from Paul Smalera:
Downgrading democracy
By Paul Smalera All views expressed are his own.
The Washington debt ceiling debate over these past months was the throwing open of the doors to the democratic slaughterhouse -- let’s please not ever complain again about not being able to watch the sausage get made. Though our media window onto the killing floor surely contributed to the S&P’s downgrade of U.S. debt, that’s not an entirely bad thing, as I’ll explain in a moment.
The preemptive downgrade of U.S. debt breaks a disturbing ratings agency pattern: Too-late downgrades from S&P and the other ratings agencies in the cases of Bear Stearns, Lehman Brothers, AIG, Greece and Ireland among many others. In the econoblogosphere, reliably hind-sighted ratings-agency downgrades, whether of sovereign debt or a teetering company’s bonds, have come to be something of a dark joke. It’s overdue that S&P got itself back into predictive rather than reactive mode. Yet the company’s sovereign debt committee surely chose the wrong target in U.S. Treasuries and broke the late-downgrade pattern for all the wrong reasons.
The ratings agency’s decision reads like nothing other than a fit of pique towards the government institutions and American people that had come to blame it as a prime enabler of the global financial crisis. The agencies, as my colleague Christopher Whalen just wrote, “prostituted themselves and their special position of trust with respect to mortgage-backed securities and exotic derivatives.” To get a little more anatomical, executives at the ratings agencies churned out AAA ratings on CDOs and other risky debt -- debt that their analysis should have shown to be junk-bond quality at best -- because they risked losing business if they were too critical. (Call it the, “every John is the best lover ever” theory of credit rating.)
The S&P’s biggest blunder here is that the U.S., thanks to the debt deal everyone hates, will continue never missing a debt payment. A close second is that even if the U.S. had run out of borrowing power, Timothy Geithner and the Treasury Department surely had a “Plan B” that would’ve prioritized debt payments to avoid a default, probably for at least a few more months before its cash-on-hand situation became truly dire.
But the real reason the S&P was wrong to downgrade the U.S. is because what we all just witnessed in D.C. was, as the famous quote goes, the sausage being made. It was an open, democratic process. The Tea Party Republicans who blocked more moderate debt ceiling legislation are duly-elected representatives who were fighting hard for their constituents and beliefs, however radical. It may frustrate moderate or liberal voters to no end that Tea Party governance appears to be little more than obstruction, but that’s been the prerogative of minorities in divided governments for centuries. In the end, as analysts conceded, they were brutally effective in swaying the Obama administration and Senate Democrats much closer to their preferred, fiscally constrictive debt ceiling deal. Since when are political compromises supposed to be pretty?
While Americans, and indeed the world, would’ve surely preferred a smoother debt deal, our divided viewpoints on the country’s proper economic direction forward produced the only deal that all sides could begrudgingly sign onto. And that’s how democracy is supposed to work. What S&P downgraded then, as it admitted when it tossed out its own $2 trillion error and went full speed ahead, was the democratic political process and the representative form of government as it currently exists in the U.S. (Aside: Has the S&P boxed itself into reaffirming its rating based on the results of every national election from here on out?)
Is the debt-ceiling deal hated because it will work, or won’t work?
By James Ledbetter All views expressed are his own.
As is so often the case when markets drop vertiginously, the explanation you get for what is happening depends almost entirely on whom you ask. There is, for example, a broad consensus that the debt-ceiling deal was a major contributor to the market plunge that kicked in last week.
But, what, precisely, are investors objecting to when they sell in reaction to the debt deal?
That depends.
To hear the deficit hawks tell it, the problem is that everyone can see that the deal was an effort to delay real decision-making on the U.S. debt. My colleague Gregg Easterbrook calls the deal “as phony as a $3 bill,” and argues that stocks dropped precipitously when “markets learned that people at the top of the government of the United States were going to do nothing at all about the national debt, beyond acting like windbags.”
