Tag: Debt Ceiling

Yes, the Debt Ceiling Matters

There is an effort on to pretend the debt ceiling is no big deal. We won’t default, they say, because Obama can simply re-direct spending to make sure our debts get paid. Why, hitting the debt ceiling could be a good thing, forcing the government to live within its means and balancing the budget in one fell stroke.

There are multiple problems with this line of thought, the primary one being that this would be an awfully big gamble. If the ceiling-deniers are wrong, the result will be economic chaos. A huge amount of the global economy rest on the idea that US debt is reliable. If that pillar is tumbled, it could be chaos. Sure, it might not be the disaster some fear. But do you really want to pull that trigger to see if the chamber is empty?

Second, it’s not clear that Obama has the Constitutional authority to balance the budget like this. Spending, as you know, originates in the House. And under laws passed by the House, most spending continues to go on even in the case of a shutdown. To prioritize debt, Obama would have to break the law and possibly violate the Constitution by essentially writing his own budget. Even if that passed Constitutional muster — do you want to give Barack Obama unfettered control of the national purse? It thought we didn’t like executive overreach.

Third, prioritizing our spending to allow for debt may not be logistically possible. Our government pays its bills — millions per day — through an automated system.

The Treasury Department maintains that it has no ability to pick and choose which bills to pay if it’s short of cash. According to the agency’s inspector general, its computer systems are designed to “make each payment in the order it comes due.” Full stop.

Under this view, if Congress fails to lift the debt ceiling, the U.S. government will only have money to cover about 65 percent of its bills. Some payments will simply fail to clear. Perhaps a payment to a defense contractor comes up short. Maybe a Social Security check bounces. Maybe an interest payment to bondholders fails.

For people who say our government is too big, the GOP seems to be kind of clueless about just how big it is and how much money flows into and out of its coffers. Two years ago, Obama noted that, with a debt ceiling breach, he couldn’t guarantee that Social Security checks would be paid. He was accused of trying to scare seniors, but what he said was correct: if any check comes in when the federal coffers are registering zero, it will not be paid. If anything, Plumer understates the problem. Both federal revenue and expenditures are highly variable depending on the time of year. Even if the budget were perfectly balanced over a fiscal year, we would run a debt in some months and a surplus in others. Under a no-more-debt scenario, this would make federal payments erratic at best.

The response to this has been to say, basically, the a default would be such a catastrophic thing that the Treasury would find a way to avoid it. I simply can not buy into that appeal to magic: problems have to be solved, not thrown out there in the hopes that a solution will magically present itself within the next week. This was the same thing they said about the sequester: it was such a bad way to cut spending that Congress would certainly find a better way to cut spending.

But aside from that, do you trust this Administration to not default in this situation? Right now, their healthcare exchanges are a debacle. And that’s with less than a million visitors a day and years to prepare. Do you really trust this Administration to carefully sort and prioritize the millions of bills our government pays every day and not fuck it up? On a week’s notice, you expect this? This isn’t a challenge on Survivor; this is our full faith and credit.

I recently had a debate about what Obama should do if we hit the debt ceiling. We came to the conclusion that he would be in a position where he would violate the Constitution either way: either by refusing to spend money Congress has authorized or by taking out debt Congress has not authorized (even with the shutdown, the government is obligated under law to continue a great deal of spending; Congress would have to pass a raft of laws to stop that spending). My opinion was, in that situation, that Obama should just issue debt. Congress’s spending authority is well-established Constitutional law. A President does not have the legal authority to refuse to spend money they have authorized or to make statutory alterations to programs. Congress’s authority to limit the debt, however, has never been challenged in the courts and some legal scholars believe the debt ceiling violates the 14th Amendment (although there is a lot of disagreement on this.

If your choice is between two Constitutional crises — and no doubt the Republicans starting impeachment proceedings either way — should you take the one with less fiscal uncertainty and more legal uncertainty?

The Debt Ceiling … Again

I think I’ve made my contempt for Obamacare pretty clear. I’ve pointed out its deep flaws, its underestimated expenses, its dubious Constitutionality. In my more cynical moments, I wonder if its flaws aren’t the point: to make the system so much worse that people will demand socialized medicine. We’re already seeing employers shed insurance and rates go up. It’s been hitting me personally as my employer has had to raise insurance rates because of increasing costs.

