Posts Tagged ‘ debt limit ’

The optimist’s view on the debt ceiling deal

Yesterday I presented a very pessimistic view of the debt ceiling deal and the “trigger” that would attempt to force the parties to come to an agreement to solve our debt problems. My reasoning was twofold: First, the trigger, which is supposed to be so terrible for both parties’ interests that it forces both parties to come to a compromise on fixing the debt, will only cut spending in the event a compromise isn’t reached. Since Republicans like spending cuts and Democrats don’t really, I reasoned that this trigger was unbalanced toward Republican interests. Secondly, this trigger couples its automatic spending cuts with the expiration of the Bush tax cuts. I believe this will give away Democrats leverage over Republicans when the Bush tax cuts come up for review and lead to the extension of all or most of the Bush tax cuts. (Again, more information can be found in the two posts before this one.)

The Super Congress will succeed where all other Congresses have failed?

Now, I would like to present the optimist’s view on the debt “trigger.” First, lets review the ground rules. The debt limit deal (passed today, Aug 2) creates a bipartisan “super committee” (or “Super Congress”–see right) which will take the next step of finding at least $1.2 trillion in additional measures to reduce the debt. If the committee reaches an agreement, its recommendations will be fast-tracked for an up-or-down vote in Congress. If it doesn’t reach agreement or Congress rejects its agreement, a debt “trigger” will kick in in Dec 2012/January 2013 which will make $1.2 trillion in automatic, savage cuts to the military, domestic spending and Medicare. Now, lets get into the political dynamics.

The Republicans on the super committee and the Republicans in the House who vote on the final package will be under enormous pressure not to accept ANY revenue increases as part of the deal. Their interest groups will tell them that they cannot close a single tax loophole, shutter a single corporate tax haven or raise rates one inch to raise revenue. That means that the only deal that is likely to be acceptable to Republicans is one that relies solely on spending cuts, and they are  unlikely to agree to anything else.

At  that point the Democrats on the super committee and in Congress might look at each other and say “so if we don’t reach an agreement with Republicans, there’s going to be $1.2 trillion in cuts, and if we do reach an agreement, there’s going to be $1.2 trillion in cuts, what do we  get out of this?” Then, Democrats will begin looking for the lesser of two evils:

  • The spending cuts in the debt trigger will be $600 billion from defense and $600 billion from domestic spending, including $200 billion from Medicare.
  • The spending cuts in a deal worked out with Republicans will not include nearly as much in cuts to defense (Republicans would never negotiate that much) and so will have to cut more deeply to Medicare and will likely cut Social Security and Medicaid as well. Certainly, Republicans will want something like $1 trillion of the cuts to come from domestic spending and entitlements.

Looking at those two options, its obvious which one the Democrats would prefer. If the choice for Dems is between two packages that are all-cuts and one cuts their priorities less than the other, that’s the one they’ll choose. Why should the Democrats negotiate for and sign off on huge cuts to their most cherished domestic programs when the trigger will only take $600 billion from domestic spending? Democrats would be better off refusing to play ball in the Republicans’ all-spending cuts game and insist on a balanced approach to debt reduction that includes higher taxes on the rich as well as decreased spending on the poor and middle class. Polls show that this is the approach favored by the American people.

When Republicans insist on cuts to very popular programs like Social Security and Medicare, while protecting rich people’s tax loopholes at all costs, Democrats will rightly refuse to go along with them. Democrats can then use Republican intransigence on taxes and their plans to gut popular programs against them in the 2012 campaign. This will help paint the Republicans as extreme and ideological while the Democrats come off as the party of moderation and balance.

This will also pit the Republican Party’s anti-tax base against its pro-military base in a veritable Republican civil war. The military contractors that donate hundreds of millions to the GOP will demand that the government increase taxes so that the military doesn’t go under the ax, while the anti-tax Tea Party will stick with their no-tax pledge and infuriate Republican hawks by standing by as the military is decimated.

All this may lead to the inevitable: the Republican Party (or at least parts of it) admitting that revenues have to rise in order to solve our debt problem.

