James Pethokoukis

Politics and policy from inside Washington

Explaining Obama’s tax-hike obsession

Jul 19, 2011 02:41 UTC

It’s the great mystery of the debt ceiling debate: Why is President Barack Obama so darn adamant about raising taxes? “This may bring my presidency down, but I will not yield on this,” Obama told Republicans before dramatically exiting their budget meeting last week.

“This,” of course, is his demand that large spending cuts be “balanced” with tax increases on wealthier Americans, entrepreneurs, investors and unpopular businesses such as Big Oil and Wall Street. But why insist on higher taxes in the middle of weakest economic recovery in the post-World War II era?

Wouldn’t standard Keynesian economics, much beloved in the White House, actually call for cutting taxes (or increasing spending) to boost aggregate demand?

Doesn’t Obama know that even his former chief economist, Christina Romer, says tax increases “will tend to slow the recovery in the near term.” Not that things look much better a few years out. The International Monetary Funds sees economic growth below 3 percent through 2016. And Democrat-friendly Goldman Sachs now thinks a double-dip recession is possible even as it lowers its growth forecast and raises its prediction for unemployment.

But Obama’s tax obsession becomes understandable when you realize the long game he’s playing: Big Taxes to fund Big Government. Decade after decade. See, it’s an almost universal belief among left-of-center journalists, economists, policymakers and politicians that Americans must pay higher taxes in coming years to cover the medical expenses of its aging population – not to mention all sorts of brand new social spending and green “investment.” Dramatically higher taxes. On everybody. And if we have a debt crisis, maybe those tax increases come sooner rather than later.

And it’s not even a secret, really. Here’s liberal economics columnist Ezra Klein of The Washington Post:

The reality is that we’re going to have higher taxes in the coming years, and beyond that, we’re going to have higher taxes than we’ve traditionally had during periods in which taxes were relatively high.

And liberal economics columnist David Leonhardt of The New York Times outlines a completely implausible scenario — at least to himself — to avoid massively higher taxes:

For taxes to remain where they are, Washington would need to end Medicare as we know it, end Social Security as we know it, severely shrink the military – or do some combination of the above.

How high? Three liberal think tanks recently devised budgets to put the U.S. government on a sustainable fiscal path through 2035. Their plans, collectively, called for Washington to collect an average of 23.6 percent of GDP vs. the post-World War II average of 18.5 percent. To put that in further perspective, the highest level of tax revenue that Uncle Sam has ever taken is 20.9 percent in 1944.

And to reach such a stratospheric level of taxation, these groups are calling for unprecedented tax hikes via millionaire surtaxes, higher taxes on alcohol and tobacco, securities transaction taxes, higher taxes on capital gains, higher taxes on corporations, higher death taxes, carbon taxes, and gasoline taxes. None of which, supposedly, would hurt economic growth. Even worse, all those tax hikes would still fail to balance the budget. And when you move past 2035, taxes would almost certainly need to go even higher.

That is the high-tax future the liberal establishment has in store for America. No wonder Obama rejected his own debt commission last December. It would limit the tax and spending burden to 21 percent of GDP. Neither is nearly enough for the Obamacrats and their successors. Just look at Obama’s budget from last February. Over a decade, it never reduces spending to less than 23 percent of GDP and spending is actually higher at the end of the ten-year span than in the middle. And eventually all that spending would need to be paid for via higher taxes. Recall that back in 2009, the White House floated a trial balloon about a instituting a value-added tax to pay for healthcare reform or general debt reduction.

Underlying all this longing for higher taxes is a belief government can’t and shouldn’t be cut. Nonsense. Both the American Enterprise Institute and Heritage Foundation have devised workable fiscal plans that would keep taxes below 20 percent of GDP. And Rep. Paul Ryan’s Path to Prosperity shows how to reduce spending to below 19 percent of GDP by 2040. And rather than managed decline toward a slow-growth, EU-style social welfare state  (that even the EU can’t afford anymore,) these plans would help keep America growing and living standards rising as they have for decades. Those are high stakes in the debt ceiling debate —  and in the battles over taxes and spending in the years to come.

