November 25, 2020

Strong Chinese Manufacturing Data Point to Turnaround

HSBC’s manufacturing purchasing managers index — a survey that takes the temperature of China’s important factory sector — rose to 51.2 in September, from 50.1, topping analysts’ expectations. The index HSBC released on Monday was based on a preliminary assessment of survey responses. A final reading will be published on Sept. 30. A separate index compiled by the authorities in Beijing, more focused on larger, state-owned enterprises of the kind that benefit from state-led investment, will be released on Oct. 1.

Readings above 50 indicate expansion, so the September figure provided more evidence that the Chinese manufacturing sector was growing again after several months of contraction, while the economy as a whole had stopped decelerating.

The firmer reading “was supported by simultaneous improvements of external and domestic demand conditions,” Qu Hongbin, chief China economist at HSBC, said in a note accompanying the data release.

Faced with slowing growth, the authorities in Beijing have in recent months announced a series of measures aimed at increasing economic activity.

Although China has avoided a repeat of the sweeping, large-scale stimulus of late 2008 and 2009, the smaller-scale, more targeted support measures of the last year or so have helped to put a floor under the economy, analysts have said.

Measures announced this year have included tax cuts for small businesses and measures aimed at speeding up railroad construction in inland and poor areas. In a bid to raise the economy’s efficiency, the authorities have also issued instructions to more than 1,400 companies in 19 industries to cut excess production capacity this year.

“We expect a more sustained recovery as the further filtering-through of fine-tuning measures should lift domestic demand. This will create more favorable conditions to push forward reforms, which should in turn boost mid- and long-term growth outlooks,” Mr. Qu wrote.

Improving demand in the beleaguered United States and European economies also is helping activity in China. New orders for exports picked up speed in September, the HSBC poll showed, echoing a trend seen in trade data for August, released this month.

“Looking ahead, we expect the cyclical pickup to be consolidated in the coming quarters, benefiting from the strengthening global demand outlook, which supports growth directly via stronger exports and by improving sentiment and profitability in industry and thus the willingness to invest,” wrote Louis Kuijs, a China economist at RBS in Hong Kong.

The latest signs of China’s resilience on Monday helped push Chinese stocks higher; the Shanghai composite rose 1.33 percent.

Still, many analysts continued to caution that the upturn may not last into next year, given that the leadership in Beijing will have to step up its efforts to combat issues — like overcapacity in some major industries, often poor allocation of capital, and a buildup in debt over the last few years — that haunt China’s economy.

“The third plenary session of the Central Committee, which is to be held this November, will lay out the agenda of economic reform going ahead,” said Zhu Haibin, chief China economist at JPMorgan Chase. “Addressing these problems in the coming years implies that the economic recovery tends to be limited.”

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Boehner Invokes ‘Plan B’, Dismissing Obama’s Fiscal Offer

The move came less than 24 hours after President Obama offered a more comprehensive deal that would raise tax rates on income over $400,000, raise $1.2 trillion in new revenue and cut $930 billion in spending over 10 years. Mr. Boehner declared that unbalanced and insufficient.

“What we’ve offered meets the definition of a balanced approach, but the president is not there yet,” Mr. Boehner said Tuesday.

The speaker made it clear he would continue negotiating with the president, and some House Republicans emerged from a closed-door meeting with Mr. Boehner confident that a deal was now in reach.

“We’re getting there,” said Representative James B. Renacci, Republican of Ohio.

But to raise the pressure, House leaders will proceed with what they are calling “Plan B,” which could come to a vote as early as Thursday. Under that plan, the House would take up tax legislation and consider two amendments. The first would mirror a bill passed by the Senate that would extend expiring Bush-era tax cuts for income below $250,000. That would be expected to fail, showing the president that his initial offer could not pass. A second amendment would raise that threshold to income below $1 million. The House may also vote on some middle ground, like the president’s $400,000 threshold.

Mr. Boehner told his conference that he would also like the bill to include provisions preventing the existing alternative minimum tax from expanding more to affect the middle class and extending existing tax rates on inherited estates.

But he said the bill would not cancel across-the-board spending cuts, known as sequestration, that would total $110 billion in 2013 and more than $1 trillion over 10 years.