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How the debt deal could get even worse for the Democrats

The structure of the debt deal is as follows in this flowchart posted by Ezra Klein:

from Ezra Klein

Basically, there is an initial $900 billion in cuts (and a raise in the debt ceiling by that amount), followed by a vote on the balanced budget amendment (groan) and then once it fails, a “super committee” of Congressmen and Senators will be formed to recommend at least $1.2 trillion more in debt reduction. If that group either can’t agree on debt saving or Congress refuses to pass the debt cuts it recommends, then a “trigger” will kick in. This trigger will make automatic, huge cuts (to total $1.2 trillion) to both military spending and domestic spending in the absence of a deal. The trigger, then, is supposed to force Congress to come up with a good plan by threatening a consequence that both parties will find unacceptable. Presumably, Democrats will want to work out a deal because  they don’t want to see huge cuts to domestic spending and Republicans will be forced to work out a deal because they do not want to see huge cuts to the military. Presumably.

This is where I think the Democrats have been completely snookered. There are two reasons and they both have to do with the trigger. The trigger is the mechanism that is supposed to force the groups to come to a deal. If the trigger is weak, then it will not force the parties to make a deal, and if the trigger is  uneven (it hurts one party’s core interests but not the other’s) it will force one party to make a deal on the terms of the party that stands to be hurt less by the trigger.

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The Republicans got everything they wanted from the Debt Deal

A debt deal has been struck and the winner is the Tea Party. The losers are Democrats, the economy, and the American people. Democrats and the President will try to say that it was a compromise and that both sides gave some and got some. Its not true, but they can’t very well get up in front of the cameras and say “this is a terrible, terrible deal which no one should support but for the fact that if we don’t vote for it, something even worse will happen.” That something worse would have a been a US government default, which would have pummeled the stock market, pushed banks under, tanked the value of the dollar, kept doctors, social security recipients or government employees from being paid and caused the interest rate to skyrocket on any kind of loan, be it a for a car, mortgage or on a credit card. In short, everyone in the United States had a ton to lose from a default. Everyone. There is not a single person who would have gained a thing in a US government default. But why was this disaster even a possibility? Its worth recounting how we got to this point.

Congress has been deficit spending since Clinton was President and every time you deficit spend, you have to increase the debt limit.  This time around, Republicans said they wanted to deficit spend without increasing the debt limit. They basically said “Woah, if you want us to keep the government from defaulting on the debt that we already voted for, you’re going to have to jump through a bunch of hoops and meet all of our demands.”

Republicans demanded a dollar in spending cuts for every dollar the debt limit would be increased. And they got it. Well, what about the fact that the main driver of our debt is  the tax cuts passed under George W. Bush? And how about the fact that domestic spending hasn’t even grown since 2001? Doesn’t matter, Republicans said that they wanted spending cuts, so they got spending cuts. The package agreed to will push back domestic discretionary spending to where it was under Dwight Eisenhower, (according to Pres. Obama) DWIGHT EISENHOWER! So we are going back to a level of domestic spending that existed back when there were no Pell Grants, no EPA, no interstate highway network to maintain, no Head Start program. We are supposed to run a post-industrial government with a budget from the Korean War period? That’s insanity.

What did Democrats get out of the deal? As any Republican will tell you, they got an increase in the debt ceiling as their prize. That’s right. Democrats got to protect the American people from a complete economic collapse. Stopping the Republicans from starting another Great Depression was their prize. This was a hostage situation in every meaning of the phrase. Republicans threatened to kill the hostage–they said they would cause an economic meltdown that would make 2008 look like Candyland unless all their demands were met. In the end, Democrats showed that they cared too much about the American economy to let the Republicans fulfill their threat. In a saner time, a political party who threatened to cause a US default for their own ideological ends, who used the health of the US economy as a bargaining chip, would never again be entrusted with any power by the American people. These are not sane times.