COMMENT

@Dustycornfield, the poor, once deprived of a job, housing and lastly food, will simply eat the rich. They lack good protein in their diets.

@jabone, welfare for the rich and corporations rather than working to move the USA forward is what the Republicans are all about … giving the most to those who do not need it, are what people like you don’t/can’t see.

The propaganda machine that is fox news truly worked its magic on the dimwitted… especially being you blame the Democrats for the “class warfare.”

http://www.nytimes.com/2003/09/14/magazi ne/the-tax-cut-con.html?pagewanted=19&sr c=pm

Posted by hsvkitty | Report as abusive

Would the GOP’s ‘Cut, Cap and Balance’ plan really cost 700,000 jobs?

Jul 18, 2011 16:24 UTC

This is the Democratic talking point: Cutting spending by $111 billion, as some Republicans want to do, would cost the economy 700,000 jobs.  Now I will admit that I am not sure if those are jobs somehow not created, jobs somehow not saved or what exactly.

But the basic point is that less government spending means fewer jobs. But to believe that, you also have to believe that more government spending means more jobs.  Just ask Moody’s.com economist Mark Zandi who had this to say in February about an earlier GOP plan to cut spending by $61 billion (and is the apparent source of the meme):

The House Republicans’ proposal would reduce 2011 real GDP growth by 0.5% and 2012 growth by 0.2%. This would mean some 400,000 fewer jobs created by the end of 2011 and 700,000 fewer jobs by the end of 2012.

And recall that Zandi had this to say about the Obama’s $800 billion stimulus:

Nonetheless, the effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4%, holding the unemployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls. These estimates of the fiscal impact are broadly consistent with those made by the CBO and the Obama administration.

I have expressed my doubts about this before, as has economist John Taylor who, after examining data as opposed to models, concludes this about the Obama stimulus (bold is mine):

Individuals and families largely saved the transfers and tax rebates. The federal government increased purchases, but by only an immaterial amount. State and local governments used the stimulus grants to reduce their net borrowing (largely by acquiring more financial assets) rather than to increase expenditures, and they shifted expenditures away from purchases toward transfers. Some argue that the economy would have been worse off without these stimulus packages, but the results do not support that view.

Here is another way of looking at why the stimulus didn’t function as projected — and why the GOP budget cuts wouldn’t hurt the economy:

Unfortunately, we find substantially smaller government spending multipliers than those used by Romer and Bernstein. For example, the multiplier associated with a permanent increase in government spending by the end of 2010 lies between 0.5 and 0.6. In other words, government spending does not induce additional private spending but instead quickly crowds out private consumption and investment.

We also provide an assessment of the impact of the American Recovery and Re-investment Act. This legislation implies measures amounting to $787 billion and spread over 2009 to 2013 but peaking in 2010. Our estimate of the total impact is closer to 1/6 of the effect estimated by Romer and Bernstein. By 2010 we project output to be about 0.65% higher. Using the same rule-of-thumb as Romer and Bernstein, this increase in GDP would translate to about 600,000 additional jobs rather than three to four million.

So if the GOP plan cost any jobs, it might be in the tens of thousands. And that number might be more than offset by massive new hiring caused by the decrease in business and consumer uncertainty. Deep cuts in spending, hard spending caps and a balanced budget amendment would go a long way toward removing the threat of fiscal crisis from the fiscal horizon. If only the EU could say the same right now.

Kill jobs? The GOP plan would potentially be a powerful job creator.

