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Posts Tagged ‘Debt Ceiling’

It appears that the government shutdown, which technically is a battle over annual appropriations legislation for so-called discretionary spending, is going to drag on for a while.

The Obama Administration has shown zero willingness to negotiate, even though Republicans have made a series of offers to resolve the conflict.

And the longer this fight lasts, the more likely that the shutdown battle will get wrapped up in a bigger fight over the debt limit.

The White House apparently thinks this is a good development because of the assumption that GOPers can be stampeded into a bad deal to keep the government from supposedly defaulting.

Indeed, the Administration already is fanning the flames of economic anxiety. Here’s some of what the Treasury Department recently wrote as part of this world-is-ending hysteria.

A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.

I’m surprised they didn’t warn about the four horsemen of the apocalypse and also say that default would mean cancer, tooth decay, and the heartbreak of psoriasis.

On a more serious note, there are three things about the Treasury report that are worth noting.

1. The Obama Administration is deliberately trying to blur the difference between defaulting on the debt, which would have real consequences, and “defaulting on obligations,” which is a catch-all phrase that includes mundane and uneventful matters such as postponing a Medicare payment to a hospital or delaying a grant disbursement to a state government.

2. The Treasury report repeatedly says bad things “could” happen and “might” happen, but never that they “will” happen. Well, I “could” be the clean-up batter next year for the New York Yankees, and I “might” date a couple of supermodels from Victoria’s Secret. But I wouldn’t want to bet my life on either of those things happening. Likewise, don’t hold your breath waiting for the sky to fall if the debt limit isn’t immediately increased.

3. The White House wants people to believe genuine default is likely even though tax receipts this fiscal year are expected to be more than $3 trillion and interest on the debt is projected to be only $237 billion. In other words, the Treasury will collect more than 12 times as much revenue as needed to pay interest on the debt. Even someone like me, with my well-known views on the incompetence of the federal government, thinks that the Treasury Department will have no problem figuring out how to avoid default.

To be sure, there would be some real problems if the debt limit wasn’t raised. The Treasury Department would have to override its own system to stop payments from automatically occurring. The bureaucrats would have to figure out how to prioritize payments.

Interest unquestionably would be paid on the debt, so there’s no real possibility of default. One also assumes the Administration would figure out how to make politically sensitive payments such as Social Security checks. But this would be uncharted territory, so things probably would be messy.

All that being said, I want to reiterate that a default only would happen if the White House wanted it to happen. And while the Obama Administration has shown a willingness to inflict pain on innocent third parties – as illustrated by the attempts to inconvenience Americans when the sequester imposed a tiny bit of fiscal restraint, it is inconceivable that the White House would decide to engineer an actual default.

By the way, it’s not just partisan political operatives in the Obama Administration who are making hysterical assertions.

Here are some blurbs from a Wall Street Journal report showing that the CEO of Goldman Sachs seems to be on the same page as the White House.

“There’s precedent for a government shutdown. There’s no precedent for default,”Goldman Sachs Group Inc. CEO Lloyd Blankfein said after emerging from an hour-long meeting between Mr. Obama and top financial executives. The executives, in town for a series of meetings arranged by the Financial Services Forum trade group, told Mr. Obama that even the possibility of the U.S. defaulting on its debt, should policy makers fail to raise the ceiling on the nation’s borrowing, would derail the nascent recovery and cause economic harm. Mr. Blankfein said they told Mr. Obama “exactly how bad it would be.”

And here are parts of a story from the UK-based Guardian about the views of the IMF’s head bureaucrat.

Christine Lagarde, the IMF’s managing director, urged America’s politicians to settle their differences before the dispute harmed the entire global economy. Speaking ahead of the fund’s annual meeting in Washington next week, Lagarde said it was “mission critical” that Democrats and Republicans raise the US debt ceiling before the 17 October deadline. Lagarde said the dispute was a fresh setback for a global economy… “In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy.”

So what’s going on? Why are they making these hyperbolic statements?

Beats me, but here are my three theories.

1. They don’t know what they’re talking about, either because of stupidity or laziness. Since neither Blankfein nor Lagarde are stupid, perhaps they are simply too lazy to learn how the federal government operates and they don’t understand that the Treasury Department will have far more money than is needed to pay interest on the debt.

2. They understand the issues, but they’re willing to make dishonest and misleading statements because they want to please the White House. This could be because they sympathize with the President’s agenda. Or perhaps this is a typical case of DC-style horsetrading, with Blankfein supporting the White House in exchange for some sort of regulatory favor and Lagarde providing help to Obama in exchange for more subsidies from American taxpayers for the IMF.