There you have it then. The only reason Democrats will vote for this package is because they do not want the US economy to implode. There is literally nothing in it for them to like. The richest Americans are not asked to pay a bit more to solve a crisis that their tax cuts largely created while Medicare, Medicaid and Social Security will likely be shrunk in the next round of cuts. All of the cuts come from the poor and middle class. Democrats’ only motivation to vote for this deal is to protect the American people from Republican recklessness. Republicans will vote for it because its everything they could have ever asked for. Some Republicans will still withhold their vote because they have decided that nothing less than a balanced budget amendment can win their vote. Those Republicans are even more ideological than the rest. They hate the government and they will never make any compromise for the good of the country.

Speaking of the good of the country, these cuts will slow down the economy and might even push us back into recession, if last quarter’s GDP numbers are any indication. A dollar less in government spending is a dollar less in the economy and there’s about to be a whole lot fewer dollars in the economy. These cuts come at a terrible time for the economy. The right time to make cuts is when the economy is already gorwing at a healthy pace, not when doing so will throw the economy back into recession.

God help us if Obama loses re-election. If he doesn’t win the election and end the Bush tax cuts once and for all, Republicans will just keep cutting until there is no more social safety net in America.

For more reading on the size of the GOP’s win here, look at this article.

Republican voters stand to lose the most in a US government default

As the US government fast approaches its legal debt limit, many Republicans have tried to argue that a government default would not be as bad as Democrats, the Secretary of the Treasury, Chairman of the Federal Reserve, independent economists, right-leaning magazines and Wall Street firms all say it will be. These very, very conservative (and very naïve) people say that the government has enough money to pay off all the interest on its debt and still meet some of its legal obligations, and anything beyond that will just be waste that needs to get trimmed. So, for this post I propose that we look beyond the irreparable harm that a default will cause to the “full faith and credit” of the US government, look beyond the fact that default will probably throw us back into recession and look beyond the fact that no one even has a plan for the avoiding raising the debt ceiling and just examine the direct harm that will ensue if the government defaults on much of its debt in August.

If Republicans refuse to increase the debt ceiling and the US government defaults on some of its debt on August 2, it is groups that tend to vote Republican will be the most harmed. How’s that, you ask? I though only hippy liberals and welfare queens needed the government? Let me explain.

The Tax Foundation has compiled a list of states that are net donors to the federal government and states that are net recipients of government aid. To do this, it took everything a state’s residents pay to the federal government in taxes and revenues in a given year and then subtracted everything that the federal government spent in that state in a given year. Expenditures include money spent on roads, education, military bases, social security, Medicare/Medicaid (everything that would be in jeopardy in a government shutdown). Then it gave a ratio of spending:revenue for each state. Here are the top ten states who received more from the Federal government than they put in:

For instance, Kentucky received $1.51 for ever $1 it sent to the Federal government. As you can see, eight of the ten states that rely most on federal aid voted for McCain in 2008. In 2004, all ten of these states voted for George W. Bush. If the debt limit is not raised, Federal spending will fall precipitously and these ten states likely stand to lose the most economically. They are also overwhelmingly Republican. Which states stand to lose the least by this metric?

You’ll note that all of these states voted for Barack Obama in 2008 and all of  them except Colorado and Nevada voted for John Kerry in 2004. They are by and large solidly Democratic states. They get much less from the federal government and give much more than their red neighbors. Looking at the debt ceiling showdown this way, it seems that Republicans are threatening to shoot their own voters in the foot by refusing to allow the government to make the payments owed primarily to people in red states. Voters in Republican states stand to lose the most if the government isn’t allowed to pay its bills once it hits the debt limit.

But of course there are some problems with looking at issues like this on a state-by-state, dollars-in vs. dollars-out measure, so let’s try another way of estimating who will be impacted by a government default.

Using this graph, we can roughly divide expenditures into 5 roughly equal groups: (for a more detailed breakdown, go here)

  1. Defense
  2. Social Security
  3. Medicare and Medicaid
  4. Interest on debt and other mandatory spending (including transportation, veterans’ pensions, unemployment, food stamps…)
  5. Discretionary programs (including foreign aid, education, disaster relief, NASA, border security…)

If the debt limit is not raised, about 40 percent of the government’s expenditures will immediately have to be cut (more will have to be cut after the initial cuts because hitting the debt ceiling wwill cause the economy to tank). So, initially about two of the five things in the list above will have to disappear overnight or some combination of 40% of all five. Who will that hurt? (Taking into account that we do not know what parts of the government Obama and Tim Geithner would choose to fund if this doomsday scenario were to come about, lets speculate about who is exposed to risk here.)

