends in extratropical cyclones are not clear, there are projections that the incidence of extreme droughts will increase if the climate warms throughout the 21st century.
If you're wondering what disasters might be delivered in the next quarter, check out the maps and the legend, above, for forecasts of temperature and precipitation anomalies through the end of October 2011. Hurricanes not included.
Domestic discretionary spending and miscellaneous mandatory spending ("Other") is on a steady downward slope.
Interest spending is on a downward slope.
Defense spending has gone up over the past decade due to the wars in Iraq and Afghanistan, but otherwise is on a steady downward slope.
Social Security is pretty flat.
Medicare spending is up.
I cut this chart off at 2008 so that the long-term trends are easier to see. There's been a spike in these numbers over the past three years because the recession has temporarily depressed GDP and temporarily increased spending — just as there were spikes during the recessions of 1979, 1989, and 2001 — but that spike will go away when the economy improves. There's no special reason that it should affect our view of our long-term finances.
So: should we be especially worried about discretionary spending, defense spending, or interest expenses? No. They haven't gone up over the past 30+ years and there's no special reason to think that trend will change. As always, we should pay attention to which programs we need and how to make them more efficient, but these parts of the budget just aren't long-term problems.
Should we be worried about Social Security? Not really. It will go up in the future thanks to the retirement of the baby boomers, but we know exactly how much it's going to increase: 1-2% of GDP through 2030 or so, and then it flattens out forever. That's going to require some combination of very small tax increases and very small benefit cuts over the next two decades, and that's it. No surprises.
This leaves Medicare. And that we should be worried about. It's gone steadily up over the past three decades and every forecast suggests it will keep going up indefinitely. Ditto for every other kind of healthcare spending, both federal and private.
Bottom line: our current deficit panic is mostly just manufactured hysteria. Our recent spike in spending is an artifact of the recession and will go away in the next few years. Generally speaking, defense, discretionary, and interest expenses aren't an issue and don't really need any special attention. Social Security is basically fine and needs only a few small tweaks. The only thing we should be seriously concerned about is healthcare spending. Period. That's the whole story. Anything else is just partisan showmanship.
This Saturday, teachers are rallying in Washington, DC. Save Our Schools is being organized by teachers and other public school supporters who view federal policies such as No Child Left Behind and Race To The Top as the wrong approach to educational reform, arguing that they rely too heavily on standardized test scores and punitive measures for schools that don't make the grade. Save our Schools' website calls for more equitable funding for schools, and more opportunities for classroom teachers and parents to influence decision-making, from developing lesson plans to shaping national policies.
Matt Damon, who recently narrated The American Teacher documentary, will be speaking. So will Jonathan Kozol, former teacher, civil rights activist, and author of Savage Inequalities and other influential books on economic and racial inequities in American schools. I haven't heard much from Kozol since he published The Shame of the Nation: The Restoration of Apartheid Schooling in Americain 2005. So it was interesting to see his thoughts on the state of public education in an interview with Anthony Cody, a former teacher and one of the rally's organizers, on the Education Week site.
Kozol thinks that No Child Left Behind is creating two classes of citizens: Those in low-income schools who are taught to "to spit up predigested answers," and those in affluent schools who are taught to ask insightful questions, demand things, and make decisions. Kozol believes that racial segregation in the nation's schools is worse than when he started advocating against it as an activist in 1968.
Here are a few highlights of his views on the state of education today and the latest efforts to reform it.
Remember when Tony Hayward said he wanted his life back, shortly after BP unleashed 4.9 million barrels of oil into the Gulf of Mexico? Well, first the wayward CEO was relocated to Siberia. But then he was released, with a severance package worth at least $1.56 million salary. Now he appears to be getting his life back up in the wilds of northern Minnesota.
As MinnPost's Don Shelby reports today, Hayward has been hired as the head of environment and safety at Glencore, the multinational mining and commodities trading company. Glencore, perhaps best known because it was founded by Marc Rich, the wealthy Democratic donor indicted for violating federal law in making oil deals with Iran, who was pardoned by Bill Clinton on his last day in office.