This view is reinforced by David Beers, the head of sovereign ratings at Standard & Poor’s, the man most responsible for the first-ever downgrade of the U.S. On Monday, Beers told a Reuters interviewer that the agency might raise the U.S. outlook to stable “if the agreement between the administration and Congress, the $2.4 trillion fiscal consolidation package, is implemented in full.”
Yet others think that implementing the package is precisely the problem. In a weekly note distributed by the investment bank Nomura, three analysts outlined what they say would be the harmful economic consequences of the Budget Control Act actually taking effect. They note that if the “sequestration” part of the bill is triggered—that is, if the so-called supercommittee can’t get Congress to agree to its recommendations—that “would result in painful across-the-board cuts in discretionary and direct spending evenly divided between defense and non-defense appropriations.” This, in conjunction with the expiring Bush tax cuts, “could completely broadside the US economy…the defense spending cuts could be especially painful as they would likely force military base closings.”
Everyone is disappointed. Those familiar with the dynamics of longer term public finances are disappointed we didn’t get anywhere. Everyone else eithers pretends to be in denial, or is in denial, and knows something is terribly wrong but are not ready to seriously consider any specifics because it is either over their heads or way too scary to think about.
Assessing the debt ceiling damage
By James Hamilton The opinions expressed are his own.
Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Hamilton’s reply. Here are responses from Laura Tyson, Benn Steil, Russ Roberts, Donald Boudreaux, Robert Frank and James Pethokoukis as well.
I much agree with the substance of Larry Summers’s observations on the recent debt deal.
Let me begin my thoughts by suggesting that the debt debate lumped together three issues that I regard as separate problems. There was first the immediate challenge of how the U.S. government was going to pay its bills for the rest of August. Second is the near-term need to bring unemployment down– we need to see more robust economic growth in order to get Americans back to work as quickly as possible. And third is the daunting challenge of putting U.S. fiscal policy on a sustainable long-run course– debt cannot continue to grow as a multiple of GDP, and something needed to change to ensure that it did not.
The first problem– finding a way to meet the government’s immediate spending commitments– was entirely a monster of Congress’s own creation. Congress had stipulated a certain level of spending. Congress had further approved of taxes that resulted in revenue substantially below those spending levels. It would then seem obvious that the government needed to borrow additional funds to make up the difference. Yet Congress had ruled that out as well in the form of a standing limit on how much could be borrowed. It was unclear how this was all supposed to be reconciled, and how exactly items such as Social Security payments, soldier salaries, and sums owed creditors were all going to be paid this week. The clean answer would of course have been to raise the debt ceiling as a stand-alone act, and separately modify the spending or tax policies if legislators didn’t want to keep on seeing the total sum borrowed continue to rise.
So perhaps we should be thankful that at least one thing we got out of the last-minute deal was a lifting of the debt ceiling, allowing August federal payments to be made on schedule. But I think there was some damage done by carrying the drama as far as we did. People were getting nervous about how this would all play out. When people get nervous they sit on the sidelines, and when folks sit on the sidelines, the economy can stall. Concerns about how this would all end up could have been one factor contributing to the July plunge in consumer sentiment, and that loss in confidence could also be relevant for recent weakness in consumer spending. I found myself getting calls from friends worried about what the wrangling in Washington might mean– was it still safe to be holding T-bills, and if not, where should people put their money? A few years ago, hardly anybody was talking seriously about the possibility that the U.S. might fail to honor its statutory debt. Today, there is open discussion of downgrading U.S. debt. Although we got through this episode, a residual uneasiness is still going to be there, and may leave us with less room to maneuver when a real problem shakes people’s confidence.
The second problem– getting the unemployed back to work– is one that could only be aggravated by recently debated measures. I share the strong concern held by many about the need for long-run fiscal sustainability. But I feel equally passionately that cutting near-term spending is counterproductive. Reducing government spending is taking away somebody’s income, namely, that of the government employee, contractor, or recipient of transfer payments. Granted, we will soon need to start making exactly those cuts. But the time to do so is when there are private sector jobs available to pick up the slack. If we try slashing the 2012 budget, it will just add more people to the current swollen unemployment rolls. Again, perhaps another thing to be thankful for in the budget deal is that the spending cuts it implements for 2012 appear to be pretty minor.