But you know what? As much as I hate Obamacare, it’s not worth crashing the debt ceiling over.

As you know, we reached out statutory debt limit a few months ago. The Treasury Department has been using various means to avoid exceeding it, but those means will run out within a month. And a significant fraction of the Republican caucus is already contemplating a debt ceiling crash, refusing to raise the debt ceiling unless Obamacare is repealed or defunded.

Let’s take those demands on their own terms. Repeal is not going to happen with a Democratic Senate and White House (and might not happen even if they were in GOP hands). Defunding it sounds good, but as Tom Coburn has reminded us (PDF), this will not actually stop the law from being implemented. The statutory parts will be in place. All that will be denied are funding for insurance exchanges and subsidies. Let me clarify that: people and employers will still be forced to buy insurance, but the mechanisms designed to ease the financial burden will be denied. I don’t see how that’s better.

So this tactic will be ineffective at best and bad at worse. And in return, we would get … the first ever default on American debt. The negative impact of that on the American economy is not imaginary. Look what happened last time:

High-frequency data on consumer confidence from the research company Gallup, based on surveys of 500 Americans daily, provide a good picture of the debt-ceiling debate’s impact (see chart). Confidence began falling right around May 11, when Boehner first announced he would not support increasing the debt limit. It went into freefall as the political stalemate worsened through July. Over the entire episode, confidence declined more than it did following the collapse of Lehman Brothers Holdings Inc. in 2008. After July 31, when the deal to break the impasse was announced, consumer confidence stabilized and began a long, slow climb that brought it back to its starting point almost a year later. (Disclosure: We have a consulting relationship with Gallup.)

Growth in nonfarm payrolls decelerated to an average 88,000 a month during the three months of the debt-ceiling impasse, compared with an average of 176,000 in the first five months of 2011 (see chart). Payroll growth subsequently recovered and has averaged 187,000 jobs a month since. Despite the rebound in job growth, employment is likely still below where it would otherwise have been.

There are also more visible permanent scars. The sense that the U.S. political system could no longer credibly commit to paying its debts led the credit-rating company Standard & Poor’s to remove the U.S. government from its list of risk-free borrowers with gold-standard AAA ratings. Just as a poor credit score raises the interest rate you pay in the long run, so a worse credit rating will probably raise the interest rate on our national debt.

The debt ceiling fight caused 300,000 fewer people to find work that summer, even is we assume no longer-term impact. Real progress was made on the debt in the next two years, but if a debt ceiling crash raises interest rates even 1%, that will mean a spike in federal interest payment that will wipe out almost all of those gains. Is that worth having what amounts to a national temper tantrum over Obamacare?

But there is something more dangerous at play here. When the Republicans threatened to hit the debt ceiling in 2011; when Obama voted against it years earlier; there was at least a strain of thought involved. We couldn’t raise the debt ceiling, the crashers told us, because we were going to default anyway. Our debt was out of control. Would you extend more credit to someone who was already wildly overspending? We couldn’t possibly raise the debt ceiling until our fiscal path was stable.

But this isn’t a fight over debt. If it were, we’d be talking about tax reform or entitlements. This is threatening to crash the economy if the Republicans don’t get their way. If we allow this precedent to be set, where does it stop? Judicial nominations? Union regulation? Are we going to threaten the debt ceiling when Republicans don’t like the table arrangements at White House banquet?

This isn’t a negotiation. This isn’t a tactic. This isn’t politics. This is a hostage situation. The GOP is holding a gun to the country’s head and threatening to blow the brains out of our economy if they don’t get what they want. That I want the same thing — the repeal of Obamacare — is irrelevant. You don’t deal with a termite infestation by burning the house down.

Pause a moment. Put aside your feelings about Obama and Obamacare. Do you want this precedent set? Do you want the Democrats to use it against President Rubio? Do you want them to threaten to hit the debt ceiling if he doesn’t fund abortions? Or pass universal daycare? Or raise taxes on the rich?

