Today we visit three important topics in the news. First, we’ll look at this morning’s first estimate of 3Q GDP which was disappointing. Second, I will briefly discuss the Fed’s latest decision yesterday to leave rates unchanged – no surprise there. Third, we will look at the new two-year budget deal agreed to by Republican leaders earlier this week, which is a disaster.
The Commerce Department reported this morning that 3Q GDP rose by only 1.5% (annual rate), down from 3.9% in the 2Q and slightly below the pre-report consensus of 1.7%. This was the “advance” estimate which will be revised two times in late November and late December.
In a surprise to almost no one, the Fed’s policy committee voted yesterday to leave the Fed Funds rate unchanged at 0.00%-0.25%. The vote was once again nine to one.
The Fed’s statement after the meeting said the economy is still expanding at a “moderate pace.” It also noted that household spending and business investment have been “increasing at solid rates in recent months.” The statement noted that the pace of job creation had slowed somewhat since the last meeting – a reference no doubt to the dreadful jobs reports for August and September.
The statement said the Committee would consider tightening policy at its next meeting on December 15-16, but without any commitment to raising the key rate this year. I continue to maintain that there will be no rate hike this year unless we get a slew of very upbeat economic reports between now and the December meeting.
Now on to our main theme today, the budget sell-out by the GOP on Monday night.
The recent budget negotiations occurred behind closed doors with President Obama and senior congressional leaders. Mr. Obama vowed that he would not sign another short-term
Continuing Resolution; rather, he demanded a new two-year budget with a big increase in the debt ceiling and new spending for both domestic and defense programs.
That meant violating the Budget Control Act of 2011, which included spending caps and “sequestration” that Republicans fought so hard for, and won, back then. But GOP leaders John Boehner and Mitch McConnell caved to Obama’s demands rather than block them and risk a government shutdown. I predicted exactly this in last week’s BLOG.
The new budget deal increases spending by another $50 billion for FY2016 and another $30 billion in FY2017 – split evenly between defense and non-defense programs.
Another unacceptable provision in this budget would raid the Social Security Trust Fund to extend the life of the Disability Insurance Trust Fund, which is set to run out of money next year. Republicans specifically denounced this gimmick in their own budget document this year, but obviously Boehner and McConnell decided otherwise.
Oh, and before I forget, a provision in the budget deal has us selling a significant amount of oil from the Strategic Petroleum Reserve starting in 2018 in order to raise more money for the politicians to spend. This is inexcusable in any event, but especially so if oil prices remain low.
There are numerous other provisions not to like in the new budget. Yet the worst thing (as noted above) is that it effectively ends sequestration, converting it from a real spending cap into a set of theoretical spending reductions at some undefined point in the future – which almost certainly means never. All that hard work back in 2011, out the window.
Sequestration is the reason why in recent years we’ve reduced federal spending substantially from about 25% of GDP to about 20%. It is the main reason that we have reduced the federal deficit in GDP terms. That is out the window as well.
John Boehner, with help from Mitch McConnell, negotiated away his greatest legacy: the Budget Control Act of 2011. Thankfully, Boehner is going away soon! He was never a true conservative. McConnell needs to share that taxi out of DC with him! We need a new Senate Majority Leader.
Finally, think of this new two-year budget deal as a ninth year of Obama’s presidency. The new president will have to live with Obama’s budget (with all the goodies in it) during the first year in office. Obama wins again.
I’ll leave you with a good article on the awful budget deal from Steven Moore, a Visiting Fellow at the Heritage Foundation and Fox news contributor, entitled:
America, This is the Worst Budget Deal Since the 1990’s Calamity
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