Republicans would then resume the fight over broad spending cuts — especially to entitlement programs like Medicare — in late January or February, when the government must raise its borrowing limit, which many Republicans believe will give them much more leverage than they have now.

Mr. Boehner told Republicans on Tuesday: “Taxes are going up on everyone on Jan. 1. They’re baked into current law. And we have to stop whatever tax rate increases we can. In the absence of an alternative, as of this morning, a ‘modified Plan B’ is the plan.”

Representative Kevin McCarthy of California, the Republican whip, said his operation would be checking whether the party had the votes to pass any tax legislation. If Democrats stay united against the $1 million threshold, it could fail because some Republicans are unlikely to ever vote for a tax increase. Representative Nancy Pelosi of California, the Democratic leader, met with House Democrats on Tuesday and urged unity against the speaker’s plan.

The White House came out strongly against the speaker’s move. The White House press secretary, Jay Carney, said “Plan B” could not pass the Senate and “therefore will not protect middle-class families” from large tax increases beginning Jan. 1.

“The president has put a balanced, reasonable proposal on the table that achieves significant deficit reduction and reflects real compromise by meeting the Republicans halfway on revenue and more than halfway on spending from where each side started,” he said. “That is the essence of compromise.”

It is not clear how much this alternative plan is real or a bargaining tactic to extract more concessions from Mr. Obama. Rob Nabors, the president’s chief liaison to Congress, met with House Democrats on Tuesday and said talks were moving forward. But privately, he expressed pessimism that Mr. Boehner could sign on to any deal, according to people familiar with those conversations.

In spite of statements to the contrary just a week ago, House Republicans on Tuesday seemed almost uniformly resigned to some sort of tax rate increases on the nation’s highest earners, though they remained committed to keeping that group as small as possible. “The principle of trying to limit the increases is a good one,” said Representative Jason Chaffetz of Utah. “But now we’ve got to see more spending cuts.”

Jennifer Steinhauer contributed reporting.

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President Delivers a New Offer on the Fiscal Crisis to Boehner

The offer is close to a plan proposed by the speaker on Friday, and both sides expressed confidence that they were closing in on a major deficit-reduction plan that could be passed well before January, when more than a half-trillion dollars in automatic tax increases and spending cuts would kick in.

Senior Republican aides said the speaker was to meet with House Republicans on Tuesday morning to discuss the state of negotiations. But they cautioned that obstacles remained.

“Any movement away from the unrealistic offers the president has made previously is a step in the right direction,” said Brendan Buck, a spokesman for Mr. Boehner. “We hope to continue discussions with the president so we can reach an agreement that is truly balanced and begins to solve our spending problem.”

The two sides are now dickering over price, not philosophical differences, and the numbers are very close.

Mr. Boehner had offered the president a deficit framework that would raise $1 trillion over 10 years, with the details to be settled next year by Congress’s tax-writing committees and the Obama administration. In response, Mr. Obama reduced his proposal to $1.2 trillion from $1.4 trillion on Monday at a 45-minute meeting with the speaker at the White House. That was down from $1.6 trillion initially.

The White House plan would permanently extend Bush-era tax cuts on household incomes below $400,000, meaning that only the top tax bracket, 35 percent, would increase to 39.6 percent. The current cutoff between the top rate and the next highest rate, 33 percent, is $388,350.

On spending, the two sides are also converging.

The White House says the president’s plan would cut spending by $1.22 trillion over 10 years, compared with $1.2 trillion in cuts from the Republicans’ initial offer. Of that, $800 billion is cuts to programs, and $122 billion comes from adopting a new measure of inflation that slows the growth of government benefits, especially Social Security. The White House is also counting on $290 billion in savings from lower interest costs on a reduced national debt.

Of the $800 billion in straight cuts, the president said half would come from federal health care programs; $200 billion from other so-called mandatory programs, like farm price supports, not subject to Congress’s annual spending bills; $100 billion from military spending; and $100 billion from domestic programs under Congress’s annual discretion.

To make all this happen, Mr. Obama proposed fast-track procedures to help Congressional tax writers overhaul the individual and corporate tax code and make changes to other programs.

