Illinois Government Consultants Incorporated

When it comes to the deficit, Ben S. Bernanke has a story, and he’s sticking to it.

Mr. Bernanke, the Federal Reserve chairman, warned on Wednesday that “the federal budget appears to be on an unsustainable path,” but also recognized that an “exceptional increase” in the deficit had been necessary to ease the pain of recession.

In nearly two hours of questioning by the House Budget Committee, however, Mr. Bernanke gave potential succor to members of both parties, while refusing to side with either of them.

To Republicans, he offered warnings about the fiscal perils of an aging population and the potential threat of soaring long-term interest rates. To Democrats, he made it clear that persistently high unemployment was a drag on growth and said that additional short-term stimulus spending might be needed.

All the while, Mr. Bernanke refused to endorse any particular spending cuts or tax increases, or even specify the balance between the two. And he was not subtle about his strategy.

“I’m trying to avoid taking sides on this because it’s really up to Congress to make those decisions,” he told Representative Michael K. Simpson, Republican of Idaho.

“But we need your expertise on it,” Mr. Simpson pressed.

“Well, no,” Mr. Bernanke replied. “Plenty of people have that kind of expertise, including the Congressional Budget Office and others.”

With inflation well below the Fed’s unofficial target of about 2 percent, attention has turned to the other side of the central bank’s mandate: maximizing employment. At the same time, the debt crisis roiling Europe has made deficit-cutting a potent topic.

Mr. Bernanke suggested that the United States had a while longer — but not much — before it would have to pull in the reins.

“This very moment is not the time to radically reduce our spending or raise our taxes, because the economy is still in a recovery mode and needs that support,” Mr. Bernanke told Representative Bob Etheridge, Democrat of North Carolina.

In the next breath, however, he added that continuing deficits risked a “potential loss of confidence in the markets.”

Representative Paul Ryan of Wisconsin, the top Republican on the committee, focused his opening statement on Europe. “What we are watching in real time is the rough justice of the marketplace and the severe economic turmoil that can be inflicted on profligate countries mired in debt,” he said.

But if Mr. Ryan had hoped for similarly dire pronouncements from Mr. Bernanke, he was disappointed.

“If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest,” Mr. Bernanke testified. “Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages, as well as lower prices for oil and some other globally traded commodities.”

Representative Jeb Hensarling, Republican of Texas, cited the research of the economist Carmen M. Reinhart, who has found that growth tends to stall in countries where the national debt reaches 90 percent of gross domestic product. The United States is at just about that threshold.

“I don’t think there’s anything magic about 90 percent,” Mr. Bernanke said, while noting that in the worst-case projections by the Congressional Budget Office, “debt and interest payments are going to get explosive in 10 or 15 years.”

When Representative Jim Jordan, Republican of Ohio, asked Mr. Bernanke to “talk to me about those tax increases that we know are going to happen,” Mr. Bernanke replied: “We have a recovery under way now. So in the very near term, increased taxes, cuts in spending, that are too large would be a negative, would be a drag on the recovery.”

But he reiterated that “I’m not going to try to adjudicate for Congress” between tax and spending measures.

Mr. Bernanke’s nimbleness in navigating deficit politics reflects his position as the most visible bridge between two administrations, having been appointed by President George W. Bush in 2006 and then reappointed by Mr. Obama to a second four-year term.

Mr. Bernanke has seemed more optimistic, or at least confident, since the crisis peaked in 2008. “As long as we have the confidence of the markets that we will be able to exit from this situation with a sustainable fiscal program, then I think we’ll be O.K.,” he told Mr. Simpson of Idaho.

How long that confidence will last, Mr. Bernanke did not say.

Only after several rounds of back-and-forth did he agree with Representative Chet Edwards, Democrat of Texas, that tax cuts do not entirely pay for themselves. And he danced around with Representative Gerald E. Connolly, a Virginia Democrat, on whether the Obama administration’s $787 billion stimulus package last year was “necessary.” Mr. Bernanke would only say it was “useful.”

“It must be nice to be an economist,” Mr. Connolly replied.
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Source: The New York Times

Historic levels of government debt in the developed world could throw the global financial system back into crisis and clear plans are needed to bring it under control, the International Monetary Fund said Tuesday.

In one of its first broad surveys since the recent recession gave way to renewed growth, the agency said that “sovereign risk” — the chance that sovereign nations have racked up so much debt they won’t be able to borrow enough money to pay their bills — is now perhaps the central threat to the global financial system.

Governments in the United States and across Europe have accumulated levels of debt not seen since World War II as the recession crimped tax receipts, spending rose on entitlement programs, and emergency measures were put in place to support the economy.