 

 

 

COMMENT

Taking my money and giving some of it back in the form of misguided programs (The presidential dollar coin fiasco comes to mind) can never be more efficient than letting me keep the money and spending it on something that I want or need. The money I keep goes directly into doing something usefull, while the money the government takes always has a pretty high collection and adminitrative costs before it is ever spent. We don’t need the “balanced” approach of tax hikes now and maybe cuts later that the dems are proposing. This will encourage the politicians to get us into even more wars, and to spend ever more money on wastefull give aways as part of their campaign to get re-elected. The cycle of tax and spend needs to be interupted. Keep on writting Mr. Pethoukokis you are correct.

Posted by zotdoc | Report as abusive

Panic at the White House? Gloomy Goldman Sachs sees high unemployment, possible recession

Jul 16, 2011 12:22 UTC

Last night in a new report, Democrat-friendly Goldman Sachs dropped an economic bomb on President Obama’s chances for reelection (bold is mine):

Following another week of weak economic data, we have cut our estimates for real GDP growth in the second and third quarter of 2011 to 1.5% and 2.5%, respectively, from 2% and 3.25%. Our forecasts for Q4 and 2012 are under review, but even excluding any further changes we now expect the unemployment rate to come down only modestly to 8¾% at the end of 2012.

The main reason for the downgrade is that the high-frequency information on overall economic activity has continued to fall substantially short of our expectations. … Some of this weakness is undoubtedly related to the disruptions to the supply chain—specifically in the auto sector—following the East Japan earthquake. By our estimates, this disruption has subtracted around ½ percentage point from second-quarter GDP growth. We expect this hit to reverse fully in the next couple of months, and this could add ½ point to third-quarter GDP growth. Moreover, some of the hit from higher energy costs is probably also temporary, as crude prices are down on net over the past three months. But the slowdown of recent months goes well beyond what can be explained with these temporary effects. … final demand growth has slowed to a pace that is typically only seen in recessions. .. Moreover, if the economy returns to recession—not our forecast, but clearly a possibility given the recent numbers …

Alarms bells must be ringing all over Obamaland today. Unemployment on Election Day about where it is right now? Sputtering — if not stalling — economic growth? To many Americans that would sound like the car is back in the ditch — if it was ever out. Maybe Goldman is wrong, but economists across Wall Street have been growing more bearish.

And recall that back in August of 2009, the White House — after having a half year to view the economy and its $800 billion stimulus response — made an astoundingly optimistic forecast. Starting in 2011, with Obamanomics fully in gear and the recession over, growth would take off. GDP would rise 4.3 percent in 2011, followed by … 4.3 percent growth in 2012 and 2013, too!  And 2014? Another year of 4.0 percent growth. Off to the races, America.

Even in its forecast earlier this year, Team Obama said it was looking for 3.5 percent GDP growth in 2012, followed by 4.4 percent in 2013,  4.3 percent in 2014.

Goldman Sachs doesn’t have to tell you things are bad. I don’t have to tell you things are bad. Everybody knows things are bad. Unemployment is at 9.2 percent (11.4 percent if the official labor force hadn’t collapsed since 2008 and 16.2 percent if you include discouraged and underemployed workers.)  Moreover, the economy grew at just 1.9 percent in the first quarter of this year and may have grown less than 2 percent in the second. Wages and income are going nowhere fast.

When will the White House signal a change of economic direction? Will cutting tax rates and regulation ever make it on the agenda? That may be the only way Obama can win another term. And time is running short.

 

COMMENT

Oddly, disliking what Obama and Obamanomics have done to the country doesn’t make you:

racist
unpatriotic (if you were a real patriot you’d just nod and say yes to anything the administration wants to do)
conservative
Republican
Tea Party

It just makes you intelligent. Welcome to the disenfranchised.

Posted by notthistime | Report as abusive

Will coming debt ceiling deal save America’s AAA credit rating?