Senior Republican aides made it clear that differences remain. For instance, they say the president is still pressing for $1.3 trillion in higher taxes because the change in the way inflation is calculated would not only slow the growth of spending but also raise more revenue by slowing the rate at which tax brackets rise each year with the cost of living. That would mean that incomes would probably grow faster than the rise in tax brackets, pushing people more quickly into higher tax rates.

They also disagree with the president over counting lower interest payments on the national debt as savings.

“A proposal that includes $1.3 trillion in revenue for only $930 billion in spending cuts cannot be considered balanced,” said another spokesman for Mr. Boehner, Michael Steel, using the Republicans’ calculation for the president’s offer.

The president is also insisting on some protections for what he has called the “most vulnerable populations,” which Republican aides said they had not been expecting. The new inflation calculations, for instance, would probably not affect wounded veterans and disabled people on Supplemental Security Income.

And Mr. Obama is sticking by his request for additional upfront spending on infrastructure and an extension of expiring unemployment benefits.

He would also secure some tax and policy changes long sought by both parties but unattainable in the context of smaller budget deals. His proposal would permanently extend popular business tax breaks like the credit for corporate research and development, permanently stop the expansion of the alternative minimum tax so it does not affect more of the middle class, and stop a long-planned and deep cut to Medicare health providers, which Congress has never had the stomach to allow to kick in.

To keep the country from returning to fiscal showdowns, Mr. Obama wants the government’s borrowing limit to rise high enough to take the issue off the table for two years, although he said that Congress could periodically weigh in and try to override a presidential lifting of the debt ceiling, should it want to.

Senior Republican aides made it clear on Monday night that the plan was not what the speaker had wanted. He had proposed higher income tax rates on income over $1 million. That revenue would be supplemented by reinstating a provision in the tax code — phased out by the Bush-era tax cuts — that automatically limits tax deductions and credits for the affluent. The speaker was also ready to accept a White House proposal from Mr. Obama’s first days in office that would limit tax deductions to 28 percent, trimming back deductions for charitable giving and other activities from the top rate paid by the giver, 35 percent currently.

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Obama Meets C.E.O.’s as Fiscal Reckoning Nears

If Congress and the president cannot reach a deal to reduce the deficit by January, more than $600 billion in tax increases and spending cuts will go into effect immediately — a prospect many chief executives and others warn could tip the economy back into recession.

Even so, Mr. Obama has some fence-mending to do before he can count on any serious backing from the business community.

“The president brought up that he hadn’t always had the best relationship with business, and he didn’t think he deserved that, but he understood that’s where things were and wanted it to be better,” said David M. Cote, chief executive of Honeywell. He was one of a dozen corporate leaders invited to meet Mr. Obama at the White House for 90 minutes Wednesday afternoon, after the president’s first news conference since the election.

While Mr. Obama did not present a detailed plan at Wednesday’s meeting or reveal what he would propose in terms of new corporate taxes, he strongly reiterated that he would not allow tax cuts for the middle class to expire. The president, according to attendees and aides, said he was committed to a balanced approach of reductions in entitlements and other government spending and increases in revenue.

With time running out, many people expect the president and Republican leaders in Congress to come up with a short-term compromise that prevents the full slate of tax increases and spending cuts from hitting in January. That would give both sides more time to come up with a far-reaching deal on entitlement spending, even as they work on a broad tax overhaul later next year.

One corporate official briefed on the meeting said that the chief executives came away with a sense that Mr. Obama was poised to present a more formal proposal in the next few days, but that he did not press them for support on particular policies. “It was more of a back and forth,” he said.

The chief executives from some of the country’s biggest and best-known companies, including Procter Gamble and I.B.M., were not unified on everything, according to one who was interviewed after the meeting.

Many of the executives who described the meeting would speak only on condition of anonymity.

The outreach to business comes as both the White House and corporate America maneuver ahead of the year-end deadline, as well as the beginning of Mr. Obama’s second term. Many executives were put off by what they saw as antibusiness rhetoric coming from the White House in his first term, and many also oppose tax increases on the rich that Mr. Obama favors but would hit them personally.

Both sides have plenty to gain from a better relationship. Business leaders want to buffer their image after the recession and the financial crisis, while Mr. Obama would gain valuable leverage if he could persuade even a few chief executives to come out in favor of higher taxes on people with incomes over $250,000.