3. They understand the issues, but are genuinely afraid that the President is so petty and ideological that he might deliberately force a default, so they are warning about the risks of that approach. Seems totally improbable, but keep in minds that the White House is so petty and spiteful that it has been spending money in a shutdown to keep elderly WWII vets from visiting an open-air memorial!

I’m guessing the second option is most accurate, but there’s no way to know for sure.

In closing, let’s take a step back and look at the big picture. What’s America’s biggest long-run economic challenge? Almost surely, the answer is that poorly designed entitlement programs will lead to a much more onerous burden of government spending.

The President made this problem worse with Obamacare (just as Bush made it worse with the prescription drug entitlement).

Advocates of fiscal responsibility want to address this problem now, before we get close to the point of a Greek-style fiscal collapse.

I’m not sure they can win, given the structure of America’s political system, but I’m damn sure glad that at least some people are trying to do what’s best for the country.

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…Well, I’m not sure what it means. But it sure doesn’t make sense when you look at the big picture. A credit card company wouldn’t increase a deadbeat’s credit limit, so why is it a sign of fiscal prudence to give Uncle Sam more borrowing authority?

That being said, I never thought it was realistic to block a debt limit increase. Indeed, I fully expected an unsatisfactory result.

But this cartoon is a pretty good summary of how Washington thinks.

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Here’s the video that won the lucrative Powerline prize. Perhaps not as catchy as the entry I posted a couple of days ago, but very well done, with a proper focus on excessive government.

And here’s a video just released by Cato on why the debt deal – at best – is a holding action that postpones the real fights until later. I give some analysis, along with my colleagues Chris Edwards and Jagadeesh Gokhale.

And here’s some of what I wrote in a column for CNN. My basic messages is that establishment politicians of both parties got what they wanted – which was no heavy lifting and all tough choices postponed. (I also wrote it early yesterday on the assumption that the bill would pass both the House and Senate, so I’m glad I didn’t look like a fool)

…politicians of both parties were the victors and taxpayers are the ones left in the cold. In other words, the budget deal was a victory for the political establishment. Here’s why Republicans are winners. They get to tell their tea party activists that they forced Obama to cut spending. It doesn’t matter that federal spending will actually be higher every year and that the cuts were based on Washington math (a spending increase becomes a spending cut if outlays don’t climb as fast as some artificial benchmark). They also get to tell their anti-tax activists that they held the line. Perhaps most important, the supercommittee must use the “current law” baseline, which assumes that the 2001 and 2003 tax cuts expire at the end of 2012. But why are GOPers happy about this, considering they want those tax cuts extended? For the simple reason that Democrats on the supercommittee therefore can’t use repeal of the “Bush tax cuts for the rich” as a revenue raiser. This means that most Republican incumbents are well-positioned to win re-election. Here’s why Democrats are winners. Thanks to the magic of government math, despite all the talk of budget cuts, discretionary spending will be more than $100 billion higher in 2021 than it is this year. And since defense spending in Iraq and Afghanistan presumably is winding down, this means even more money will be available for domestic programs. In addition to telling the pro-spending lobbies that the gravy train is still on the tracks, they also get to tell the class-warfare crowd that there’s an improved likelihood of higher taxes for corporate jet owners and other “rich” people. Notwithstanding GOP assertions, nothing in the agreement precludes the supercommittee from meeting its $1.5 trillion target with tax revenue. The 2001 and 2003 tax legislation is not an option, but everything else is on the table. This means that most Democratic incumbents are well-positioned to win re-election.

But don’t forget that postponing a fight doesn’t make it go away. We’ll have at least two more big fiscal fights this year – the spending bills for fiscal year 2012 (which begins October 1) and the “super committee,” which has to make recommendations by Thanksgiving. I’ll have more to say on those issues soon.

Last but not least, here’s an entry in the Powerline contest from my Cato colleague Caleb Brown. I like the huckster theme.

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Considering the Democrats control the Senate and the White House, I actually think the Republican leadership did a decent job in the debt negotiations. Of course, I had low expectations, but did anybody expect miracles with Obama in the White House?

As you might expect, this means the agreement is – at best – a tiny step on a long journey.

I’ve already looked at the revenue part of the deal, so let’s turn our attention to the spending side of the fiscal ledger. Specifically, the supposed spending cuts for the “discretionary” part of the budget.*

This chart shows you everything you need to understand about the budget deal. The top line (fuchsia, I’m told) is the “discretionary baseline,” which is an estimate of how fast spending would increase to keep pace with factors such as inflation. The next line shows how fast discretionary spending will grow under the budget agreement.