If parts #4 and #5, as well as Medicaid are cut, then that hurts a very mixed bag of people. Everyone from the TSA to scientists at the National Institutes of Health, to poor children, to border security guards, veterans and the recently unemployed will be affected by cuts in those areas that make up about 40% of expenditures. Many of the people in this group tend to vote Democratic, such as the poor, but this is such a varied constituency that it is difficult to speculate, although I assume that this group would tend to lean Democratic. However, it is easier to single out the people who would be affected by cuts in the rest of the government.

If it is Social Security and Medicare that get the ax (Medicare makes up the vast majority of MedicareandMedicaid expenditures) then that would dramatically hurt senior citizens. About 40% of the government goes directly to senior citizens through these 2 programs. Seniors were also the only age group to vote for McCain over Obama in 2008 and also voted strongly for Republicans in 2010. This Republican group stands to lose a lot if the government defaults.

If the military gets cut, that obviously hurts soldiers, their families, towns near bases and military contractors. Thats another 20% of the government. Soldiers and veterans are very Republican. Polls specifically of veterans seem to be rare, but Gallup found that veterans were solidly backing McCain by 22 points a couple months before the 2008 election, even though Obama was leading by 3 points nationally at that time. Veterans also went for Bush over Kerry by 16 points. The military and veterans currently eat up about a quarter of our budget, so they are very likely to be harmed by a default.

About two thirds of government spending goes towards groups that tend to support Republicans. If we move veterans benefits from the “other mandatory” part of the pie to the “defense” part of the pie, then we have about 65 percent of the government going towards seniors, the military and veterans, all of which tend to vote Republican.

Judging by both a state-based metric and an interest group-based metric, it would seem that Republican voters will be the ones most hurt in a government default. So why are many Republicans so hell-bent on not raising the debt limit? I have no idea. Its the triumph of ideology over socio-economic interests, I suppose.

GOP Presidential Candidates Series: Tim Pawlenty

Tim Pawlenty is conservative to the core. That’s the message his campaign has been screaming from the rooftops. Every single ad, policy proposal, or public statement seems to be designed to tell the Republican electorate that this former 2-term governor of Minnesota is the “real deal” when it comes to conservative bona fides. But no, his campaign will tell you, Pawlenty is not one of the “crazy” conservatives (like Michele Bachmann or Herman Cain) that make corporate CEOs and Republican party elites very nervous. He is the kind of candidate that is both exceedingly conservative (let me tell you) and also a dependable good ‘ole boy.

Pawlenty has a long record as a fairly successful and mostly uncontroversial politician. He has risen through the ranks of the GOP, rising from the city council to become governor, while notably foregoing a a US Senate run to make the higher-ups in the party happy. He is unremarkable in demeanor, has taken almost no controversial stances (his past support for cap-and-trade, now repudiated, is a notable exception), has picked limited fights with democrats in the past, and has good relations with the party elite.

In short, Pawlenty is an extremely generic and uncontroversial Republican candidate. In many years, the Republican nomination goes by default to such a candidate.

However, the Republican party already has a default heir apparent for their nomination-Mitt Romney. Romney ran for the nomination four years ago, has  a considerable donor base, experience running a national campaign, high name-recognition and a national network of former supporters  to call on. However, he also has a flaw–the health reform he signed into law as governor of Massachusetts is nearly identical to end-of-the-world law Obamacare!

Hence the Pawlenty campaign’s focus on his conservatism. Pawlenty is trying to present himself as a credible alternative to Romney among voters who are concerned about Romney’s past support for an individual mandate, health reform, abortion rights and gay rights. Pawlenty is showcasing his conservatism at every turn so that he becomes the anti-Romney in this campaign among establishment Republicans and party elites.

