James Pethokoukis

Politics and policy from inside Washington

How bad was Obama 2012 budget 1.0?

Apr 18, 2011 20:36 UTC

It was this bad. (Note that this Goldman Sachs chart also shows that Obama’s budget would have resulted in the pulling of the automatic tax hike/debt cut trigger suggested in his new budget speech/plan). The WH plan is OMB FY 2012 Budget:

gschart

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COMMENT

That graph is incorrect. Under the CBO baseline, debt held by the public will reach 67% of GDP by 2021. Under Ryan’s plan it reaches 70% of GDP by 2021. Check the CBO’s assessment of Ryan’s plan.

Posted by JamesGreenfield | Report as abusive

The politics of S&P’s U.S. debt warning

Apr 18, 2011 17:16 UTC

OK, so Standard & Poor’s has downgraded the outlook for the U.S. to negative, saying it believes there’s a risk policymakers may not reach agreement on how to address the country’s long-term fiscal pressures.

“Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable,” S&P said in a release.

Some thoughts here:

1) Did the rather incoherent, hodgepodge nature of Obama’s budget speech last week play a role in this? As I wrote:

Obama’s much-hyped new budget plan is actually neither new nor a budget nor a plan. To the extent that it’s even a “framework” — to grant the White House its preferred descriptor — it’s one whose ideas and goals are precariously fastened together by the chewing gum and sticky tape of rosy economic assumptions and fiscal opacity. Then again, the core purpose isn’t budgetary balance but political persuasion.

And then there was the president’s rhetoric. Recall how Paul Ryan blasted Obama:  ”Rather than building bridges, he is poisoning the well.”  Here is how S&P puts it:

We view President Obama’s and Congressman Ryan’s proposals as the starting point of a process aimed at broader engagement, which could result in substantial and lasting U.S. government fiscal consolidation. That said, we see the path to agreement as challenging because the gap between the parties remains wide. We believe there is a significant risk that Congressional negotiations could result in no agreement on a medium-term fiscal strategy until after the fall 2012 Congressional and Presidential elections. If so, the first budget proposal that could include related measures would be Budget 2014 (for the fiscal year beginning Oct. 1, 2013), and we believe a delay beyond that time is possible.

2) The agency’s shocking note doesn’t mention the debt ceiling debate. But both Rs and Ds may try to use it to their advantage. Rs can argue it means the vote to raise the limit must include real budget reforms and cuts. Ds can say the U.S. fiscal position is precarious enough that this is no time to mess with the debt ceiling. Of course, that line would run counter to the Dem meme that the debt situation is important but not urgent.

3) Financial pros say that even should S&P take the next step and actually downgrade America’s AAA status — the note said there was at least a 1-in-3 chance of that happening within two years — it would likely have little economic impact. As the WSJ notes:

Meanwhile, Dan Greenhaus of Miller Tabak + Co. notes that even if the U.S. lost its premier status, that doesn’t mean the end of the world. “The experience of Canada and Japan show that the loss of a AAA rating is not a death blow,” he writes in a note to clients. “If governmental finances can be adjusted (in the case of Canada) or domestic participants continue to find the debt attractive (in the case of Japan), higher yields on a sustained basis are not assured.”

But that seems a bit too pat to me. Market and consumer psychology is a precarious thing. It might really depend on what else was happening in the world at that time.

4) I hope Republicans don’t let S&P use this warning to bully them into accepting tax increases to get a quick Grand Compromise budget deal. As I wrote a bit earlier today:

Here’s the problem: Any attempt to cut deficits and debt faster than Paul Ryan’s “Path to Prosperity“  would almost certainly have to involve immediate benefit cuts to Medicare and Social Security recipients or higher taxes. And to the extent that S&P’s call will be interpreted as an exhortation to cut now, those Democrats and Republicans (such as those in the U.S. Senate’s Gang of Six) who insist higher taxes must be part of the fiscal fix will have their hand strengthened. But what S&P is really saying is Washington must decide on a plan. Ryan has a plan, the Obama White House does not.

5) Washington types keep telling me that Americans really don’t care about the debt issue. But I think this warning — not to mention an actual loss of the AAA rating — is yet another data point that will sink into our collective head — right along with a trillion-dollar deficit, the EU debt crisis and our financial meltdown which shows too much debt can cause wealth to disappear in a flash.

COMMENT

Don’t think even for a moment this doesn’t help anyone but Palin. This is like manna from heaven for her. It’s as if God himself decided that she should have a banner week.

Everything seems to be falling into place for her now.

Posted by section9 | Report as abusive

Geithner vs. Ryan on S&P’s debt warning

Apr 18, 2011 16:01 UTC

Here is what the Treasury Department has to say about S&P’s bomb:

“This morning, S&P affirmed the AAA rating of the U.S., but emphasized the importance of timely bipartisan cooperation and action on fiscal reform. In addition, Moody’s commented today that ‘we view the changed parameters of the debate, with broadly similar goals as to government debt levels, as a turning point that is positive for the long-term fiscal position of the U.S. federal government.’

“As the president said last week, addressing the current fiscal situation is well within our capacity as a country. He has initiated a bipartisan process that will allow us to make progress on a balanced approach to restoring fiscal responsibility. The U.S. economy is strengthening as it emerges from the recent recession. Both political parties now agree that it is time to begin bringing down deficits as a share of GDP.