@oneofthesheep
You are correct, wars and the equipment to fight them is costly…$4 Trillion and counting since 2001, but without a dime raised in taxes to cover the increase in military spending and the increase in costs with veterans returning home, what is the end game?
$4 Trillion is equal to 26% of the National Debt. Where are the patriots willing to help pay for the added expense of our war efforts?
On another note, sadly Mr. Hamilton you have too many academic credentials to be heard from those on the Right. Apparently anyone connected to academia is open to a vitriolic assault from any two-bit Neo-Con zealot with an anti education agenda.
Entitlement reform would indicate maturity
By Russ Roberts The opinions expressed are his own.
Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Roberts’ reply. Laura Tyson, James Hamilton, Donald Boudreaux, Robert Frank, Benn Steil and James Pethokoukis as well.
Summers begins with a refreshing instance of honesty about the effect of the debt deal:
Despite claims of spending reductions in the $1 trillion range, the actual agreements reached so far likely will have little impact on actual spending over the next decade.
It is hard to reconcile this likely truth with the accusations coming from the left that Obama has caved and the Republicans are “terrorists” for “slashing government spending” but such is the nature of political life these days. Summers is also right about the importance of the baseline. When is a cut not a cut? When it’s a reduction from an artificially high baseline. There is very little austerity in the debt deal.
Summers next claim is harder to swallow:
The deal confirms the very low levels of spending already negotiated for 2011 and 2012, and caps 2013 spending about where most would have expected this Congress to end up.
I just checked on online college degree program with a very obscure college. They want about $26,100 for a 13 to 16 month 90 credit per hour bachelors degree working at home with one’s own computer.
Entitlement reform won’t indicate maturity anymore than those who grabbed the inefficiently loaded lifeboats of the Titanic indicated public spiritedness.
It is simply that those in the boats have to spend a great deal of time for the rest of their lives arguing with themselves that their own welfare was somehow better for society as a whole. Good Luck trying!
There will be many more riots in the street. Its very difficult not to when one find oneself freezing to death.
Regretting raising the debt-ceiling
By Donald Boudreaux The opinions expressed are his own.
Reuters invited leading economists and writers to reply to Larry Summers’ op-ed on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Donald Boudreaux’s reply. Here are responses from Laura Tyson, James Hamilton, Robert Frank, Russ Roberts, Benn Steil and James Pethokoukis as well.
Larry Summers’ cynicism about the new debt deal is justified. What, indeed, is the baseline from which $1.5 trillion is to be subtracted?
That there’s no clear answer to this question — and that there’s no serious effort to avoid the coming explosion of entitlement spending — drives home the truth that this deal really is nothing more than, as The Economist describes it, “a mishmash of expedient stop gaps and promises.”
My objections to the entire debt-ceiling brouhaha, however, run more deeply than those of Prof. Summers.
Unlike him, I dispute the claim that failure to raise the debt-ceiling would have been a calamity. Sure, failure to raise the debt-ceiling would have prevented Uncle Sam from doling out as much money as he promised to dole out to countless numbers of people counting on moola from Washington. But even without a higher debt ceiling, the government’s cash flow would have been more than adequate to pay all of its genuine creditors in full. No actual default would have been necessary.
When one considers how many ways the wealth of the nation is distributed and redistributed, from subsidies to the top, from the top, to the bottom, from the bottom, and very likely sideways, it should be a matter of real confusion and no doubt endless debate, what “other people’s money” really means.
No one really has anything but other people’s money, especially now. The process is supposed to work best when it is a matter of exchange. Somehow the reservoirs must be filled, or the fountains run dry and the gardens and the gardeners die.