As Shelby notes, Glencore recently became the principal investor in a hard rock mining operation in Hoyt Lakes, Minn. This is probably bad news for the Land of 10,000 Lakes—just like his reign at BP was for the Gulf of Mexico. From the piece:
Iron mining and northern Minnesota have gone hand in glove for a century. But the proposed PolyMet mine in Hoyt Lakes is a different animal. It is called hardrock sulfide mining. It will be going after copper and nickel and precious metals. It promises jobs in a job-starved part of our state. But there are two things you should know about hardrock sulfide mining. The first thing is that the Environmental Protection Agency says hardrock mining generates more toxic waste than any other sector of the U.S. economy. The second thing you should know is that the history of this sort of mining shows that when the metals run out, the companies decamp. The real pollution starts after they leave with the winnings, go broke, or sell out.
I'm sure all those nice folks in Minnesota will be happy to help Hayward get his life back.
Last year, executives for Mylan, the Pittsburgh-based generic drug maker, took the company's two corporate jets on hundreds of flights to vacation hotspots such as Las Vegas, Miami, and the California wine country. The worst offender was CEO Bob Coury, who racked up $535,590 in personal jet flights on the company dime. Of course, Coury's air travel perk pales in comparison to his overall pay package of $23 million, which included a big raise pegged to a 15 percent bump in the company's share price. As long as Mylan rakes in profits, should shareholders care that its execs expense a few fun-filled weekend getaways?
The short answer is yes, according to a new report from GorvernanceMetrics International, a corporate oversight consultancy. Lavish spending on corporate jets rarely theatens to break a company on its own, but "if you're looking for a red flag to provoke a wider look at a company's governance and accounting practices, unusually high corporate jet perks is usually a pretty good one," the report says. Among the Fortune 500 companies that doled out CEO jet perks last year, the top 10 percent of spenders, or 18 companies, all ranked worse than average on one or more measures of shareholder risk or excessive corporate pay.
Mylan, which also makes the EpiPen cure for severe allergic reactions, earned a "very high concern" rating from the Corporate Library executive pay consultancy and an "agressive" rating from Audit Integrity, which flags risks such as SEC violations. Mylan spent six times more on personal flights for its CEO than did larger drugmakers such as Johnson & Johnson and Pfizer. Only two other companies, Abercrombie & Fitch and the Wynn Resorts, shelled out more than Mylan on corporate jets last year.
"If a board can't say "no" to a CEO's request that the company pay for his or her vacation, or taxes, or tax advice (to list just a few examples), that board may not be exercising very strong oversight of CEO performance," the report concludes. In other words, corporate directors who can't keep their execs out of the honey pot are liable to get stung. And in Mylan's case, an EpiPen probably won't save them.
Corporate compensation and shareholder risk ratings for the biggest spenders on corporate jet perks:
Every morning I take a couple of short breaks from the keyboard to do some stretching exercises that are designed to ease my neck and shoulder pain. I usually turn on the TV while I'm doing this, and that's pretty much my entire exposure to Fox News. So what were they going on about a few minutes ago while I stretched? The fact that people get really upset when they hear that 51 percent of Americans pay no taxes.
Well, I'd be upset too. Who the hell are these freeloaders? Answer: They don't exist, of course. From the Tax Foundation, an organization that even conservatives ought to be willing to credit, here's a report from a few years ago showing the total tax burden on various income groups in America:
Other estimates put the low-end tax burden higher and the high-end tax burden lower, but no matter. This tells the story. The blue bars don't cherry pick just the federal income tax to make a dumb partisan talking point; they show how much each group actually pays in total taxes. Bottom line: Poor people pay less in taxes than rich people, as they should, but it's very far from zero. The midpoint of that first quintile is about $11,000, and even a household earning that little pays about $1,400 in taxes. The household in the second quintile, earning a munificent $30,000 per year, pays $7,000 in taxes.
I know we live in a post-fact environment, but those are the facts. Pass 'em around. There are no freeloaders here.
UPDATE: Just to clear this up in case there's any misunderstanding, it's approximately true that 51 percent of Americans pay no federal income tax. However, conservatives routinely abbreviate this by claiming that 51 percent of Americans pay no taxes. This is the zombie lie. Conservatives get very upset when you call them on it, but that never makes them stop.
So where does the rest come from? Well, in addition to federal income taxes, Americans pay excise taxes, payroll taxes, property taxes, sales taxes, state income taxes, and various other taxes. That's where the blue bar in the chart comes from. In one form or another, even poor Americans pay a fair chunk of their income in taxes.
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