Economy Watch: Battle of the Budgets Begins

3 min read

The Obama administration released its version of the fiscal 2012 federal budget to compete with the House Republicans' version, but neither side is willing to make cuts to non-discretionary spending.

The Obama administration released its version of the fiscal 2012 federal budget on Monday to compete with the House Republicans’ version agreed upon (sort of) last week. The headline takeaway regarding the administration’s budget is that it will cut roughly $1.1 trillion from the deficit over the course of the next 10 years–a little less than the deficit is currently increasing in one year.

The cuts are to be from a combination of actual cuts from discretionary spending–mostly small items in federal terms, a few billion here, a few billion there–and increased taxes as the Bush-era tax cuts for the wealthy expire. Notably for some real estate firms and other investment entities, the budget proposes a $15 billion tax increase on carried interest, which is the income paid to investment managers.

Arguably the administration’s proposals for cuts are more nuanced than the meat-cleaver approach advocated with enthusiasm by some brand-new members of Congress, but both proposal packages are exercises in tinkering at the margins of the problem, since discretionary spending–the only kind of spending anyone wants to cut–is only about 16 percent of the federal budget. Neither the administration nor the eager novices in the House (nor the jaded pros in the House, either) has the political nerve ahead of the 2012 elections to propose cuts to any of the rest: Social Security, Medicare, Medicaid and the Department of Defense, except for those related to the winding down of operations in Iraq.

Homebuilders still glum

The U.S. economy might be improving, but not enough to persuade many buyers into the market for new homes. At least that seems to be the feeling among homebuilders, whose confidence in their market held unchanged at a crummy 16 for a third consecutive month in January, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) released on Monday.

Even if buyers were showing a glimmer of an interest in buying, raising the necessary funds to build new homes remains problematical. Builders continue to report hard times in obtaining production financing, and in maintaining performing lines of credit.

“The HMI and its subcomponent indexes are holding steady following a below-expectations finish in 2010,” notes NAHB Chief Economist David Crowe in a statement. “At this point, housing remains on the sidelines of a weak economic recovery as consumers and builders wait for clear and consistent indications that jobs and economic output are reviving.”

China no. 2 by one measure

Japan has been the “number 2 economy” in the world for about 40 years now, but on Monday the Japanese government acknowledged that the Chinese economy was actually larger than Japan’s in 2010, at least in terms of nominal gross domestic product measured in U.S. dollars. The Japanese estimated their own GDP at $5.474 trillion last year, as opposed to China’s GDP, which was $5.879 trillion.

Then again, China has about 1.3 billion people, compared with 127 million in Japan. Per capita GDP, and living standards besides, still greatly favor the Japanese.

Wall Street had a lackluster day on Monday, with the Dow Jones Industrial Average coming close to breaking even by losing only 5.07 points, or 0.04 percent. The S&P 500 gained 0.24 percent and the Nasdaq was up 0.28 percent.

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