Posts Tagged ‘Federal Debt’

The Thinker

Tea Partiers: be careful what you wish for

Much has been written about Speaker of the House John Boehner’s recent resignation announcement. The news wasn’t particularly surprising to me. The only element of surprise to me was how long he held on.

Today being speaker means trying to govern when a sizeable and very vocal part of your own party actively wants anarchy instead. He’s been between a rock and a hard place since the Tea Party stormed Congress after the 2010 election. When members of the Tea Party threatened to introduce a motion to “vacate the chair” (remove him from his position as speaker) if Boehner failed to fight on a spending bill to keep the government running, Boehner decided to call it quits.

The Tea Party was essentially demanding that both the Senate and the President agree to certain cuts in government spending that neither would agree to in order for the government to stay open, i.e. extortion. Either they are convinced that this hardball approach would yield results hitherto unattained or they believed that shutting down the government is a necessary sacrifice to attain these ends. Compromise was simply not an option to these Tea Partiers, although our constitutional system by design moves parties toward compromise. No one branch of government is given all the power. To refuse to compromise is essentially anti-constitutional, and is arguably treasonous.

But the Tea Party, which supposedly is overrun with people who greatly respect the U.S. constitution, is demanding that the Senate and the president agree to all of its demands and won’t entertain the idea of meeting in the middle somewhere. All of its demands must be met or it will shut down the government indefinitely until they agree to them. Boehner’s resignation provided breathing space for a continuing resolution to keep the government open October 1. However, this merely postpones Armageddon because in November the government will run out of extraordinary means to avoid going over the debt ceiling. And the Tea Party in the House would prefer to let the U.S. government default on its debt for the first time ever rather than compromise on any of its demands.

One problem with being angry is that it becomes impossible to think clearly. And that’s what will happen if House Republicans allow the government to default on its debts. When this happens someone is going to get a haircut. Most likely it will be these Tea Partiers. The Treasury Department (or more likely the President) will have to decide which creditors get paid and which won’t.

The most vindictive way for the president to wreak revenge (and since he’ll be leaving office, there is no downside) would be to halt all federal payments to congressional districts represented by members of the Tea Party. This is playing hardball, something I suspect President Obama is too civilized to actually do. But it would ensure the end of the Tea Party almost for sure. All it will take is for one grandma in these districts to not get their social security check at the start of the month. Tea Partiers would be out of congress entirely after the 2016 election. It could possibly be the end of the Republican Party as well. It makes a certain amount of sense that those who represent people that want anarchy should be the first to experience its downsides.

In any event if the debt ceiling is not raised, some creditors would have to wait until revenue is collected to get paid. Maybe payments would be a first in, first out queue. More likely the president would prioritize payments favoring social security and Medicare and defer payments to troops, defense contractors and holders of U. S. treasury bills. In short, the power would move toward the Executive, weakening the hands of the Tea Party.

They don’t understand this, of course, and that’s because they are angry and not thinking clearly. Aside from higher interest rates that our creditors will demand in the future to fund our government, those most damaged are likely to be those who are pushing for anarchy. If it happens it will be an expensive lesson in governance, but perhaps a necessary price for the country to pay to elect men and women who will actually govern. And governing requires compromise.

If that’s what it takes to make the Tea Party see the light, bring it on I guess.

 
The Thinker

My crystal ball on how the sequester will play out

Lots of pundits are puzzling through the politics of the federal sequester that began March 1, trying to figure out how long it will last and what the end game will be. If it were simply a matter of exercising common sense, it would have never occurred in the first place. Neither party claims it wanted the sequester, so a one line law passed by both the House and the Senate repealing the sequester would have done the trick. But of course what parties say they want and what they actually do are two different things. The reality is that neither party nor the White House saw advantage in capitulation and Republicans simply refuse to compromise.

The sequester could be moot by March 26, which is when the current continuing resolution funding the government runs out. If no new resolution is passed, sequester will be the least of the government’s problems. It will simply shut down, except for whatever is considered to be emergency services. So federal employees worried about whether they will be furloughed one day a week will have bigger problems to worry about: total unemployment, at least until something is passed into law. The experience in 1996 didn’t go well for Republicans, so it is probably something they will not want to repeat. Time will tell.