Lloyd C. Blankfein, chief executive of Goldman Sachs, publicly endorsed higher tax rates in an opinion article published in The Wall Street Journal on Wednesday.

“I believe that tax increases, especially for the wealthiest, are appropriate, but only if they are joined by serious cuts in discretionary spending and entitlements,” he wrote.

While Mr. Blankfein and other Wall Street leaders have been speaking out about the dangers of the fiscal impasse, only one executive from the financial services industry, Kenneth I. Chenault of American Express, was at Wednesday’s meeting.

Afterward, the corporate leaders seemed pleased with the tone of the meeting but cautious about the prospect of finding common ground with the White House on the budget choices facing Congress and the president.

“I’d say everybody came away feeling pretty good about the whole discussion,” Mr. Cote said. “Now, all of us are C.E.O.’s, so we’ve learned not to confuse words with results. And that’s what we still need to see.”

Ursula M. Burns, chief executive of Xerox, who was also at the meeting, said afterward that it was clear that “we’re going to have to work through some sticking points.” But while “we didn’t get into too many specifics,” she said, it was also made clear that “we cannot go over the fiscal cliff.”

Ms. Burns’s comments about the potentially dire consequences of the fiscal impasse echoed those of other chief executives, including many in the Business Roundtable, which began an ad campaign Tuesday calling on lawmakers to resolve the issue quickly. The Campaign to Fix the Debt, a new group with a $40 million budget and the support of many Fortune 500 chiefs, began its own ad campaign on Monday.

Michael T. Duke, chief executive of Wal-Mart Stores, warned in a statement after the meeting that “before the end of the year, Washington needs to find an agreement to avoid the fiscal cliff.” He said Walmart customers “are working hard to adapt to the ‘new normal,’ but their confidence is still very fragile. They are shopping for Christmas now, and they don’t need uncertainty over a tax increase.”


Helene Cooper reported from Washington and Nelson D. Schwartz from New York. Jackie Calmes contributed reporting from Washington.

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Obama Says Vote Validates His Efforts on Taxes

In his first remarks from the White House since his re-election, Mr. Obama made it clear that he believed his victory had validated his relentless campaign call for wealthier Americans to pay more and that he expected Republicans to heed that message.

“I just want to point out this was a central question during the election,” he said in brief remarks in the East Room. “It was debated over and over again. And on Tuesday night, we found out that the majority of Americans agree with my approach.”

Mr. Obama said he had invited Congressional leaders to the White House next week to begin talks as they return for a lame-duck session of Congress. He said he was willing to make some concessions as long as the final fiscal bargain was properly balanced between new tax revenue and spending cuts.

“I’m not wedded to every detail of my plan,” Mr. Obama said. “I’m open to compromise.”

At the same time, he encouraged Congress to quickly pass an extension of the existing lower rates for those making under $250,000 even while the broader negotiations take place.

“While there may be disagreement in Congress over whether or not to raise taxes on folks making over $250,000 a year, nobody — not Republicans, not Democrats — want taxes to go up for folks making under $250,000 a year,” he said. “So let’s not wait.”

The president’s comments came shortly after Speaker John A. Boehner, who had been striking a conciliatory tone since Republican election losses in the Senate and the House, told reporters that Republicans had won a mandate of their own by retaining control of the House and that he supported continuing rates enacted in the Bush-era tax cuts for all income levels.

“Raising tax rates will slow down our ability to create the jobs that everyone says they want,” said Mr. Boehner, who said he favored generating any new federal revenue to offset the deficit by closing tax loopholes and limiting deductions.

“It’s clear that there are a lot of special interest loopholes in the tax code, both corporate and personal,” he said. “It’s also clear that there are all kinds of deductions, some of which make sense; others don’t. And by lowering rates and cleaning up the tax code, we know we’re going to get more economic growth.”

The president and Mr. Boehner were careful with their language and left room for compromise despite their fundamental differences about shifting more of the tax burden to high-income Americans. Mr. Boehner would not be very specific on what his goal might be for raising new federal tax dollars.

“I don’t want to box myself in,” he said. “I don’t want to box anybody else in. I think it’s important for us to come to an agreement with the president. But this is his opportunity to lead.”

