Is the U.S. Debt Really a Problem? (You will not find the answer below)

For those wondering where the U.S. public debt (as a percent of GDP, using IMF definitions) ranks with other high-debt countries.  Below is the list of the 20 countries with the largest public debt as a percent of GDP (according to the International Monetary Funds' 2010 estimates) :

	Japan			225.8%
	Saint Kitts and Nevis			196.3%
	Lebanon			138.9%
	Jamaica			135.7%
	Greece			130.2%
	Italy			118.4%
	Iceland			115.6%
	Belgium			100.2%
	Singapore			98.9%
	Ireland			93.6%
	United States			92.7%
	France			84.2%
	Portugal			83.1%
	Dominica			83.0%
	Seychelles			82.6%
	Canada			81.7%
	Hungary			78.4%
	Belize			78.1%
	United Kingdom			76.7%
	Israel			76.1%

Yes, the U.S. is in deep debt compared to other advanced industrial economies.  Is it a crisis?  It depends.  If the debt is largely a function of public investments in infrastructure, education, technology, and scientific research and development (see China today or the U.S. in 1946), you need not worry.  Future returns will more than handle your debt burden (on a personal level, its like a young doctor who has incurred significant student loan debt but has not yet realized what will be significant future monetary gains).  If, however, your debt is structural, such as interest payments on the debt and obligations to entitlement programs, then you might have a problem.  The U.S. would appear to be the latter.  But is it a crisis?  Increasingly voters think it is, but numerous economists argue that the real crisis in the U.S. is the lack of demand and now is NOT the time to cut government spending.  Is it possible both arguments are correct?

The Market Says U.S. Likely to Default

Traders on the Intrade futures exchange are increasingly pessimistic that the U.S. government will increase the debt ceiling by July 31st.  As of Sunday (7/24/2011), the Intrade market said there is a 33 percent chance that the U.S. Congress will pass a debt ceiling increase bill.  Furthermore, the trend has been negative on the probability of a debt ceiling increase by July 31st, dropping from a high of around 93 percent in mid-March.

Most polls indicate the U.S. public blames both President Obama and Congress for this mess - one tradeoff the House Republicans are actually willing to make.  Members of Congress know how to get re-elected when the voting public is angry at Congress.  Incumbents in the House of Representatives win, on average, about 90 percent of the time, despite the fact that the public's approval of Congress (as a whole) has rarely broken 50 percent since the mid-1990s.  Presidents, in contrast, have demonstrated no such ability.  It is hard for a president to get re-elected with approval ratings below 50 percent.

This presents a difficult dilemma for President Obama.  By holding firm on the notion that revenue increases (be it increased taxes on the wealthy and/or the elimination of tax loopholes) must be part of the debt ceiling agreement and thereby increasing the likelihood of a short-term U.S. treasury default, Obama faces the prospect of a increasingly weak U.S. economy heading into the 2012 election.

Translation:  Sending the U.S. into default does more damage to Obama's reelection chances than it does to those of the House Republicans.  Obama knows this and we therefore will see at least a short-term deal from Obama and Boehner by Wednesday.

Prediction Market: Obama Still Favorite to Win in 2012

Binyamin Appelbaum's recent warning in the New York Times that "No American president since FDR has won a second term in office when the unemployment rate on Election Day topped 7.2," has received significant attention across the media landscape.  While some academics and blogsphere writers have correctly noted that the statistical relationship is much more complex than Appelbaum's conclusion, it is still difficult to escape his implied assertion that, unless something dramatic happens in the U.S. employment picture, President Obama will lose in 2012.

Before the Democrats get too discouraged, I suggest they visit the website - Intrade.com - and check its prediction for the 2012 Presidential Election.  Intrade.com is a futures market that allows investors to make predictions on the outcome of real-world events.  The prices for the securities traded on Intrade.com represent the probability of something happening.  More importantly, prediction markets such as Intrade.com have proven to be very accurate in predicting real-world events, particularly elections.  So, Democrats, here is the good news.  As of today, July 7, 2011, the Intrade futures market is predicting that Obama has a 58.5% chance of re-election.  This is despite the gloomy economic news that continues to haunt the American economy.

The bad news for Democrats, however, is that there is a lot of time between now and the election for that prediction to change.  Moreover, there are signs since March 2011 of a small but steadily declining trend in President Obama chances for re-election.  Suffice it to say, macro-level changes in the U.S. economy between now and next July will probably go along way in determining the 2012 election outcome.

Another interesting finding from Intrade.com is that Mitt Romney continues to hold steady at about a 34 percent chance of being the Republican nominee, followed by Michele Bachmann (17.4%), Rich Perry (12.6%), Tim Pawlenty (9.0%), and Jon Huntsman (7.5%), with Sarah Palin behind at a distant 5.4 percent.  In fact, the trends as of today suggest the Republican nomination will be at least a two-faction race with Romney competing against either an ascendant Bachmann or Perry, and perhaps both.

Bachmann's Road to the Nomination

Washington, D.C. (July 3, 2011) - A month ago a senior operative at the Republican National Committee (RNC) suggested to me privately that the Michele Bachmann campaign is nothing more than a stalking horse campaign, a comely vessel through which to test some of the more polarizing rhetorical strategies being considered by Republican Party senior leaders for the general election.  At the very least, during this early juncture in the nomination process, Bachmann is an entertaining diversion for what will likely be a very contentious nomination fight and an equally competitive general election campaign.

The results of the June 27th Des Moines Register Iowa Poll, however, may be changing views both within and outside the Republican Party.  According to the Iowa Poll, Bachmann is in a virtual tie with national frontrunner Mitt Romney among likely Iowa caucus attendees (at 22 and 23 percent support, respectively).  More importantly, among likely Iowa caucus-goers, Bachmann has the highest favorability rating (65 percent) and one of the lowest unfavorability ratings (12 percent - Gov. Rick Perry has the lowest at 8 percent ).  Even among political analysts most dismissive of Bachmann's national viability, the growing consensus is that she has a real chance of winning Iowa.  A product of near-homestate-bias or not, such a victory by Bachmann could easily make her competitive in the contests immediately following Iowa (namely, New Hampshire, South Carolina and Nevada).  If she wins two of those three contests, Romney is done.  While the Romney campaign has sent signals that it does not consider victories in Iowa or South Carolina critical to their overall strategy, that strategy may not work if an electable anti-Romney candidate wins both Iowa and South Carolina.  For Romney to win the nomination, he will need to prove at some point that a Mormon from the liberal North can win in the conservative South.

The senior RNC operative mentioned above, for one, now sees Bachmann as the likely winner of the Iowa caucuses early next year (with or without Texas Governor Rick Perry or Sarah Palin entering the race).  "Among the declared and likely GOP candidates, nobody gets more airtime on Fox News than Michele Bachmann," the RNC operative noted.  "And its entirely framed in the most positive tones.  A campaign can't buy that kind of publicity."  Bachmann also seems to possess one of the qualities that made Ronald Reagan so annoying to the Democrats.  Negative coverage doesn't seem to diminish her standing among Independent voters -- at least not yet.  Which is in contrast to Sarah Palin, whose negative coverage seems to have a long half-life with voters, particularly with the Independent voters so critical to any credible national candidacy.  More importantly, all the trend lines are in Bachmann's favor and at the direct expense of Palin's numbers, making it appear that, as of July 3, 2011, Bachmann is what Palin wants to be - a serious presidential candidate.