The earliest impact of the sequester is going to be on constituencies that Republicans care the most about: defense and the massive military industrial complex that depends on defense spending. Federal employees may have thirty days to avoid furloughs, but defense contractors won’t be so lucky. This means that Republicans will endure most of the initial heat for blocking a resolution to the sequester. And the impact will fall most heavily in red states. Here in Virginia, our governor Bob McDonnell is already squealing, due to the huge defense contractor community both in the Washington suburbs and in the Hampton Roads area. The bright red state of Texas is also likely to be one of the first to get squeezed as well, as they also have their thumbs deep into the federal defense pie. They also host huge bases where much of the surrounding community has their livelihood dependent upon spending at these bases, such as Fort Hood.

Doubtless the military industrial complex is already frantically dialing their senators and legislators asking them to strike a deal. The only question is how long Republicans will choose to hold out against this squealing. And that depends on Republicans not affiliated with the Tea Party and whether they will bolt. If they find common ground with House Democrats, they would have a majority to end the sequester. This has been the tactic that Speaker Boehner has repeatedly used so far when he cannot convince his own party to take necessary action. What is unclear is whether enough pressure can be exerted to affect this change.

It’s more likely all parties will find a reason to drag it out through March 26. The question then becomes not the sequester, but what can pass a divided congress in the way of a continuing resolution to fund the government. What would normally happen is a split the difference bill between the House and the Senate. The Senate would probably not pass a continuing resolution that funds the government at the sequester rate through the end of the fiscal year without it being softened through tax increases. The House will probably not approve any resolution that increases taxes.

My bet is that in the end it will be the defense cuts that force the bargain and affect political compromise. The rationale from Republicans will go something like this: “We can no longer afford to jeopardize our nation’s security by these unilateral cuts to defense.” The compromise: ditch the defense cuts, but keep the non-discretionary cuts in place, but spread this pain over all discretionary spending. The deal will be in essence to cut the sequester in half, at least through the end of the fiscal year, and leave it in fiscal year 2014 to be figured out through the appropriation process. This way everyone sort of wins. Defense takes a smaller hit, but it will still be considered “manageable” by Republicans. Non-defense discretionary spending will be trimmed as well, but to the 2%-3% level vs. the 5%-6% for the year that has to be spread out through the end of fiscal year 2013 now.

Anyhow, that’s my crystal ball. We’ll see how this all works out, but one thing is certain: it won’t be easy or pretty.

 
The Thinker

Playing Public Debt Poker

Predictably, Republicans walked away yesterday from negotiations on extending the federal debt ceiling. It was predictable but it was also childish. Led by House Majority Leader Eric Cantor, Republicans attending the talks led by Vice President Joe Biden said there was no point in continuing negotiations unless all tax increases were taken off the table.

Essentially, Republicans at the talks no longer believe in negotiations. By definition, when parties are negotiate each side has to compromise. In negotiation, no side gets to have it completely their way, particularly when Republicans control only one house of Congress. Republicans do not want negotiations; instead, they putting all their chips on the capitulation square.

That’s sticking to principle, but it’s not going over well with voters. Voters are completely comfortable with tax increases as part of reducing the deficit, particularly on the well off. Naturally, Republicans contend otherwise, although numerous polls contradict them. The only poll that seems to matter to Republicans are surveys of other Republicans. The rest of us are, after all, something lesser. We are those little people that the late Leona Helmsley despised. Yet voters, like Republicans, also suffer from cognitive dissonance. A majority of voters also do not favor extending the federal debt ceiling, so in that sense Republicans are following the will of the people. Voters also want to keep Medicare in its current form. Voters, like Republicans, want to have it both ways.

Only of course you can’t have it both ways. Our debt problem is a direct result of decades of doing just this. Republicans at least realize that if you cannot raise taxes then to reduce the deficit significantly you have to butcher entitlements like Medicare. If they succeed in their plan, then they guarantee their own political irrelevance in the next election. What is needed is some give and take. What is needed, frankly, is something rarely seen in Washington of late: statesmanship.

Statesmanship means looking out for the good of the nation as a whole instead of just your own partisan interests. It means that to achieve a larger goal, everyone has to make sacrifices. So far Democrats have given a lot, and have largely conceded on the point that expenditures need to go down to balance the budget. Now is time for Republicans to show some statesmanship as well and agree that at least some taxes need to be raised. Some of it can be done by removing subsidies, which, contrary to the opinions of Grover Norquist are not tax increases. In any event, when you have a budget deficit as large as we have now and have divided government, it cannot be fixed instantly. It happens slowly and incrementally. It’s very much like trying to instantly turn an aircraft carrier. You can’t turn one of them on a dime.