The speaker, who has struggled with his more conservative rank and file in the past, said he was confident that he could pass a deal if one was reached with the White House. “When the president and I have been able to come to an agreement, there has been no problem getting it passed here in the House,” he said.

House Republican leadership aides found some positive signals in Mr. Obama’s combative tone. They noted that he never specified he wants tax rates to rise, only that he wants additional revenues generated by taxes on the rich. That would give both sides the latitude to devise a restructured tax code that eliminates or limits tax deductions and credits for the rich — or that follows Mitt Romney’s proposal to cap deductions at a set limit for rich households, though many analysts say that approach alone cannot raise the revenue Democrats want.

Any agreement to avert a fiscal crisis in January, when hundreds of billions of dollars in automatic tax increases and spending cuts kick in, now revolves around the definition of tax increases. Mr. Boehner is holding the line against any increase in tax rates, even for the richest Americans, who currently are in the 35 percent tax bracket. But he is leaving open the possibility of a tax overhaul that raises more revenue than the existing code.

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Economix Blog: Defining Middle Class



Dollars to doughnuts.

In a discussion on “Good Morning America” about his tax plan, Mitt Romney suggested the cutoff for middle income was for households earning “$200,000 to $250,000 and less.” President Obama has used a similar threshold in talking about extending tax cuts for the middle class.

To be clear, both politicians appear to be talking about the ceiling for the middle class, not its midpoint. It’s a pretty high ceiling, though; here’s a chart showing household income distributions for 2011, based on calculations from the Tax Policy Center:

Source: Tax Policy Center

As you can see in the chart, households earning $250,000 fall somewhere just above the 96th percentile. For context, the Tax Policy Center placed the median household at about $42,000 in cash income in 2011. (Using a slightly different metric, the Census Bureau reported on Wednesday that the median household income was about $50,000.)

As broad as these politicians’ definition might be for middle class, historically Americans of all income levels have predominantly self-identified with that category. In a survey conducted in July by Pew Research Center, about half of American adults surveyed said they were middle class, including almost half of those earning more than $100,000.

Those self-identifications are changing, though.

Pew also found that the share of people who self-identify as lower class or lower middle class has risen substantially, from 25 percent in 2008 to 32 percent in 2012. The greatest growth is among younger Americans.

Since people seem to define middle class by culture and values as much by income, it will be interesting to see if this growing self-identification with lower class sticks in the years ahead as this younger cohort ages, and if it does, what kind of pressure (if any) that might put on politicians to redefine their stated socioeconomic class categories. As I mentioned in an earlier post, even as the median American family has gotten poorer, Americans overall have lowered their expectations for what the rich should pay in taxes.

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Wealth Matters: Get a Grip on Taxes Before the Storm Hits

This year, tax advisers agree, was benign in terms of changes to the Internal Revenue Code. But that comes after two tumultuous years. In 2009, tax preparers waited nervously for action on the expiring estate tax that never came. Then, in late 2010 came a jumble of unexpected tax actions: from reinstating the estate tax for this year and next, with a higher exemption level than most tax advisers expected, to extending the Bush-era tax cuts for two more years.

So how to handle these last few weeks of the tax year? As is true every year, taxpayers should run a checklist for everything from selling securities that have lost money to taking advantage of annual gift allowances.

But even then, seemingly straightforward deductions are not always so. The $500 energy tax credit, for example, limits the amount you can deduct for new windows to 10 percent of the value up to $200. In other words, you had to spend $2,000 on windows to get the full window credit.

And charitable deductions can be more broadly defined to include costs incurred while volunteering, said Mark Steber, chief tax officer at Jackson Hewitt, a tax preparation company. “You can’t deduct the value of your time, but you can deduct your out-of-pocket expenses,” he said.

But beyond the usual recommendations, the tax advisers I spoke to stressed that you should use this year to get your affairs in order for what promises to be an uncertain two years of tax policy.

“For high-net-worth individuals, chances are the next year or so is going to be a challenging time,” said Chris Johnson, head of United States wealth advisory at Barclays Wealth. “There is going to be a lot of attention focused on ways to extract additional tax dollars.”

If Congress does not act to extend a series of smaller tax deductions, next year could be costly for middle-income taxpayers as well. Here are some of the more pressing issues to consider.