“The crisis has lead to a deteriorating trajectory for debt” among developed countries, which could cause higher interest rates and slower growth and weaken the broader financial system, the IMF said. Government debt could “take the credit crisis into a new phase, as nations begin to reach the limits of public sector support for the financial system and the real economy.”

The IMF’s latest Global Financial Stability Report was released Tuesday morning ahead of meetings this week between the fund and the finance ministers of the G-20 group of economically important countries.

The report said that in many ways the financial system had stabilized, and that some aspects of the recent crisis had proved less severe than initially thought. The agency’s estimate of how much banks will have to write off in bad loans, for example, was reduced by $500 billion, to $2.3 trillion.

But fund officials said government officials needed to act quickly on two fronts: agreeing on new regulations for banks and financial firms, particularly those so large and influential their failure could harm the broader economy, and deciding on the spending cuts, tax increases or other measures needed to curb deficits.

“The window of opportunity for real reform . . . is rapidly closing,” as improvements in the economy relieve the pressure for change, the IMF said.

The most acute government debt problems are currently in Greece, whose government is negotiating a rescue plan with the IMF and other European nations but has already had to cut social benefits and raise taxes.

“Greece is a wake-up call” for the rest of the developed world, IMF’s head of capital markets, Jose Viñals, said at a briefing about the report.
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Source: The Washington Post

The American economy appears to be in a cyclical recovery that is gaining strength. Firms have begun to hire and consumer spending seems to be accelerating.

That is what usually happens after particularly sharp recessions, so it is surprising that many commentators, whether economists or politicians, seem to doubt that such a thing could possibly be happening.

Usually you can depend on the White House to view the economy with the most rose-tinted glasses available. But it was not until last week, after a strong employment report, that President Obama started to sound a little optimistic.

“The tough measures that we took — measures that were necessary even though sometimes they were unpopular — have broken this slide and are helping us to climb out of this recession,” he said in a speech at a factory making battery components in North Carolina.

Note, however, that he seemed to believe the country remained in recession. It is virtually certain that is not accurate, as least as will be determined by the arbiters of recession at the National Bureau of Economic Research. “The recession is over,” one of those arbiters, Jeffrey Frankel of Harvard, wrote this week.

But the White House is unwilling to make that claim.

Why is good news being received with such doubt? Why is “new normal” the currently popular economic phrase, signifying that growth will be subpar for an extended period, and that the old normal is no longer something to be expected?

It is possible, of course, that I am wrong and the prevalent pessimism is correct. Many economic indicators, including Thursday’s retail sales report, are looking up, but that does not prove the recovery will be self-sustaining. There are issues relating to over-indebted consumers and local governments. The housing collapse will have an impact for some time.

But there are, I think, a number of reasons for the glum outlook that are unrelated to the actual economic data.

First, the last two recoveries, after the downturns of 1990-91 and 2001, were in fact very slow to pick up any momentum. It is easy to forget that those recessions were also remarkably shallow. If you are under 45, you probably don’t have much recollection of the last strong recovery, after the recession that ended in late 1982.

Add to that the fact that the vast majority of the seers did not see this recession coming. Remember Ben Bernanke assuring us the subprime problem was “contained”? In mid-2008, after the recession had been under way for six months, the Fed thought there would be no recession, and the most pessimistic member of its Open Market Committee thought the unemployment rate could climb to 6.1 percent by late 2009. It actually went over 10 percent.

In January of this year — after the recession had probably been over for at least a few months — the most optimistic member of the committee expected the unemployment rate to fall to 8.6 percent by late this year. The consensus was for a rate no lower than 9.5 percent.

Having been embarrassed by missing impending disaster, there is an understandable hesitation to appear foolishly optimistic again.

But even without that factor, it is normal for recessions to make people pessimistic. “Go back and read what people were saying in 1982 or 1975,” said Robert Barbera, the chief economist of ITG. “Nobody was saying, ‘Deep recession, big recovery.’ It is quite normal to expect an abnormally weak recovery. It is also normal for that expectation to be wrong.”

But if that is normal, one factor that brings optimism to some forecasts is absent this time. Both Republicans and Democrats have good reasons to be negative. Republicans are loath to give President Obama credit for anything, and no doubt grate when he points to his administration’s stimulus program as a cause of the good economic news, as he did in North Carolina.

Democrats would love to give the president credit. But much of the Democratic Party wants another stimulus bill to be passed, notwithstanding worries about budget deficits. Chances for that are not enhanced by the perception the economy is getting better.

The employment report for March, released a week ago, was a milestone that has been little noted. The household survey, from which the unemployment rate is calculated, showed a gain during the first quarter of this year of 1.1 million jobs, the best performance since the spring of 2005.