This bullshit must stop. It’s gone too far. This isn’t a game; this is our country. It’s bad enough that we’re staring down the barrel of a politically-disastrous government shutdown. But a debt ceiling crash? As much as Obamacare is going to hurt us, it’s peanuts compared to that. Millions of us are still unemployed; others in precarious positions. For a bunch of people with guaranteed jobs to promise to make things worse for no discernible gain (other than making talk-radio yammerheads happy) is the most breath-takingly irresponsible unconservative thing I can imagine. And, unfortunately, it’s about what I’ve come to expect.

IOU Nothing

I won’t waste much time on this. A new alternative has been proposed to the $1 trillion coin that is, if anything sillier. It’s that the government should just issue IOU’s. Seriously:

Congressional Republicans have said they will demand immense cuts to popular government programs in exchange for agreeing to raise the nation’s authorized borrowing limit of $16.4 trillion.

Stop right there. I highlighted this sentence in just to show you the author’s delusions. The GOP is not proposing immense cuts. All programs will grow over the next decade. And they are even trying to weasel out of those cuts. I realize the Left thinks we don’t have a spending problem. But when real-term spending doubles over a decade, most rational people think spending might have something to do with our present woes.

Anyway, continue.

However, there is a plausible course of action, one that the president should publicly adopt in the coming weeks as his contingency plan should debt-ceiling negotiations falter. He should threaten to issue scrip — “registered warrants” — to existing claims holders (other than those who own actual government debt) in lieu of money. Recipients of these I.O.U.’s could include federal employees, defense contractors, Medicare service providers, Social Security recipients and others.

The scrip would not violate the debt ceiling because it wouldn’t constitute a new borrowing of money backed by the credit of the United States. It would merely be a formal acknowledgment of a pre-existing monetary claim against the United States that the Treasury was not currently able to pay. The president could therefore establish a scrip program by executive order without piling a constitutional crisis on top of a fiscal one.

To avoid any confusion with actual Treasury debt, and to be consistent with the law governing claims against the United States more generally, the scrip would not pay interest in most cases. And unlike debt, it would have no fixed maturity date but rather would become redeemable in cash only when the secretary of the Treasury was able to certify that there’s enough money available in the Treasury’s general fund to cover it.

Finally, the scrip would be transferable, allowing financial institutions to buy it at a high percentage of its face value, knowing that the political crisis would almost certainly be resolved before long.

He cites California as an example. But California is not the federal government. What he is essentially calling for is the President to create a new currency that is not backed by the full faith and credit. Oh yes. I’m sure that the Republican party, who have promised legal fights over the 14th Amendment Option and the Coin, will will look at that and say, “Oh, Jeez. He’s got us now!”

Look, the President has been given two contradictory instructions from Congress. They have passed spending bills, instructing him to spend more money than we are taking in. And they have not passed a bill authorizing him to borrow money to cover the difference. They haven’t told him to make bricks without straw. They’ve told him to make bricks out of thin air.

The President has two options: break one of those laws or default. It’s that simple. And if he’s going to break the law on the debt ceiling, just break the law on the debt ceiling and issue more bonds. That way we’re in a plain old constitutional crisis instead of a constitutional crisis and an absurd legal battle over a God-damned coin.

A … I just … OK. You might want to skip the rest of this post because I’m going to lose it.

Good God, liberals, do you even hear yourselves?! Are you so far up your own asses that this is sounding anything short of absurd?! Platinum coins? IOU scrips? 14th Amendment? For God’s sake, if the Republicans suggested something like this — if Michele Bachmann suggested something like this — you’d go nuts! You’d be lampooning it as a sign that the GOP has finally gone off the deep end. Hell, Stephen Colbert called you out on it the other night.

Stop this silliness. Stop it right now. Every moment you spend on these absurdities is a moment you’re not spending working the actual problem we are facing. Yes, the GOP is crazy to contemplate hitting the debt ceiling. But these absurdities within absurdities only provoke more craziness. You’re not helping. You’re patting yourselves on the back for your own perceived cleverness.

Here’s something you could do: get Harry Reid to pass a damned budget. It has been over 1000 days since the Senate last voted on a budget. A budget usually includes a debt ceiling hike to cover the authorized spending. Maybe … just maybe … if we return to an actual budget process, we can organize spending, taxation and debt in an organized systematic regular way — the way we’re supposed to — rather than this perpetual series of crises and cliffs. I know that sounds insane to budget the way we did for two centuries. But it’s so crazy it just. Might. Work!

