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Saturday, August 3, 2013

Nobody Saw This Coming

"Consequence to cuts 'no one thought would happen'"

Tom Raum Best economic world history in 1000 words or less

Automatic spending cuts: Unwanted consequence of a trigger nobody liked or thought would pass
By Tom Raum, Associated Press | Associated Press – 5 hrs ago.. .

President Barack Obama gestures as he speaks to reporters in the White House briefing room in Washington, Friday, March 1, 2013, following a meeting …more 
WASHINGTON (AP) -- It's not the first time that government economic engineering has produced a time bomb with a short fuse. 

Back in 2011, few lawmakers, if any, thought deep and indiscriminate spending cuts, totaling about $85 billion and now starting to kick in, were a smart idea. 

The across-the-board cuts, set up as a last-resort trigger and based on a mechanism used in the 1980s, are a reality largely because President Barack Obama and House Speaker John Boehner, R-Ohio, failed to find a way to stop them. 

Republicans, influenced by tea party and other conservative factions, insisted on just spending cuts to narrow the deficit. Tax increases were out. 

Obama and the Democratic-run Senate didn't budge from a mix of cuts and increased tax revenues. 

"Arbitrary" and "stupid" Obama called the auto-pilot cuts, known as sequester. 

But history shows a long trail of unintended consequences from government actions — or inaction: 

—President Franklin D. Roosevelt, after a solid re-election victory in 1936, believed that the Great Depression was winding down. Unemployment was declining and economic activity was coming back. 

Roosevelt and Congress believed it was time to cut free-flowing government spending and raise taxes. The Federal Reserve tightened its financial reins. But the fragile economy couldn't withstand the blows. The Depression roared back, lasting until the 1940s when U.S. involvement in World War II finally revived the economy. 

—President Ronald Reagan's ambitious 1986 overhaul of the tax code simplified taxes and closed many loopholes, including repealing the popular tax deduction for credit-card interest. Then people started borrowing heavily against fast-rising equity in their homes; that interest still was deductible. 

But the practice eventually helped put millions of homeowners under water on their mortgages when the housing bubble burst, contributing to the 2007-2009 recession. 

—The Fed has kept short-term interest rates unusually low and printed money to keep downward pressure on longer-term rates, easing borrowing for businesses and individuals. 

Yet retirees and other savers are earning near-zero interest on bonds and savings accounts, and many investors are jumping into riskier transactions in search of higher returns.