True, the more widely reported numbers from the survey of employers are not as good. But those numbers are subject to heavy revision as better data becomes available. At the turning points for employment after the last two downturns, those numbers turned out to be far better than was reported at the time.

Employment is a lagging indicator. Employers can be slow to cut back when business turns down, and slow to rehire when it picks up. It stands to reason that when employers cut back sharply — as happened in this cycle — they will have to rehire faster than if they had been slow to fire, as was true in the two previous downturns.

I looked back at the recoveries after seven recessions from 1950 through 1982 and found that, on average, such a strong three-month performance of the household survey, defined as a gain of at least 0.8 percent in the total number of existing jobs, came seven months after the recession had ended, with a range of two to 13 months.

If the 2007-9 recession ended in August, as the index of coincident indicators would seem to indicate, the lag this time will have been seven months.

The lag was 28 months after the 1990-91 recession ended, and an amazing 42 months after the 2001 downturn concluded. Those really did deserve the title of “jobless recovery.” But they were very different from what appears to be unfolding now.

The stock market’s recent performance may be sending a similar message. Prices have been rising, but there is not much volume. Why? A lot of money managers are fully invested, but many investors remain fearful and are not putting cash into mutual funds. To judge from anecdotal evidence, some of the buying now is short-covering by hedge funds that expected the economy to be much weaker than it is, and thought corporate earnings reports would devastate investors. Instead, they are hearing from companies that business is stronger than expected.

Some Americans are in deep trouble, to be sure, and the days of paying for second homes by refinancing the mortgage on the first will not return soon. But many Americans — both individuals and businesses — who cut back sharply when fear was at a peak a year ago are now finding that they overreacted. The businesses need to hire to meet demand, some of it coming from individuals who are less fearful now of losing their own jobs.

In 1982, Democrats scoffed at a surging stock market and thought a severe recession would last for a very long time. They were confident that the economy would doom Ronald Reagan’s re-election campaign in 1984. All they had to do was make clear they offered a stark alternative to the failing policies of the incumbent.

Change a few words (Reagan to Obama, Democrats to Republicans, 1984 to 2012) and you have an accurate description of the current political climate. Could the Republicans be as wrong now as the Democrats were then?
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Source: The New York Times

Salvador Lopez had no idea what he wanted to do when he left the Marines in 2005. A year of private college didn’t work out. Jobs led nowhere. Then he enrolled in community college.

Now he’s serving his second term as president of student government at Chicago’s Richard J. Daley College and working toward becoming an engineer. For him — and for many others, he said — community college provides the perfect environment.

But community colleges are grappling with an unprecedented dilemma brought on by the recession. Enrollment is up at the same time the state is facing a budget crisis that has led it to cut education funds and then fail to even hand over money the schools still have coming.

What’s more, property tax revenues that make up a huge chunk of many colleges’ budgets are shrinking.

The result: staff layoffs, fewer classes and more students squeezed into classrooms.

Lopez and his classmates fear community colleges won’t be able to keep serving students who want a low-cost education or need personal attention from teachers.

“Community colleges are important because there are a lot of people who need second chances, and sometimes they haven’t had their first one,” said Lopez, who hopes to transfer to the University of Illinois at Chicago to finish his education.

Double-digit enrollment gains:

With low tuition, child-care services and GED instruction, community colleges offer higher education to students who are often the hardest to reach, such as single parents and high school dropouts.

They also serve a diverse population. In fall 2008, 37 percent of the state’s community college students were black, American Indian, Asian or Hispanic, compared with 26 percent of Illinois public university students.

Illinois’ two-year colleges have seen average spring enrollment jump nearly 8 percent over last year, and enrollment was up 3 percent in 2009. Several campuses have seen double-digit gains, including Highland Community College in Freeport, where enrollment is up 21 percent this spring.

Lincoln Land Community College, based in Springfield, reported fall enrollment of more than 7,800 was up 17.9 percent and spring enrollment is up 17.4 percent to more than 8,500. The figures include the Springfield, Jacksonville, Beardstown, Litchfield, Hillsboro and Taylorville campuses.

Administrators say such a boom is hard to fund even in the best of circumstances, let alone when the state is $40 million behind in providing the money allocated to community colleges this fiscal year, with one more quarter to go.

Some schools rely on that money more than others.

On average, community colleges get about 21 percent of their funding from the state and federal governments, with the rest from tuition and local property taxes, said Ellen Andres, chief financial officer of the Illinois Community College Board. But some colleges depend far more on the state — in some cases getting more than half their money from Springfield.