WHAT MAY EXPIRE AFTER 2011 Every year Congress passes a series of so-called patches, renewing some 70 tax breaks for another year or two. In the past, this has been a formality, much as raising the debt ceiling used to be. This year, it remains to be seen what Congress will do.

Mark Luscombe, principal federal tax analyst at CCH, a publisher of research and software for tax lawyers and accountants, noted that when these patches expired in 2009 and were re-enacted retroactively at the end of 2010, the delay wreaked havoc with tax planning.

The deductions vary. Teachers, for example, can deduct $250 toward classroom expenses.

Other patches affect broader swaths of the population. One allows residents to choose between deducting state income and sales tax against their federal tax. This is a favorite of people in states like Florida and Texas that have no state income tax.

In high-tax states, the big worry is what happens to the alternative minimum tax, a parallel system of taxation that cancels out many deductions. The A.M.T. was originally meant to keep wealthy people from paying too little in taxes. Because it was not indexed for inflation, however, Congress has had to approve periodic fixes to keep it from affecting many more people than intended.

Without a fix next year, Stephen A. Baxley, director of tax and financial planning at Bessemer Trust, said, the A.M.T. “will hit an additional 20 million people, and most of them are middle-income taxpayers.” It normally claims around four million taxpayers.

Two of the big triggers for the A.M.T. are high state taxes on property and income, which hits residents of New York, New Jersey, Connecticut and California disproportionately, said Alfred Peguero, partner in PricewaterhouseCoopers’s private company services practice.

For older people, there is again a chance that the provision allowing them to directly donate the required minimum withdrawal from their retirement account to charity may be delayed or not renewed. Currently, people over 70 1/2 can donate up to $100,000 to charity. If this patch were to disappear, the federal income tax on the withdrawal and the charitable deduction would cancel each other out. But some states do not allow charitable deductions above a certain income, or at all.

“Higher taxpayers have their itemized deductions reduced in New York,” Mr. Baxley said. “In Connecticut and New Jersey, you don’t get any benefit from itemized deductions.”

WHAT CHANGES IN 2012 There are several provisions that take effect or lapse regardless of Congressional action.

One set to start in 2012 is a requirement that brokers report the purchase price on mutual funds and exchange-traded funds to the Internal Revenue Service for capital gains purposes. (They began doing this for stocks this year.)

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Obama to Press Committee on Jobs

Much more than he has in past months, Mr. Obama has spent this week combining his pitch for deficit reduction with a renewed emphasis on the need for further temporary spending and tax cuts to encourage businesses to hire and consumers to spend, going beyond proposals like continued payroll-tax relief.

Until the economy showed fresh signs of weakening lately, Mr. Obama had all but shelved additional stimulus proposals, given Republicans’ opposition. But even before he has disclosed details of his proposals — including new tax incentives for hiring, public works measures and state aid for teachers — Mr. Obama has essentially dared Republicans to try to block them, suggesting the onus is on Republicans to prevent a recovery-threatening impasse.

“My basic argument to them is this: We should not have to choose between getting our fiscal house in order, and jobs and growth,” Mr. Obama told an audience Wednesday in Atkinson, Ill., on the final day of his three-day bus tour through Minnesota, Iowa and Illinois.

As for deficit reduction, Mr. Obama suggested that he would call in his speech for the bipartisan 12-member Congressional committee that was created by his debt-reduction deal with Republicans this month to be more ambitious about deficit-reduction than its formal charge requires — including tax increases on the wealthy, which Republicans oppose.

“I’m going to make a presentation that has more deficit reduction than the $1.5 trillion that they’ve been assigned,” he said.

He said the ultimate goal should be $4 trillion in savings over 10 years. Counting the $1 trillion in cuts already agreed to in the debt-limit deal, that would suggest that the committee — and Mr. Obama — would have find $3 trillion more. But he will not seek that much.

“We’ll have more spending cuts than we have revenue,” he said, after expressing concern that Speaker John A. Boehner of Ohio had named Republicans to the panel who oppose any tax increases. “But we’re going to have to take a balanced approach,” Mr. Obama said, without “drastic cuts” in Medicare and Medicaid — though he made clear that changes to those fast-growing programs must be on the table.

The president’s plans for a speech with a broad economic agenda comes after months in which Republicans have ridiculed him as not having a detailed debt-reduction plan, and many supporters have urged him to show more leadership — and more fight — in the battle over the size and role of government.