“S&P assumes that the U.S. will enact ‘a comprehensive budgetary consolidation program — combined with meaningful steps toward implementation by 2013,’ but we believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation.”

And here is House Budget Chairman Paul Ryan:

“We face the most predictable economic crisis in our history — a crisis driven by the explosive growth of government spending and debt. House Republicans took action last week to chart a new course by passing a budget that lifts our crushing burden of debt and puts our economy on the path to prosperity. By contrast, the President’s budget locks in Washington’s recent spending spree, adds $13 trillion to the debt over the next decade, and accelerates our nation toward a fiscal crisis. The failure to advance solutions threatens not only the livelihoods of future generations, but also the economic security of American families today. A campaign speech is no substitute for a serious, credible budget. The President and his party’s leaders must put an end to empty promises and work with us to avert this looming economic crisis.”

10 things you need to know about S&P’s U.S. debt warning

Apr 18, 2011 15:28 UTC

Barclays bank offers its take on S&P. Here are some highlights (bold is mine):

1) A couple of hours ago, S&P put its long-term rating on U.S. sovereign debt on negative outlook. This means that it believes there is at least a 33% chance that it will lower the AAA long-term rating of the U.S. within two years.

2) Its base case remains that U.S. policymakers will agree on a deficit reduction plan with savings of $4-5trn over the next 10-12 years. But importantly, S&P emphasizes that meaningful steps to implement this must start by 2013.

3) We believe this is an aggressive timetable, since it means that policymakers will have to agree on a long-term deficit reduction plan before the 2012 elections. This will be tough, given the political landscape and the structural nature of the budgetary problems.

4) According to S&P, the ratio of net general government debt/GDP would rise to 84% in the base case by 2013 (and 90% in a pessimistic scenario). Beyond the medium term, it views growth in entitlement programs to be the main source of fiscal pressure.

5) The catalyst for the negative outlook was the “increased risk” that there would be no resolution to “the medium and long-term fiscal challenges” facing the U.S. until after the 2012 elections.

6) In other words, once the two political parties put their deficit reduction plans on the table, it became obvious how far apart they were, and how difficult the road to political convergence would be. S&P noted that despite more than two years having passed since the financial crisis, there has been no agreement on steps to reverse the fiscal deterioration. It highlighted the examples of other countries such as UK, France and Germany, which have begun implementing plans to address their fiscal problems.

7) The announcement was seemingly a surprise to the bond market: 30y yields reversed their early morning rally, and the yield curve steepened immediately after the announcement. It was a surprise to us, as well. While we have always emphasized the unsustainable nature of the U.S. deficit and have outlined the likely factors that would drive a lowering of the U.S. AAA rating (see How risk-free are U.S. Treasuries? January 8, 2010), we had believed that the rating agencies would wait till after the 2012 elections before taking any action.

8) This announcement was not about the debt ceiling; in fact, the debt ceiling is not even mentioned in the S&P release. In sharp contrast, the reason why U.S. government ratings came under pressure in 1995-96 (Moody’s put parts of U.S. government debt on negative watch) was the debt ceiling impasse at that point. This means that even if the debt ceiling debate were to be resolved in the near term, it would not be enough to restore the outlook to stable.

9) On the other hand, the longer that debt ceiling negotiations drag on, the bigger the seeming rift between the two political parties and the greater the likelihood of a downgrade down the road. In turn, this would mean a steeper Treasury yield curve, higher yields on the long bond, narrower longer-term swap spreads, and a flatter swap spread curve.

10) The key to a stable outlook is that there be a concrete plan for deficit reduction that needs not only to be agreed upon, but also put in place by 2013. As noted earlier, this will be very challenging.

COMMENT

S&P is in no position to dictate policy to the U.S. Government. We all know how much a AAA rating from them is worth after the financial meltdown of 2 years ago. I don’t know why their execs aren’t behind bars.

Posted by Fishrl | Report as abusive

Is S&P’s debt warning creating a tax trap for Republicans?

Apr 18, 2011 15:08 UTC

The White House believes America’s debt problem is an important issue, but not an urgent one. Bond rating firm S&P seems to think differently:

Standard & Poor’s Ratings Services said today that it affirmed its ‘AAA’ long-term and ‘A-1+’ short-term sovereign credit ratings on the U.S. Standard & Poor’s also said that it revised its outlook on the long-term rating of the U.S. sovereign to negative from stable. …

Because the U.S. has, relative to its ‘AAA’ peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable. …

We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. f iscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns….

“Our negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years,” Mr. Swann said. “The outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012.”

Here’s the problem: Any attempt to cut deficits and debt faster than Paul Ryan’s “Path to Prosperity“  would almost certainly have to involve immediate benefit cuts to Medicare and Social Security recipients or higher taxes. And to the extent that S&P’s call will be interpreted as an exhortation to cut now, those Democrats and Republicans (such as those in the U.S. Senate’s Gang of Six) who insist higher taxes must be part of the fiscal fix will have their hand strengthened. But what S&P is really saying is Washington must decide on a plan. Ryan has a plan, the Obama White House does not.

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