Illinois appropriated $416 million for community colleges in the current budget. Despite enrollment gains, Gov. Pat Quinn has proposed $7 million less for next year.

“There’s just no new money to be had,” Andres said.

‘Can’t tax a tree’:

Schools’ funding formulas vary according to location — urban districts like Chicago rely more heavily on property taxes, while schools in rural areas depend more on state money because their districts contain fewer people and businesses.

“You can’t tax a tree,” said John Erwin, president of Illinois Central Community College in East Peoria.

The Illinois Eastern Community College district in southeastern Illinois gets 50 percent of its $32 million budget from the state, and when those payments are late, “it really causes me problems,” said CEO Terry Bruce.

“You have to spend the money and hope the state pays you later in a good fashion,” he said.

The state was $3.5 million behind in its payments to Illinois Eastern at last count. Bruce has had to trim nearly 10 percent from the school’s budget, lay off staff and administrators, freeze pay, and institute 10 furlough days, even with enrollment up about 4 percent over last year.

Administrators are scrambling to figure out how to make the most of their limited money, even trying to make it easier to dip into funds set aside for construction projects.

The Illinois Council of Community College Presidents has sent a letter to Comptroller Dan Hynes suggesting that schools relying on the state for 40 percent or more of their funding be paid first whenever money is released, Andres said.

While schools have tried to insulate students from budget woes, the cracks are starting to show with higher tuition, longer registration lines, crowded classes and staff reductions. Two popular administrators at Daley College were cut, Lopez said, and several teachers have been let go.

Tuition increases, coupled with cuts to support services such as counseling and tutoring, mean students end up paying more money for fewer resources, Andres said.

Sacrificing quality?

At John A. Logan College in southern Illinois, which is still owed more than $6 million from the state, journalism student Jake Cross said he’s worried about “the quality of education and classroom sizes just booming. The great thing about a community college is supposed to be small classes.”

The Illinois budget deficit is expected to top $13 billion in the upcoming fiscal year, easily the biggest gap in Illinois history.

Quinn wants an income tax increase that he says would allow the state to avoid education cuts, including the $7 million trim he proposed for community colleges.

“They’re the most nimble way of all of us keeping up with the global economy,” Quinn said recently. “I don’t think cutting back on community colleges is a good way to go at all.”

Students said they understand the need to make cuts and even to raise tuition, but they hope cuts don’t go too deep.

“I don’t want to sacrifice quality at a community college just so it can exist, which seems to be what’s happening,” Cross said.
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Source: The State Journal Register - The Oldest Newspaper in Illinois

The Federal Reserve left its benchmark interest rate near zero on Tuesday, affirming its view that job growth and other economic indicators remained weak as the United States slowly pulls itself out of recession.

The Federal Open Market Committee, the Fed’s chief policy setting arm, left the fed funds rate at zero to 0.25 percent, where it has been since December 2008. As it has said since March 2009, the committee repeated that the rate would probably remain “exceptionally low” for “an extended period.” Many economists have taken that language to mean that the Fed will not begin tightening monetary policy until the second half of this year at the soonest.

“Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit,” the committee said in a statement. “Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls.”

The committee’s vote was 9 to 1. Thomas M. Hoenig, the president of the Federal Reserve Bank of Kansas City, dissented, as he did in January, when the committee last voted. Mr. Hoenig “believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability,” the Fed said in a statement.

With interest rates unable to go any lower, the Fed has had to use other instruments of monetary policy to help stimulate economic growth. Chief among those tools has been the purchase of enormous sums of assets, which has had the effect of placing downward pressure on long-term interest rates.

On Tuesday, the Fed said it would complete its purchase of $1.25 trillion in mortgage-backed securities by March 31. While some economists fear that the termination of the program could lead to an increase in mortgage rates and hamper the recovery of the housing market, the gradual winding down has not yet had a major effect, which the Fed has seen as encouraging.

Less than a month ago, the Fed signaled its first steps to normalize lending by raising the interest rate it charges on short-term loans to banks to 0.75 percent from 0.50 percent. While the move had no direct connection to home mortgage, credit card or auto loan rates, it indicated to the markets, politicians and the public that the era of extraordinarily cheap money necessitated by the financial crisis was drawing gradually to a close.

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Source: The New York Times

WASHINGTON — At a time of deepening political disaffection and intensified distress about the economy, President Obama enjoys an edge over Republicans in the battle for public support, according to the latest New York Times/CBS News poll.

While the president is showing signs of vulnerability on his handling of the economy — a majority of respondents say he has yet to offer a clear plan for creating jobs — Americans blame former President George W. Bush, Wall Street and Congress much more than they do Mr. Obama for the nation’s economic problems and the budget deficit, the poll found.