The federal government, for better or worse, is a huge institution and an economic machine with intricate ties into our economy. Defaulting on our debt would exacerbate our problems. It would make borrowing money more expensive. If we needed to fight another war, no matter how noble, and needed to borrow money to wage it, if we default we might not be able to do so. No one knows exactly what would happen if we did in fact default but almost everyone agrees it would be very bad. Some Republicans live in La-La Land, and think a short-term default would have no negative consequences but would give way for capitulation to their demands. If default happens, it is likely to be calamitous to economies and markets not just in the United States, but also across the world. Default is also the greatest way to ensure the irrelevance of the Republican Party. If they are seen in retrospect as responsible for default, a new depression is no way to garner political capital.

It may not be convenient and it may be politically painful, but this problem will resolve itself not through capitulation but only through negotiation. Where to go from here? Eric Cantor suggested that the big boys need to step up: President Obama, Speaker Boehner and Senate Majority Leader Reed have to cut a deal and try to sell it.

To make the deal though will take some external actors as well as some smart tactics. Thankfully, the external actors are already nervous. Bond rating firms are threatening to lower our nation’s bond ratings if an agreement is not in place by early July. This means fewer will want to lend to us, and those that do will demand higher interest rates. The biggest stick out there is probably the U.S. Chamber of Commerce, which has threatened to work against Republicans who refuse to extend the debt ceiling. Generally, only big business gets the undivided attention of Republicans.

Lastly, it’s time for the President to make an aggressive case to voters. Thus far he has been under the radar on the issue. It would involve not just Oval Office speeches, but going on the road, outlining the scope of the problem, making the case for tax increases as part of a solution, and noting that deep cuts have already been agreed to. He needs to use the power of his office to peel off just enough nervous Republicans to make a deal happen. He needs to paint a potential doomsday scenario if default occurs, and bring with him noted and credible authorities, like the president of the U.S. Chamber of Commerce and the Chairman of the Federal Reserve. There are still no guarantees, as Republicans are obviously not playing with a full deck. But it might work. If it doesn’t, it will be clear which party was not interested in negotiation, but only in capitulation.

To most Americans, the debt ceiling is abstract. They are against debt in general, but have little idea that not raising the debt ceiling means defaulting on our debt. They do understand the importance of having a job, so it will be important to make the link between a default and an economy that could tailspin.

The most likely outcome will be last minute incremental extensions to the debt ceiling without real political accommodation, simply dragging on political paralysis. The economy is faltering for many reasons, but given the huge effect of the federal government on the economy, what is really making everyone nervous is that Washington’s deeply partisan politicians simply refuse to give and take. Business likes predictability in affairs, and unless there is bipartisan plan forward, there will be none.

 
The Thinker

Bet on more debt

Revolution is breaking out not only in Egypt but also on Capitol Hill. While protestors demanding freedom are taking over Tahrir Square in Cairo, Republican senators and legislators complaining that oppressive “socialism” is diminishing our freedom.

On Capitol Hill, we have the expected noise principally from Republicans about how dreadfully awful our $1.5 trillion dollar deficit this year will be (I agree) and how it must be stopped now! The chess pieces are moving. Earlier in the week, Senate Republicans forced a vote on the repeal of the Affordable Care Act, which predictably lost. Certain federal district courts apparently don’t like the ACA either. One Florida judge declared the whole act unconstitutional.

Glimmers of Republican sanity are emerging. House Republicans, or at least its leadership, seem to be backing away from an earlier threat not to extend the federal debt ceiling later this year, realizing that the resulting economic meltdown may not be good for their reelection prospects. Meanwhile, President Obama is playing a clever game of defense, setting boundaries on what is acceptable and not acceptable to cut and vowing to veto bills with earmarks. Overall, the momentum certainly seems to be on the side of those trying to cut deficits and reduce the size of the federal government. This time will the cut federal spending and deficits crowd actually succeed?

My vote: bet on more debt. It seems likely that non-defense discretionary spending will be frozen for a few years. Of course, there will be lots of threats and wailing about how bad things are and how the dynamics must change now. However, that’s all they are: threats and wailing. To effect real change, new external drivers are needed. Specifically, our creditors need to stop lending us money (or slow the amount of money they are lending us) or bond rating firms (some of whom were bailed out by federal tax money just a couple of years ago) need to downgrade the U.S. Treasury’s AAA bond rating.