The good news is that discretionary spending does not grow as fast with the budget agreement. The bad news is that it still grows. In other words, the supposed “budget cuts” are based on Washington math, where a spending increase is called a spending cut simply because outlays didn’t rise even faster.

But the really bad news is that the burden of discretionary spending – over the entire 10-year period – will be more than twice as large as it was in 2000. In other words, the budget deal basically leaves unchallenged the entire Bush-Obama spending binge.

But, as the old saying goes, a journey of 14.3 trillion miles begins with a first step.

*By way of background, the federal budget has three types of spending. Entitlements, which are “permanently appropriated” and increase automatically. Net interest, which is the one part of the budget that truly is uncontrollable. And discretionary, which are the parts of the budget funded by annual appropriations bills.

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Politicians last night announced the framework of a deal to increase the debt limit. In addition to authorizing about $900 billion more red ink right away, it would require immediate budget cuts of more than $900 billion, though “immediate” means over 10 years and “budget cuts” means spending still goes up (but not as fast as previously planned).

But that’s the relatively uncontroversial part. The fighting we’re seeing today revolves around a “super-committee” that’s been created to find $1.5 trillion of additional “deficit reduction” over the next 10 years (based on Washington math, of course).

And much of the squabbling is about whether the super-committee is a vehicle for higher taxes. As with all kiss-your-sister budget deals, both sides can point to something they like.

Here’s what Republicans like:

The super-committee must use the “current law” baseline, which assumes that the 2001 and 2003 tax cuts expire at the end of 2012. But why are GOPers happy about this, considering they want those tax cuts extended? For the simple reason that Democrats on the super-committee therefore can’t use repeal of the “Bush tax cuts for the rich” as a revenue raiser.

Here’s what Democrats like:

There appears to be nothing in the agreement to preclude the super-committee from meeting its $1.5 trillion target with tax revenue. The 2001 and 2003 tax legislation is not an option, but everything else is on the table (notwithstanding GOP claims that it is “impossible for Joint Committee to increase taxes”).

In other words, there is a risk of tax hikes, just as I warned last week. Indeed, the five-step scenario I outlined last week needs to be modified because now a tax-hike deal would be “vital” to not only “protect” the nation from alleged default, but also to forestall the “brutal” sequester that might take place in the absence of an agreement.

But you don’t have to believe me. Just read the fact sheet distributed by the White House, which is filled with class warfare rhetoric about “shared sacrifice.”

This doesn’t mean there will be tax increases, of course, and this doesn’t mean Boehner and McConnell gave up more than Obama, Reid, and Pelosi.

But as someone who assumes politicians will do the wrong thing whenever possible, it’s always good to identify the worst-case scenario and then prepare to explain why it’s not a good idea.

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Welcome Instapundit readers. Thanks, Glenn.

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Two of my rules for fiscal policy are:

1) The details of any budget agreement will be to the left of what is first announced, and,

2) The “spending cuts” in any budget agreement will evaporate within two years.

With this in mind, I’m not expecting to be overjoyed when we get the details of the supposed agreement.

So let’s pass the time with some debt-ceiling entertainment (who knew such a genre even existed?).

We’ll start with one of the entries in Powerline’s debt contest. This video didn’t win a prize, but I urge you to share this post widely because the creator highlighted excessive spending and redistribution, thus putting the focus on the real problem of too much government rather than just looking at the symptom of too much red ink.

And the video also is entertaining.

And for downright cleverness, let’s look at the horrible things that happen, if Iowahawk’s predictions are accurate, if the government shuts down.

Beltway policy experts begin living by own wits; after 45 minutes there are no survivors.

Roving bands of outlaws stalk our streets, selling incandescent bulbs to vulnerable children.

Unregulated mohair prices at the whim of unscrupulous mohair speculators.

NPR news segments no longer buffered by soothing zither interludes.

Breadlines teeming with jobless Outreach Coordinators, Diversity Liaisons, and Sustainability Facilitators.

Cowboy poetry utterly lacking in metre.

General Motors unfairly forced to build cars that people want, for a profit.

Chaos reigns at Goldman Sachs, who no longer knows who to bribe with political donations.

Mankind’s dream of high speed government rail service between Chicago and Iowa City tragically dies.

Sesame Street descends into Mad Maxian anarchy; Oscar the Grouch fashions shivs out the letter J and the number 4

No longer protected by government warning labels, massive wave of amputations from people sticking limbs into lawn mowers

New York devolves into a dystopian hellscape of sugared cola moonshiners, salty snackhouses and tobacco dens.