I realize that wouldn’t give you a West Wing moment where you finally beat those damned GOP bastards and the credits roll. But credits don’t roll in real life. Budget tricks have consequences and legal fights. Fixing the budget won’t be as satisfying as a coin trick. But it might help save the country from the perilous fiscal path we have been on since the millenium.

Boehner Flinches from the Abyss

So for all of the stress, the House GOP leadership (including Paul Ryan), a minority of Republican Congressmen, and a majority of Democrats
passed the tax deal they were offered by the Senate. The Rich (less than 1% of the population) got tagged with a 4.6% increase (horrors!) and caps were placed on deductions, among other meaningless items.

I suppose it is palatable since we have at least gotten the remainder of Bush’s tax cuts to remain permanent. Even Grover Norquist has twisted this and basically said that since the tax cuts had expired, those Republicans who voted for this deal were voting for a tax cut, not an increase. Interesting contortion.

But then there’s virtually no spending cut in this deal. The increased revenue is not going to make a dent in the deficit. For all the drama, we slapped a few million wealthy people with a small tax raise and refused to address the fact that spending is out of control. It’s a pathetic failure of the entire political establishment.

It is easy to blast Boehner today, but what choice did he have? Yes, I personally believed it would have been best to go over the cliff and let the chips fall where they may. However, I knew that Boehner wouldn’t do that. He didn’t want to take the blame for tax increases on the middle class (it’s going to happen eventually anyway) and it was too tempting to target the unpopular minority that is top earners. Also, he likes grand, useless compromises for some reason.

On the bright side, around 2/3 of the House GOP broke with Boehner on this deal and hence have political cover. Boehner has set himself up beautifully for the inevitable coup and primary challenge that he has coming.

I would say that he was courageous to do this IF I actually believed that the deal means anything. It doesn’t. It’s too little, too late, and still comes across as a major defeat for the GOP. We could have gotten a tax deal as useless as this one weeks ago and not had the brinksmanship that managed to make Obama look like a triumphant, responsible statesman.

Boehner must not be returned as the Speaker of the House, even if means leaving the post vacant. The real fight is going to be over the debt ceiling and Boehner cannot be counted on to do right either by his party or the nation.

Boehner Stays on Defense

Rep. Boehner apparently misinterpreted conservative demands that he toughen it out on fiscal cliff negotiations.  He came out with a very short press release this morning and did nothing more than tell Obama to take  or leave the GOP’s plan or come up with his own.

I disagree with this approach (yeah, I rarely cut Boehner any slack).  It’s not the President’s job to propose this, it’s Congress’s and specifically the House of Representatives.  Boehner is engaging in needless dick-measuring with Obama when he should instead pass something through the House and let the Democrats explain their votes and vetoes.  This gridlock plays perfectly into the President’s hands and bolsters the media-driven perception (which the electorate is falling for) that the failure of negotiations will be the GOP’s fault.

I’m on board with others who say that the House should simply pass the recommendations of the Simpson-Bowles committee.  When the Democrats kill it, let them explain why they wouldn’t support the findings of the President’s bipartisan commission.  We have no truly good options.  Let’s go for the one that most deflects blame.

Putting it back on the President just gives him more ammo to stand up and bitch about Republicans.  Smack the mic out of his hand and make his party do something.

Comedic Reality

Thelonious Munk (yeah, I never heard of him either) has a few choice words about our president and his ability to manage the country’s finances:

His first mistake, thinking those Harvard/Yale types are our “Best and Brightest”.

Thelonious is taking his show on the road, and such is earning income, which means he is a tax payer so he has every right in the world to rail at how his tax money is being spent. It really is insulting to think that average folks wrt their finances are more responsible and better at it then those best and brightest.

Maybe it wasn’t such a good idea for “B” to be the first:

In Your Court, Harry

The Boehner bill barely passed the House. It’s now up to Harry Reid to pass his plan. Then, hopefully, a reconciliation bill will move us forward.

Ignore the media hype about “slashing” spending. This is only binding on … well, never.

Update: The Boehner bill went down in the Senate. That was fast. Now Reid wants a vote on his bill by the GOP is going to filibuster. You can probably guess my reaction to that.