However, there are also challenges for Pawlenty on the “conservative” front. There are several other candidates in the race who have much stronger conservative  credentials than Pawlenty, among them Bachmann and Cain. If the nomination becomes a race to see who is the most forceful conservative, Pawlenty can’t hold a candle to the charismatic and absolute conservatism of Bachmann and Cain. So, Pawlenty has to present himself as comparable to those Tea Partiers on the conservative front, but much more electable, and with a proven record as a public servant.

If it seems like Pawlenty is defined as a contrast to other candidates, its because that is what his campaign is based on. He is running as everyone’s second-option. He wants to be everything to everyone in the Republican party. Pawlenty’s own story is acceptable, but not compelling, he is conservative, but not unproven and unpredictable. He will be the electable alternative to Bachmann and Cain among conservatives and Tea Partiers and he will be the true conservative for establishment Republicans who may worry about Romney.

Now let’s look at how Pawlenty has tried to showcase his conservatism. He recently released an ad bragging about causing the first-ever government shutdown in Minnesota state history by refusing to sign a budget raising taxes on the richest Minnesotans. Instead, he and the legislature compromised on raising taxes–oops! I mean raising “fees”–on cigarettes (conservatives don’t raise “taxes,”  they increase “fees”). The ad also says he fought unions by causing one of the longest transit strikes in the nation’s history. The ad portrays Pawlenty as a fighter who will harm thousands of innocent people–do anything really– in order to stick it to unions and protect the richest Minnesotans from paying a bit more in tax. I guess the image of a governor who is willing to sacrifice the most vulnerable in order to score cheap ideological points plays well in Republican circles.

Pawlenty was one of the first candidates to urge the government not to increase the debt limit (see? he’s sooooo conservative). Why? He says it will “force hard choices now” and keep America from becoming Greece. Well, doesn’t Pawlenty know that failing to increase the debt limit will mean the government has to discontinue 40% of its spending this year? Does he have a plan to do just that? Absolutely not. No one does. Doing so would be impossible and unthinkable. No one has a plan to do that. Pawlenty says that this “hard  choice” on the debt should involve cutting nothing from defense while “means-testing the cost-of-living increase in Social Security benefits,(this is actually a good idea, but it won’t do anything to keep us from hitting the debt ceiling) capping and block-granting Medicaid payments to states,(cutting Medicaid) and moving Medicare to a more efficient, pay-for-performance model (already being done through Obama’s ACA, and no one knows how well it will work).” Note that the savings from these action would NOT solve our debt ceiling problem or even come close to it. But Pawlenty has released a detailed economic plan, so let’s take a look at that.

Pawlenty’s economic plan is sheer madness. Pawlenty proposes to solve all of our nation’s problems by (you guessed it) LOWERING TAXES! Its a plan so incredibly simple, he can’t believe more people havn’t thought of it! In his plan massively lowering taxes on the rich will both solve our deficit problems and launch us into a period of prosperity unknown in modern American history. It will cause 5 percent growth for a decade. Never mind that America hasn’t seen 5% growth for any 3 consecutive years in modern history, let alone 5% growth for a decade. Pawlenty has found the secret: tax cuts for the rich. So what will these magic tax cuts look like? Let’s compare them to the Bush tax cuts:

No one will ever be able to out-conservative Pawlenty on economics. As Ezra Klein says, Pawlenty makes Bush look like Robin Hood. Pawlenty basically looked at the Bush tax cuts and said “the problem with them was that they didn’t give enough money to the rich, if they would only have shoveled MORE money to the top 1%, we would be in an economic paradise now. O, and these tax cuts will actually raise revenue.” How does cutting taxes raise revenue? I don’t know, but that cognitive dissonance makes about as much sense as anything else in his plan. The right-leaning Economist completely trashes Pawlenty’s plan saying

And no matter what party you belong to, you should find it troubling that Mr Pawlenty’s ridiculous economic plan could ever be considered acceptable by a large portion of the population.

But of course Pawlenty has a response to these reality-based critiques of his plan: anyone who doesn’t think it will work just doesn’t believe in America!

Though he has an interesting political strategy, if any of the things that Pawlenty says he wants to happen actually do happen, America is in trouble. I can’t endorse someone who glorifies shutting government down, wants the US government to default, backs the Republicans’ terrible balanced budget amendment, claims to be a serious candidate while laying out completely unfeasible economic plans, and proposes to balance the budget on the backs of the poor while passing massive tax cuts for the rich.