At-risk Mexican drug lords forced to buy own machine guns.

Chevy Volt rebate checks bounce, stranded owners more than 50 miles from outlet.

WH communications office reduced to sending talking points to Media Matters via smoke signals and log drums.

Potential 5-year old terrorists head to boarding gates ungroped.

Defenseless mortgage holders forced to live in houses they can actually afford.

Without college loan program, America loses an entire generation of Marxist Dance Theorists.

Embarrassing state dinners, as Obamas are forced to downgrade from Wagyu to Kobe beef.

President Obama places tarp over Washington Monument to conceal from Chinese repo men.

With the Dept of Ed shuttered, national school quality plummets to 1960s levels.

Anthony Weiner is forced to pay for own sex addiction therapy.

Displaced teenaged policy wonks organize under Supreme Warlord Ezra Klein.

Nation’s freeway exits croweded with desperate bureaucrats waving ‘will regulate for food’ signs.

State Department diplomacy becomes 38% less diplomatic.

WH holds rummage sale Rose Garden; all HOPE merchandise, styrofoam Greek columns 95% off.

Iowahawk, by the way, is the creator of the funniest public policy video ever produced. You will watch it more than one time.

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In the spirit of the budget battle, readers have to eat their peas (i.e., endure my analysis) before getting to the dessert menu of jokes from the late-night comics.

The big news today is that Speaker Boehner had to cancel a vote on his “Budget Control Act” last night. But other than the political-drama angle, I’m not sure why this is newsworthy.  Senate Democrats were united against the plan, with all 53 members signing a letter of opposition.

In other words, this was just a symbolic vote.

But I must admit that I’m puzzled why the GOP leadership decided to even bother going down this path. Republicans were beginning to make progress with the theme of “We’ve passed two proposals, where’s Reid’s plan or Obama’s plan?”

So why did they let the Democrats off the hook by launching an intra-party fight over a proposal that Senate Dems already have rejected? Beats the heck out of me.

In my conversations with folks on the Hill, I’ve suggested that GOPers should do three things.

1. Explain that they’ve passed a debt limit increase as part of cut, cap, and balance.

2. Explain that they look forward to hammering out a compromise deal in a conference committee as soon as the Senate approves its version of a debt limit increase.

3. Express disappointment that the Senate has failed to act, especially with time running out, and also reiterate that the White House has never put forward a plan.

These three steps won’t lead to anything wonderful. I’ve always been realistic about the GOP not having the power at this point to win a policy victory. But this approach sounds – and is – very reasonable and might help pressure the left into a reasonable deal.

Last but not least, I’m also curious about how the anemic growth numbers released today – flat in the first quarter and only 1.3 percent growth in the second quarter – will impact the debate. Given the low quality of debate in DC, I won’t be surprised if some hacks argue that the GOP’s failure to fully surrender on the debt limit issue somehow is responsible for how the economy performed in the first half of the year. Maybe time machines.

The only thing I can say for sure is that there is no risk of default, which is what I told the Canadian Broadcasting Company.

Now, for a bit of levity, here are a few jokes from the talk shows. I’ll give Conan the edge for this batch.

Leno

  • They say “Captain America” is successful because it takes place in a time when America could fight a war and get out of a depression at the same time. A whole different thing from today.
  • The Kardashian sisters made $65 million. Maybe they should be running the country.
  • Iowa Congressman Steve King says that if the country falls into default, President Obama could be impeached. Obama could stop that with three words: “President Joe Biden.”

Conan:

  • The government is less than a week away from not being able to pay its bills. We may have to move in with Canada for a while.
  • The debt ceiling debate is such a mess right now, al-Qaida is desperately trying to find a way to take credit for it.
  • If the debt ceiling isn’t raised by Aug. 2, the whole country can go into default and we won’t be able to pay our bills. Then we’ll have to ask our parents for money, which will be very embarrassing.
  • President Obama urged the American people to call Congress and demand that both parties work together on a compromise. The calls are 99 cents for the first minute, and a trillion dollars for each additional minute.

Kimmel:

  • John Boehner told Republicans to “get in line.” He was very angry. His face turned from orange to mandarin orange.
  • They say that the United States might default on its loans and China might foreclose. We’ll have to move into a cheap rental country or something.

Letterman:

  • The NFL lockout is over. All the parties agreed and we have a compromise. It’s too bad the national debt isn’t as important as football.

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