Fountains usually pump water. It is not necessary for them to pump blood. I’ve never understood the theology of blood. Do those who believe in it, or seem to, understand it themselves?
Washington’s next challenge
By James Pethokoukis The opinions expressed are his own.
Reuters invited leading economists to reply to Larry Summers’ ope-d on his reaction to the debt ceiling deal. We will be publishing the responses here. Below is Reuters Breakingviews columnist James Pethokoukis’ reply. Here are responses from Laura Tyson, James Hamilton, Robert Frank, Russ Roberts, Benn Steil and Donald Boudreaux as well.
Like Larry Summers, I have a “multifaceted reaction” to Washington’s debt ceiling and budget deal. In fact, I have the exact same multifaceted reaction, except driven by completely different rationales.
1. Like Summers, I feel relief — but not because the agreement averted default and avoided harsh austerity. While the package doesn’t fundamentally change America’s fatal fiscal trajectory, it keeps the legislative momentum headed in the right direction with a focus on reducing debt via spending cuts rather than tax increases.
Nor do I think the process was some sort of “shabby spectacle.” The democratic process is always messy, and frequently driven by a sense of crisis. But it was designed to prevent tyranny; not to promote efficiency. And the recent House ban on earmarks ensured much of the haggling revolved around policy rather than political favors.
2. Likewise, I am cynical — but not about the nature of the debt deal. Future editions of Congress and the economic cycle will have great say about how much America taxes and spends in coming years. Fiscal norms are being set and attitudes changed now, such as when Congress rejected President Barack Obama’s recent budget 97-0. The new budget deal is part of that ongoing evolution.
I am bothered, however, by the unwillingness of the current administration to clearly outline its vision for America’s fiscal future. The consensus of left-of-center economists and policy wonks is that America needs to tax and spend far above traditional levels in coming decades due to America’s aging population and public investment deficit. The White House should come clean and have an upfront debate with Republicans about where the country needs to go.
Political strategy in the Budget Control Act era
By Keith Hennessey The opinions expressed are his own.
I cover three topics in this post: what important players won in this deal, the core concepts and tradeoffs within the deal, and what the different strategies might be this Fall under this bill when it becomes law.
The President knows he will get debt limit increases through early 2013 no matter what House conservatives/Tea Party members do. Those Members can no longer “hold a debt limit increase hostage” before the 2012 election.
We could also describe this as eliminating liquidity risk through 2012.
Assuming someone doesn’t find a way out of the enforcement mechanisms in the bill (1 in 3 chance), there will be at least $2.1 T in deficit reduction over the next 10 years as a result. While I think that’s a big policy benefit, I’m not sure how important that is substantively to the President. (Is he for stimulus? Austerity? Who knows at this point.)
But given his recent public conversion to deficit hawk, the President will undoubtedly stress it publicly over the next 18 months and began doing so last night. At a minimum, the President will benefit politically with deficit hawk centrists, both for the policy result and the achievement of a bipartisan agreement. Prepare to watch the President seize political credit for spending cuts he fought.
The President also has an opportunity to push for tax increases as part of the Joint Committee deficit reduction process this fall. You will hear the corporate jets & Big Oil riffs ad nauseam.
G’Day All,
The several articles I’ve read indicate that raising federal income rate %s actually do more harm and raise less dollars for the US economy and treasury??!!
DocE
Debt police go rogue
By Zachary Karabell The opinions expressed are his own.
As the debt-ceiling storm intensifies, some reports indicate that the White House, and perhaps the global financial markets, are less concerned with paying bills after Aug. 2 than with credit-rating agencies imposing their first-ever U.S. government downgrade, from AAA to AA+.
How did it come to this—that a trio of private-sector companies could wield such enormous influence? More specifically, a trio that has proven chronically behind the curve, analytically compromised, and complicit in the financial crisis of 2008–09 as well as the more recent euro-zone debt dilemmas? Somehow, these inept groups again find themselves destabilizing the global system in the name of preserving it.