Yet Republican leaders served notice that they would oppose stimulus measures now or higher tax revenues later. That signals another contentious budget battle this fall, after the summer-long chain of events that ended with the relatively modest deficit-reduction deal, which cleared the way for a needed increase in the nation’s debt limit but also provoked Standard Poor’s to downgrade the United States credit rating and contributed to days of market turbulence.

In a memorandum to House Republicans on Wednesday, Representative Eric Cantor of Virginia, the majority leader, said their agenda must include “stopping the discussions of new stimulus spending with money that we simply do not have.” He accused the president of waging “class warfare” — Republican code for Mr. Obama’s proposed tax increases on high incomes.

Senator Mitch McConnell of Kentucky, the Republican minority leader, criticized “job-killing tax increases” and said, “Continuing the spending spree on failed stimulus programs won’t shrink the deficit.”

Many economists argue that while temporary spending and tax cuts add to deficits initially, such measures can increase tax collections, reduce costs for safety-net programs and ultimately keep deficits smaller than otherwise by spurring business activity and lowering unemployment. How economists would judge Mr. Obama’s proposals will depend on their details; contrary to Republicans’ claims, economists generally judged his 2009-10 stimulus program to have helped, but to have been insufficient to overcome the deep downturn.

While the details, date and venue of Mr. Obama’s speech remain to be finalized, the president throughout his bus tour hinted at his approach for simultaneously stimulating the economy while reducing projected deficits through spending cuts and revenue increases to take effect once the economy recovers.

In Minnesota on Monday, Mr. Obama said he would propose “a very specific plan to boost the economy, to create jobs, and to control our deficit.

“And my attitude is, get it done,” he contined. “And if they don’t get it done, then we’ll be running against a Congress that’s not doing anything for the American people, and the choice will be very stark and will be very clear.”

To sustain the wobbly recovery, Mr. Obama has called for extending for another year a cut in employees’ payroll tax and unemployment compensation for those out of work longer than six months. He has also proposed an infrastructure bank to leverage public and private money for roads, bridges, schools and other public projects, renewed tax write-offs for businesses’ capital investments, an overhaul of patent law to spur innovation and approval of trade pacts to promote jobs in export industries.

This week, Mr. Obama suggested he also would ask Congress to provide aid to financially struggling states and cities to keep teachers on the job — a move many Democrats and local officials have been pleading for.

“I personally believe that one of the most effective ways that we could help the economy is making sure that we’re not seeing more teacher layoffs,” he said, to applause.

Aides say Mr. Obama is also considering expanding payroll-tax relief to employers and a tax credit for new hires. Since an infrastructure bank would take time to start up, he also will propose other ways to encourage construction more quickly, an aide said.

“When interest rates are low, contractors are begging for work, construction workers are lining up to find jobs, let’s rebuild America,” he said this week.

Mark Landler contributed reporting from Atkinson, Ill.

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Economix: Behind the S.&P. Warning on the Deficit

Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Standard Poor’s announced on Monday that its credit rating for the United States was affirmed at AAA (the highest level possible) but that it was revising the outlook for this rating to “negative.”

In this context, that was a warning “that we could lower our long-term rating on the U.S. within two years” (see Page 5 of the report). This news temporarily roiled equity markets around the world, although the bond markets largely shrugged it off.

While S.P.’s statement generated considerable attention, the economics behind its thinking is highly questionable. Still, given the quirky nature of American politics, this intervention may or may not end up having a constructive impact on the thinking of both the right and the left.

It is commendable that S.P. now wants to talk about the United States fiscal deficit –- one wonders where it was, for example last year, during the debate about extending the Bush-era tax cuts.

In January, both S.P. and Moody’s Investors Service warned that the United States might tarnish its credit rating if its national debt kept growing. Though the latest S.P. report did not explicitly refer to the coming Congressional vote over raising the debt ceiling, it certainly added an element to the debate.

But S.P. did not lay out even the most basic numbers or point readers toward the nonpartisan and definitive Congressional Budget Office analysis of medium- and longer-term budget issues. This matters, because the C.B.O. numbers definitely do not show debt exploding upward immediately from today.