They credit Mr. Obama more than Republicans with making an effort at bipartisanship, and they back the White House’s policies on a variety of disputed issues, including allowing gay men and lesbians to serve openly in the military and repealing the Bush tax cuts for the wealthy.

The poll suggests that both parties face a toxic environment as they prepare for the elections in November. Public disapproval of Congress is at a historic high, and huge numbers of Americans think Congress is beholden to special interests. Fewer than 1 in 10 Americans say members of Congress deserve re-election.

As the party in power, Democrats face a particular risk from any wave of voter discontent; unfavorable views of the Democratic Party are as high as they have been since the Republican takeover of Congress in 1994, though Republicans continue to register an even worse showing. The percentage of Americans who approve of Mr. Obama’s job performance, 46 percent, is as low as it has been since he took office.

Still, the poll suggests that Mr. Obama and his party have an opportunity to deflect the anger and anxiety if they can frame the election not as a referendum on the president and his party, but as a choice between them and a Republican approach that yielded results under Mr. Bush that much of the nation still blames for the country’s woes. That is what the White House has been trying to do since the beginning of the year.

For all the erosion in support for Mr. Obama, Americans say he better understands their needs and problems and has made more of an effort to be bipartisan than Congressional Republicans, the poll found.

“It feels like an attempt to sabotage the majority and to regain control of power rather than working on a compromise,” John Smith, a Republican from Greenville, S.C., said of his party after participating in the poll.

Americans say that Mr. Obama is far less likely to favor special interests over the American people than Congress. Mr. Obama and his party continue to have an edge over Republicans on which party would do better in dealing with health care and job creation. But Republicans have gained an edge on handling of the economy.

The public has lost much of its enthusiasm for a health care overhaul, and how Mr. Obama has managed it. He gets low marks for his handling of the deficit and the economy. And the fact that 56 percent of respondents think that Mr. Obama does not have a plan to create jobs is a distressing bit of news for a White House that in recent weeks had made an intensive effort to present Mr. Obama as concerned with the economy.

But the public backs other elements of Mr. Obama’s agenda. By a two-to-one ratio, Americans support an end to tax cuts for the wealthy, and Americans favor allowing gay men and lesbians to serve openly in the military.

The Tea Party movement, which has grown out of the strain of discontent, so far commands relatively little public support; 18 percent of respondents said they considered themselves supporters of the movement, while 55 percent said they had heard little or nothing about it.

The level of dissatisfaction with both political parties — and the fact that 56 percent of Americans in the poll want a smaller government — suggests that the Tea Party movement has an opportunity to draw more support. The poll found that 51 percent of Americans now view the Democratic Party unfavorably, nearly matching the highest in the history of the Times/CBS News poll. At the same time, 57 percent have an unfavorable view of the Republican Party.

The nationwide telephone poll of 1,084 adults was taken from Feb. 5 through 10 and has a margin of sampling error of plus or minus three percentage points for all adults.

The poll found substantial pessimism: 62 percent of respondents said the country was heading in the wrong direction. And 70 percent of those polled said they thought it was going to take two years or longer for the effects of the recession that technically ended last year to fade away.

Three-quarters of the public disapproves of Congress, matching the highest level measured by the New York Times/CBS News Poll since it began asking the question in 1977. Four out of five voters thought Congress was more interested in serving special interests than voters.

“I think Congress and the Senate need to be completely revamped,” said Michael Wish, 30, a Democrat from Medina, Ohio. He added, “The old way of doing things is no longer working.”

Americans appear hungry for an end to partisan infighting in Washington, so much so that half of respondents said the Senate should change the filibuster rules that Republicans have used to block Mr. Obama’s agenda. Almost 60 percent said both Mr. Obama and Congressional Republicans should compromise in the interest of consensus.

But Mr. Obama is seen as making more of an effort to do that: 62 percent said Mr. Obama was trying to work with Congressional Republicans, while the same percentage said that Republicans were not trying to work with Mr. Obama.

“Obama is certainly trying,” said Bonnie Ewasiuk, 60, of Woodbridge, Va. “I’m a Republican so I don’t like to go against the party, but Obama has reached out and had meetings and I don’t think the Republicans are going to be responsive. All you see from them is negativity.”

More than half of respondents said that Mr. Obama had not spent enough time trying to fix the economy, and nearly half said he had spent too much time trying to pass a health care bill.

He scored better on other measures, particularly in comparison with Republicans; 60 percent said the president understood their problems, compared with 42 percent who said the same thing about Congressional Democrats and 35 percent for Congressional Republicans.

Source: The New York Times

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