While there are more than 100 credit-rating agencies worldwide, three—Moody’s, Fitch, and Standard & Poor’s—occupy their own particular universe, the products of a New Deal ruling from the SEC that enshrined “nationally recognized statistical rating organizations” to ensure that the bonds held by insurance companies, banks, and broker-dealers were appropriate for their capital requirements.
From this well-intended decision, three new private-sector firms attained the status of government regulators but with none of the oversight. Undoubtedly there are many honorable, meticulous, and intelligent people working for these companies. But throughout the last decades of the 20th century and into the 21st, the decisions of the agencies about the creditworthiness of emerging-market countries imperiled financing needs, and we have seen a repeat of the crises of the European periphery, as the best plans to restructure the debts of Ireland, Portugal, and Greece have been jeopardized by the rigid application of formulas that the ratings agencies apply.
These agencies also evaluate private debt. And it was their continual stamp of approval on trillions of dollars of ultimately worthless mortgage-backed securities that allowed pension funds, endowments, and municipalities to buy them up in the erroneous belief that they were safe and sound. That decision cost taxpayers hundreds of billions of dollars.
Yet here they are again, threatening to downgrade the debt of the United States—potentially costing taxpayers hundreds of billions, again, in the form of higher interest payments—because they don’t like the messiness of the political process and they don’t approve of the level of debt relative to GDP, so said David Beers of S&P.
A downgrade of U.S. creditworthiness is not imminent. Unfortunately neither is the trustworthiness of the rating agencies. Our largely unregulated financial system abounds with conflict of interest from the private sector to the public. Pension systems, 401K holders, banks and government are all dependent upon the performance of the stock and bond markets. No one cares about consequences, just make the numbers look good.
Clearly the reinstatement of Glass Steagal is in order. We have been and are repeating the mistakes of the 1920s. The hedge fund/derivative market has turned investments into a casino game and serve no fundamental purpose as do the short sellers. Wise people in government have warned every administration going back to Clinton of the dangers of the derivative market only to be marginalized or replaced.
Cicero among others stated long ago one can measure how corrupt a society is by how many laws they have. Perhaps “We the People” are unwilling to exercise our inalienable right as sovereign over our elected leaders. They are supposed to serve us, not themselves and their social class.
I fundamentally agree with you on Social Security and Medicare…good (in concept) for America. The unfortunate reality is that in keeping Senior’s costs down, it has the effect of increasing everyone else’s medical costs.
If I had my way, all health care would be managed by non-profit entities, and there should be some common sense as to, say, not authorising new hips for people that statistically will never walk again, or multi-thousand dollar treatments for people that will statistically be dead very soon anyway. All would have to execute a Living Will and organ donation form before being admitted to a hospital.
Health care is way too important and complex for government to administer, it seems fundamentally immoral for shareholders to profit from another’s poor health. I would not be opposed to a “universal health care system” of common rules, checks and balances under which multiple regional non-profit entities would compete to serve individuals (similar to Medicare Pt. D). If pushed, I would view insurance companies similarly.
It is unfortunate that the only time unions and management are of common mind is when taxpayers are stuck with the bill for their agreements. Speaking strictly of today, the “average” take-home pay of a union worker IS higher that that of the “average” take-home pay of a non-union worker, but that tide doesn’t raise all boats.
The “average” non-union worker can’t join the union… he/she has to “know somebody”. Fact be known, the steward’s son or brother-in-law probably gets more hours than others of similar seniority; and seniority trumps skill and productivity in a union every time.
In that sense, I don’t think the “union privilege” helps the going rate in the trades at all…it’s supply and demand where contracts don’t require union help. It certainly doesn’t help the average American afford a house or government to work on infrastructure and get a dollar’s worth of effort for each dollar spent.
Our Uncle Sam was the crook that plundered the trust fund, and I’d like to neuter big Pharma’s lobbiests…they’re good. Really good!
Whaddaya think now?