Driving Toward the Glass Ceiling

I’m happy that the GOP has held out on the debt ceiling and continues to hold out for more budgetary discipline. But there are rumblings right now that have me very worried. They have broken off talks with the Democrats and are balking at any revenue increases at all. And a substantial part of the base seems to think that hitting the debt ceiling is preferable to the deal that is currently on the table.

I find that baffling. The deal that is currently on the table is a very good one and one that Republicans have usually accepted. Estimates of the ratio of spending cuts to tax hikes range from 3-1 to 5-1. If it is the latter, that is pretty much identical to the deal the Republicans proposed back in March. Moreover, the tax hikes are what they should be, what luminaries like Alan Greenspan have been advocating for years — the elimination of tax expenditures rather than hikes in marginal rates.

There’s another aspect of this: the baseline. If the Republicans do nothing, a number of policies are already programmed into the law. The Bush tax cuts will expire — raising taxes approximately six times what the Democrats are asking. The AMT patch will expire and the SGR cuts to Medicare fees will kick in. In other words, walking away now will give the Democrats everything they want.

Frankly, I’m not sure what the Republicans are holding out for. Further cuts are going to require statutory changes to Medicare and Social Security law, something that can’t be thrown together in a few weeks. We’re at the lowest level of taxation since Harry and Bess Truman were in the White House. There is little evidence that canceling tax expenditures will hurt the economy. What gives?

(I’m also not sure what they’re thinking politically. If we hit the debt ceiling, one of two things happens. Either we stop paying debt interest, which causes a default and the various economic woes. Or we stop cutting checks for military personnel and Social Security recipients. Maybe the Republicans are expecting a crowd of pitchfork waving people to descend on Washington demanding that we don’t raise taxes on people making six figures or more. I just don’t see it happening. If the government stops issuing checks, the Democrats have a winning issue in 2012 — they’re not the ones walking away from a deal. You can then welcome back Speaker Pelosi and enjoy Obama’s second term.)

There are lot of people out there who will tell you that nothing bad will happen if we default. I find this difficult to believe, given the sheer scale of our debt. I find that difficult to believe, given the near unanimity among economists that this would be Very Bad Thing — bad for the bond market, bad for the dollar, bad for the stock market, bad for unemployment.

Even if we give the debt ceiling breakers a doubt, I still don’t see it. Let’s say that there is a chance — however remote — that a default does not trigger another even worse economic crisis. Do we want to take that chance? Do we want to pull the trigger on the revolver to find out if the chamber is empty? That’s about as anti-conservative a position as I can imagine: to risk the economy because of the unwillingness to sign a great deal in favor of an ideologically pure one.

But then again, I don’t recognize today’s GOP. Heedless risk in the service of ideology defines them. They are willing to, for example, gamble hundreds of billions of dollars and thousands of lives on nation building. Pragmatic conservatism, risk reduction, bet hedging — this is something alien to today’s GOP. They are more interested in sticking to ideology than governing.

In the end, the wild card here is whether Obama decides to take the 14h Amendment solution, bypassing Congress on the debt ceiling. While Congress is constitutionally charged with debt, the ceiling is more of an historical artifact than anything else. It was implemented when the Treasury actually had to physically raise funds and therefore needed instruction on just how much to raise. In today’s electronic era, it mainly serves as a political bone.

But you know what? I think the dirty little secret of the GOP is that they want Obama to bypass them. It would obviate the need for difficult budget cuts and/or tax increases. It would let them blame Obama for something and enrage the base. It would give them fodder for ranting and raving and calling for impeachment and slagging Obama as Marxist communist Kenyan anti-colonial whatever. The only people who would be hurt are the few remaining taxpayers, investors, the employed, the unemployed, business people, etc. But the political class would be set.

What’s to lose? Only their ability to govern. But I have yet to be convinced that the GOP values the ability to govern. I’ve been surprisingly impressed by Boehner so far this year. Now is his real test: to see if he can cut a deal and save the GOP from themselves.

Update: An interesting post at powerline argues that low taxes cause higher spending by, essentially, allowing people to buy more government at a discount. I think he makes an excellent point. If taxes were high enough to pay for the government we have, there would be a lot more conservatives.