The President's Rebuttal

"The GOP budget cut packet
Is so flawed that I've got to attack it;
The shortfall won't close
Unless we put those
Such as me in a higher tax bracket."

US President Barack Obama responded to the Republican deficit reduction proposal yesterday, declaring that he would "refuse to renew" an extension of the "Bush tax cuts" for the wealthiest Americans, including himself. The proposal put forward by House Budget Committee Chair Paul Ryan (R - Wis.) would privatize Medicare and make drastic cuts in many federal programs, and yet not result in a projected balanced budget until 2030. As the President and most non-partisan experts have pointed out, the federal budget cannot be balanced in a reasonable time frame - even with substantial cuts in programs - without reverting to the tax rates of Clinton years.

Rising Imports

Low prices on imports had checked
The inflation the Feds would project,
But metals and wages
May have a contagious-
ly Inflationary effect.

The US had long imported disinflation along with t-shirts, toys and tchochkes from China, but lately a combination of higher commodity prices, currency moves including a strengthening yuan, and wage pressures in China and elsewhere have boosted the prices of manufactured goods imported into the US.  According to the latest figures from the Labor Department, manufactured imported goods have gone from a source of disinflation to its opposite.

Hot Metal

With the copper price four-fold inflated,
Commodity analysts debated
Whether Chinese demand,
From the stockpile on hand,
Really could or just couldn't be sated.  

Copper prices, which have quadrupled after a two-year rally, are now drawing some skepticism.  Although Chinese industrial demand has driven the rally, recent signs indicate that a slight revaluation is in order. According to the Wall Street Journal, evidence has surfaced that up to a million tons of copper may be sitting in bonded warehouses around the country, implying a weaker consumption than was heretofore assumed. Copper bulls counter that these stockpiles could be consumed in less than one month; such is the voracious appetite of Chinese industry.

Beyond a Shutdown

Our partisan federal malaise
May collapse for a couple of days,
But weightier yet
Is our national debt -
How to shrink it, what's cut and who pays?  


As the clock wound down to a Friday midnight deadline before a US federal government shutdown, many were caught up in the short-term drama.  Congressional agreement was needed on a plan to keep the government operating for the rest of the year.   However, the long-term - and more important - question of arresting the growth of the federal debt remains wide open.  This will take a combination of spending cuts and tax increases that no major federal officer-holder has yet proposed. 

Corny, But True

The proportion the price of grain takes
Of the pay that a poor nation makes
Is more, as a rule,
For a serving of gruel
Than a similar serving of flakes.

Everyone's talking about the rising price of food, but only in poorer nations has it led to political upheaval. One reason is that, not only does food make up a greater percentage of the household expenses of lower-income nations, but by economizing with foods made from scratch they are more exposed to commodity price fluctuations. As Cornell University professor Per Pinstrup Andersen explains on the public radio Marketplace program: "[With Corn Flakes] you're paying a little for corn and the rest for the person who makes the cereal, packages the cereal, sells the cereal, and prints that fancy rooster on the box. That corn tortilla, well, that just requires corn."

So, while the flakes may be overpriced, the tortilla is more affected by overpriced corn.

GOP Deficit Reduction

House Budget Committee Chair Ryan
To balance the budget is tryin',
But without tax-rate hikes
He may cut as he likes
And fall short of the goal he's implyin'.  

The budget proposal unveiled by Rep. Paul Ryan (R., Wisconsin) serves up an unusual recipe of brutal realism and wishful thinking. On the one hand, Mr. Ryan correctly identifies healthcare spending as the element most in need of control, and makes potentially explosive changes and cutbacks to Medicare and Medicaid. On the other hand, by starting from the revenue base of the Bush tax cuts, he doesn't project a balanced budget until 2030. Even this achievement relies on such rosy assumptions as 4% unemployment and a reduction in federal spending from  24% to 14.75% of the US economy. A truly realistic plan to balance the budget will require more revenue as well as less spending.

Fed-Fueled Feeding Frenzy?

The Federal Reserve was attacked
By many who cited the fact
Of unrest overseas
Since they started to ease,
A tack which the right never backed.  

"Food inflation is quite a misstatement,"
Said the Fed, "Of what lowering the rate meant;
For oil and wheat
Beat a hasty retreat
On the days when we signaled abatement."  

The Federal Reserve's "QE2" program of stimulating the markets through purchases of Treasury bonds has coincided with price increases of 30-50% for metals, fuels and food since last August. Hawkish commentators such as Larry Kudlow and right-wing bloviators such as Rush Limbaugh have seized on this fact to claim that the Fed's easing caused commodity inflation. The argument is that it created excess capital flows that bid up the prices of assets around the world. The criticism took on apocalyptic overtones when food protests erupted in Arabic countries and led to political upheaval.

In response, two reasearchers from the San Francisco Fed have published a rather polite study, which concludes that they "cannot provide evidence" that QE2 caused food inflation. The reason is that, on the days when new asset purchases were announced, commodity markets tended to retreat; the market therefore thought of QE2 as bearish for commodities. Left unanswered, however, is the question of whether excess capital did in fact cause more buying of commodities and the overall bullish trend.

The San Francisco Fed's omission does of course leave the field wide open for blogging poets to address this crucial question, which we will bravely attempt.

That Empty Feeling

A fellow was fit to be tied:
"How the food makers subtly misguide!
While the price has held steady
Per box of spaghetti,
There's not as much noodle inside."  

This week, Limericks Économiques looks at food inflation.  You've probably noticed that those grocery items that have not gotten pricier have gotten smaller. This phenomenon was documented behind the paywall of the New York Times by Stephanie Clifford and Catherine Rampell. They quote one mother of nine who, only after the pasta dinner came up a bit short, noticed that the boxes that once contained 16 ounces now only held 13.25.  In this way,  food processors hope to mitigate the perception of the unavoidable passing of higher costs along to the consumer.

Fed Funds Folly

Said a wavering dove at the Fed:
"With no growth in employment ahead,
We're tempting the fates
By holding down rates,
So we'd best fight inflation instead."  

As reported by Kelly Evans in the Journal's Ahead of the Tape today, even some dovish governors of the Fed are worried that inflation may return ahead of job growth.  All signs point to a "no-hire, no-fire" job market, in which companies earn renewed profits from a skilled and less dispensable  work force, while many unskilled jobs have structurally disappeared and cannot be brought back by monetary stimulus. Meanwhile, both headline and core inflation figures show signs of picking up, leading erstwhile doves to make hawkish suggestions for gradual 1% hikes in the Fed funds rate.