(Disclosure: I’m on the C.B.O.’s Panel of Economic Advisers, which meets twice a year, and I am paid for that role, though I did not take part in this analysis in any way.)

You can see the C.B.O. analysis clearly in Table 1.1 in its latest report, where the line “debt held by the public at the end of the year” (meaning private-sector holdings of federal government debt and excluding government agency holding of government debt) makes it clear: debt as a percentage of gross domestic product rises to 75.5 percent at the end of 2013 and then increases very little through 2019.

Two serious budget issues are made clear by the C.B.O. analysis. First, the big increase in debt in recent years has been primarily due to the financial crisis. To see this, compare the January 2011 C.B.O. forecast cited above with its view from January 2008 (see page XII, Summary Table 1), before the seriousness of the banking disaster — and the ensuing recession — became clear.

At that point, the C.B.O. expected federal government debt relative to gross domestic product to reach only 22.6 percent in 2018 (compared with the 75.3 percent for 2018 from the 2011 projections.)

In other words, the financial crisis will end up causing government debt to increase by more than 50 percentage points of G.D.P. over a decade. This is the major fiscal crisis of today and the likely one tomorrow. (I wrote more on this in a column this week for Bloomberg.)

S.P. does mention this issue, but somewhat elliptically, when it says, “The risks from the U.S. financial sector are higher than we considered them to be before 2008” (Page 4). And S.P. does put “the maximum aggregate financial sector asset impairment in a stress scenario at 34 percent of G.D.P., compared with our estimate of 26 percent in 2007” (Page 5).

But there is no indication of where these numbers come from –- and no sense that S.P. is focused on the likely medium-term fiscal cost of the financial crisis (as seen in the C.B.O. numbers): the loss of tax revenue from the economic slowdown, for example, or the costs of addressing cyclical problems, such as spending on unemployment.

Instead, S.P. talks about the upfront cost without explaining what it means. My educated guess is that this means such programs as the Troubled Asset Relief Program, or TARP — costs that could be recouped, at least in part, and thus would not constitute ultimate losses.

A future financial crisis, given the nature of our economy, could well cause a debt increase of more than 34 percent of G.D.P. — just look at what happened this time in the United States or the way in which Ireland was ruined by big banks and reaction by the politicians there. There is no way that the S.P.’s stress situation is sufficiently negative.

To be fair, the C.B.O. also does not present a realistic stress or alternative situation along these lines, because of a problem with its current methodology that needs to be addressed.

The International Monetary Fund is already pressing, for example in its latest Fiscal Monitor (see Appendix 3, particularly the web of risks shown on Page 84), for all countries to recognize more fully the probable future fiscal costs implied by contingent liabilities of all kinds arising from large and reckless financial sectors. (More disclosure: I was paid an honorarium to attend a Fiscal Forum at the I.M.F. last week at which these issues were discussed.)

There is, of course, a longer-run budget issue — beyond 2020 –- that is mostly about health care costs. S.P. follows the current consensus by flagging the Medicare component of this, and the C.B.O.’s projections on this front are undoubtedly scary (see this C.B.O. Web page or jump directly to the document and study the image on its front page).

But the real threat to the economy is health-care costs seen broadly, not just the Medicare component. For more on this, see the analysis by my co-author on the Baseline Scenario blog, James Kwak, writing about an important letter from Douglas W. Elmendorf (the head of the C.B.O.) to Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, on Mr. Ryan’s budget proposal.

In Mr. Kwak’s words, “The bottom line is that the Ryan Plan increases beneficiary costs more than it reduces government costs.”

The real danger to the United States economy –- and to its federal budget –- is that we will somehow derail growth, either by letting too-big-to-fail banks become irresponsible again or by allowing health-care costs to continue to rise on their current trajectory or in some other way.

It is disappointing to see S.P. miss the opportunity to clarify this issue. The company still seems hampered by some of the same weak analytics that contributed to its misreading of subprime mortgages and associated derivatives.

Will its broad-brush and somewhat indiscriminate warning push politicians to sensible debate and eventual action –- with regard to both the financial system dangers (the medium-term issue) or health care costs (the longer-term issue)?

Perhaps, but this sort of “warning” may also whip up debt hysteria of a kind that can quite easily lead to policies that quickly undermine growth.

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