For past entries in the series, see: Herman Cain.

Debt Limit Articles

The New Republic is doing some really good analysis of the debt talks. Jonathan Chait has a great article about the debt negotiations from Obama’s side here. Its well-worth the read.

He also discusses the negotiations from the Republican House’s side here.

And here  is an article on what he thinks the final deal will actually look like.

No more posts to come until after the weekend, unfortunately. When I return, more of the GOP Presidential Candidates Series, more on the debt limit talks and a proposal to help fix Washington.

Why Obama won’t use the “Constitutional Option” for the Debt Ceiling

Talks over increasing the nation’s debt limit have gotten shaky over the past week. Faced with Republican demands for $2 trillion in spending cuts and absolutely no tax increases before Republicans will agree to raise the debt limit, many liberals, law professors, and even a top Democratic senator have begun popularizing the notion that the debt limit is unconstitutional. They argue that President Obama can just ignore this man-made crisis and continue to pay for the US’s fiscal obligations without a raise in the debt ceiling. Their rationale comes from section 4 of the fourteenth amendment, which reads:

 The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. (emphasis mine)

It would seem that they have a good case. Our country has legally incurred a large amount of public debt and by not raising the debt ceiling, Congress would be saying that it never intends to repay its legally incurred debts. That seems to be the exact action this amendment was designed to prevent. Also, it is unlikely that anyone would have the standing to sue the treasury in court for ignoring the debt limit.

This seems to be the easy way for Obama to both get out of dealing with an increasingly implacable and uncompromising GOP and to save the economy from a near-certain economic implosion. So why did he appear to rule it out yesterday?

Any expert who seriously discusses the US  budget agrees: the debt ceiling must absolutely be raised. If not, the economy will go into a tailspin and innocent people will suffer as they lose their jobs, Social Security checks and medical coverage. The only problem is polls show that raising the debt ceiling is unpopular. Even when pollsters include the caveat that failing to raise the debt ceiling would be severely damaging to the economy, a plurality still opposes the increase.

Even if the debt limit is unconstitutional, Obama would pay a huge political price for unilaterally declaring it so. Sure, by doing so he would save the economy from a catastrophic collapse (assuming no agreement on debt is made by Aug 2), but he would pay a large political price for getting rid of the debt limit. His numbers on his handling of the debt are already very low and this would just add fuel to Republicans claims that he is a high-spending politician who is out of touch with the American public.

But what about the fact that getting rid of the debt limit would save the economy from a double-dip recession? Wouldn’t Obama be rewarded for protecting the economy from foolhardy and crazed Republicans who would do anything to prevent a tax increase on the richest Americans? In a word, no.

If there is anything Obama has learned in the past 2 and a half years, its that you can’t campaign on what might have been. Republicans can hammer Obama on the economy and his stimulus bill even though independent experts agree that things would have been much worse without Obama’s actions to prop up the economy. We might have had unemployment at 12% without the stimulus, but might-haves don’t run in elections. The banking system might have completely collapsed without TARP, but the fact that we could be in a full-blown depression right now doesn’t make people feel any better about the bailouts. People vote off their current situation and their current impressions. Might-haves or near misses will rarely impact the electorate’s votes.

So, for Obama to get any credit for saving the economy from ruin, or to pin any blame on the Republicans for leading the economy to the abyss, the country actually has to cross the threshold of a default and begin to feel the pain of a government working with only half of its limbs. Otherwise, Obama will be the bad guy. The Obama team seems to see these dynamics at work, and because they seem to be unwilling to let the country default in order to score political points, Obama has offered the Republicans a deal that’s 83% spending cuts and 17% tax hikes. Or in other words, its a plan that’s 83% what Republicans want and 17%  what Democrats would prefer.

Obama has bent over backwards to give Republicans a dream-like deal because he A) does not want the country to default on its debt and B) knows that he can gain nothing from declaring the debt limit unconstitutional. Obama seems to have decided that it would be better to give  the Republicans almost everything they want, rather than to take either of the other two options open to him.