There is little evidence now that either of these things will happen. Why? There are many reasons but principally there is an enormous surplus of capital in the world, including trillions held by U.S. companies. Many of those holding the capital are already heavily invested in U.S. treasuries and do not want to see their investment’s value diminished. A lot of their extra money can certainly be invested in other stocks and bonds, but even blue chip companies are not as safe a refuge for money as U.S. treasury bills. Seeking safety, it seems unlikely that capital will flee U.S. securities.

The improving economy will eventually increase tax revenues. It will be hard to see over the next few years, particularly since Congress and the president have already agreed to borrow money to fund a cut in social security withholdings. Nevertheless, eventually the economy will pick up a head of steam, bringing in more in the way of revenues and thus lessening the deficit. As the deficit shrinks, however marginally, the animus to cut federal spending eases as well. Getting out of wars in Iraq and Afghanistan will help eventually as well.

Another reason to bet on debt is to consider what really matters. For Republicans, the deficit is a talking point toward their real utopian goal of cutting the size of the federal government. To seriously do this they need sixty plus votes in the Senate, a majority of the House and a Republican president. Two out of three are possible in 2012, but three out of three are very unlikely. As for right now, we will all have to muddle through somehow. What this will amount to in the end is probably a freeze on non-defense discretionary spending. President Obama noted in his State of the Union speech that this is only fifteen percent of federal spending, so a freeze does not solve any underlying problems. Medicare costs in particular will keep rising.

Republicans talk about cutting Medicare and Medicaid, but it is mostly talk. What they really want to do is cut non-defense discretionary spending. They want symbolic victories, like getting rid of the Department of Education and the Corporation for Public Broadcasting because these agencies offend them. Even if they succeed, which is unlikely, they don’t address the real problem. Discretionary spending outside of Defense has not been the principle cause of deficits since the Great Depression.

The real problems driving up the debt, aside from the bad economy and tax cuts are: Medicare, Medicaid and defense spending. Of the three, only one is a realistic target for major cuts. Can you pick the right target? If you said Medicaid, come up and claim your prize. Why Medicaid? Because when push comes to shove, the disenfranchised are always the first to go. You can see it in being played out right now in state and local governments. Here in Virginia, for example, services for the mentally ill were one of the first cut. A few people speak for the mentally ill, but not many and they are not well organized. Nor do they contribute to politicians’ war chests. Even with Medicaid, it is not going to go away, but if forced to choose between the three, it will be the first to be sizably cut. That is because those who buy influence ultimately win. The poor, being poor, cannot buy influence, and survive only on largess. So Medicaid stands a decent chance of being a loser, while farm subsidies will doubtless continue. (After all, they go principally to red states, and principally to large agricultural companies.)

The Defense Department may get symbolic cuts, but that’s all they will be. Secretary of Defense Robert Gates is proposing “cuts”, but this does not mean he expects DoD’s budget to go down. No, he is proposing slowing its rate of growth. While there are some Tea Partiers who would favor real and painful cuts to the Department of Defense, there are too many teats feeding off the military industrial complex. Cuts will be mostly symbolic and weapons systems built in large numbers of congressional districts, as usual, will be mostly immune to cuts.

Social Security is largely untouchable. Social Security will neither be abolished nor will it be replaced with some sort of voucher system. Any honest Republican knows this. At worst, the retirement age will be increased but that will prove unpopular with voters, who can hardly keep a job now. Moreover, social security is not insolvent. It will always have a steady revenue stream through withholdings. The only concern is that over the next twenty years it will be slowly drawing from its trust of already accumulated savings, i.e. Treasury bills, unless the law changes.

Medicare spending is the most chronic and largest problem. Cutting it and raising taxes are the only two things that will seriously reduce the deficit. Unfortunately, it remains popular with the public and retirees depend on it. Republicans live in a fantasy world that it can be converted into a voucher system. To fix Medicare will require making painful choices among many vested interests including doctors, drug companies, retirees, hospitals, ancillary insurance providers and clinics. For it to become solvent will require that hardest of work: everyone must share in the misery. Of course, everyone will want someone else to endure the misery, not them.

The last reason to bet on debt is that tax increases have become anathema. When push comes to shove, Republicans will put deficit spending ahead of tax increases. This is as sure as the sun will rise. The only way to seriously raise tax rates is to have a Democratic congress, sixty plus Democratic votes in the Senate and a Democratic president. That too is very unlikely.

So for the short term, unless our creditors and rating firms force our hand, expect barbarians at the gate, but wielding only noise as weapons. More debt will win because it is the least painful choice. Future generations, after all, aren’t yet of voting age.

 

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