Economic Outlook: The new Greece

By ANTHONY HALL, United Press International   |   Feb. 15, 2011 at 10:13 AM
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Budget plans seldom have happy as a starting point. Spending proposed by the White House Monday is certainly no exception.

Facing a Republican majority House, the budget sets up a dancing-as-fast-as-we-can scenario, like a Mexican hat dance, in which someone throws the words "budget cuts" in the middle of the floor, then everyone dances around the issue. Meaningful cuts are unlikely, economist Peter Morici argues, because the largest expenses in the federal budget are sacred cows.

About 60 percent of the budget today and 68 percent within 10 years is targeted for Social Security, Medicaid and Medicare, Morici said. That's a large bulk of spending that requires a serious fix, as baby boomers flip from being revenue contributors to benefit receivers. "Without curbing spending in those areas, there is simply no way out of Washington's fiscal mess," Morici said.

Corporate America also took one look at the budget and phoned their favorite lobbyists.

Oil companies and banks complained about $200 billion more in taxes they would pay unless Republicans can come to their rescue.

The budget proposes to raise tax on corporations that do business overseas by $129 billion over the next decade, in part by shutting loopholes that allow the largest U.S. companies to pay an effective tax rate of 20 percent, a sizable deduction from the 35 percent tax rate that corporations are expected to pay, The Washington Post reported.

The budget also calls for banks to pay a $30 billion "financial crisis responsibility fee." That phrase, "there's an app for that," can be reworked a bit here. There's certainly a lobbyist for that.

In another pay-as-you-go scheme, the White House wants to raise the rate companies pay for the federal program that takes over pension funds that are no longer solvent.

Last year that agency, the Pension Benefit Guaranty Corp., paid $5.6 billion to 801,000 pensioners as 172 pension plans failed in 2010 adding 109,000 retirees to its client list.

The PBGC is also liable for pension plans for 700,000 more workers who have yet to retire, the Post said.

In the simplest terms, taxes are supposed to perform like a toll on a highway: If you use a service, you have to pay for it. Companies that agree to pay pension plans, then fail to keep the plans going benefit by recruiting staff with a competitive pension plan. But the PBGC now has a deficit of $23 billion.

Lobbyists will roll up their sleeves and see what they can do about that.

What are Democrats saying? Some, such as Secretary of State Hillary Clinton, are saying the cuts went too far, but she is referring to her own department -- and department heads are expected to defend their own turf.

Sen. Charles Schumer said he was "surprised (the cuts) went that quickly and that far."

But Europe is likely to disagree, while Asia is likely to stay quiet about the whole mess.

Countries in Asia have a solid bias, which is to view the United States as a cash cow, hoping U.S. consumers keep importing their cars, computers and cell phones. In Europe, where austerity budgets are the norm, a lot of people will be shaking their heads. With cuts that fell far short of recommendations by the White House's own fiscal commission, the United States, they will say, is the new Greece.

In international markets Tuesday, the Nikkei 225 index in Japan rose 0.2 percent, while the Shanghai composite index in China was flat, rising less than 0.01 percent. The Hang Seng index in Hong Kong fell 0.96 percent, while the Sensex in India rose 2.67 percent.

In Australia, the S&P/ASX 200 index fell 0.1 percent.

In midday trading in Europe, the FTSE 100 index in Britain lost 0.25 percent, while the DAX 30 in Germany fell 0.04 percent. The CAC 40 in France rose 0.2 percent, while the Stoxx Europe 600 fell 0.03 percent.

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