Jul 15, 2011 11:34 UTC

Keeping America’s gold-plated credit rating may take both a deal to raise the debt ceiling (which will happen) and a meaningful deficit reduction plan of around $4 trillion (which is not happening). Moody’s says it wants a  ”deficit trajectory that leads to stabilization and then decline in the ratios of federal government to GDP and debt to revenue beginning within the next few years.” And here is Standard & Poor’s in a report released last night:

If a debt ceiling agreement does not include a plan that seems likely to us to credibly stabilize the U.S.’ medium-term debt dynamics but the result of the debt ceiling negotiations leads us to believe that such a plan could be negotiated within a few months, all other things unchanged, we expect to affirm both the long- and short-term ratings and assign a negative outlook, If such an agreement is reached, but we do not believe that it likely will stabilize the U.S.’ debt dynamics, we, again all other things unchanged, would expect to lower the long-term ‘AAA rating, affirm the ‘A-1+’ short-term rating, and assign a negative outlook on the long-term rating.

Looking at the most likely scenario out there right now, Goldman Sachs has its doubts (bold is mine):

Using our baseline projections as a starting point, the $1.7trn agreement we outline would represent substantial progress, but would probably fall short of Moody’s criteria. That said, we view any agreement that is reached this year as a first step; tax and entitlement reform efforts look likely following the election in 2013. With a cyclically-adjusted primary deficit of around 6% of GDP in 2011, additional consolidation clearly will be necessary, and thus we view this as the first round of what will ultimately need to be multiple deficit reduction measures over the next few years.

Here is the deal  Goldman is looking at (from its report):

1) An agreement that involves primary deficit reduction of $1.5trn to $1.7trn

2) Roughly $1.1 trillion in savings from the discretionary budget, which would be achieved through spending caps; roughly $350 bn in health-related savings, mainly from Medicare; and around $250bn in savings from other areas of the “mandatory” budget such as agricultural subsidies, federal retirement benefits, and fees charged by the GSEs.

3) $2.4trn debt limit increase structured in a similar manner to what Senate Minority Leader McConnell proposed earlier this week.

4) Our hypothetical agreement assumes that the 2% payroll tax cut will be extended through next year, at a cost of $111bn spread over FY2012 and FY2013, and that that a small amount of “tax expenditures” are eliminated, raising $55bn.

– We assume a package in which a good deal of the total savings occur in the last few years.  …  This assumption, combined with other spending cuts and the tax provisions noted above, results in a roughly budget neutral package in 2012 (as compared with current law), rising to savings excluding interest of nearly $300bn by FY2021. Compared with our own forecast, which assumes a payroll tax cut extension and modest spending cuts in 2012, this would increase the structural deficit reduction we assume by 0.2% to 0.3% of GDP.

Bottom line: “The upshot is that against either our projections or the official baseline projection from CBO, the hypothetical $1.7trn agreement we sketch out would meaningfully reduce the debt-to-GDP ratio over the next ten years. The debt reduction would reduce interest expense by more than $300bn, for a total of around $2trn in deficit reduction. Likewise, it would reduce the primary fiscal balance (i.e. the deficit excluding interest expense) by nearly 1.5% of GDP toward the end of the decade.”

Certainly this will only be the first of many deals, with a much bigger one likely in 2013. Hopefully, the credit raters will take that into account. But certainly it seems as if a loss of the AAA ratings is possible even with a debt ceiling deal. And that would be bad. What might happen? We at Reuters have looked at this:

1) When Moody’s Investors Service revised its outlook on Japan’s AAA-rated sovereign debt to negative from stable in 1998 — similar to what S&P did to the United States on Monday — the yen sank to its lowest level in six years and government bond prices fell sharply.

2) If the dollar did weaken, it could boosts export sales of U.S. manufacturers, but also put upward pressure on inflation by making imports more expensive.

3) The greater threat might be higher borrowing costs if investors demand a greater reward to take on more risk from a less credit-worthy nation. The knock-on effect would be felt in sectors sensitive to interest rates such as housing and automobile sales, both of which were floored by the Great Recession of 2007-2009.

4) Skeptics downplay the significance of a potential S&P downgrade. Tom Porcelli, chief economist at RBC Capital Markets, found that sovereign yields on four countries that lost AAA status actually fell six basis points on average 12 months after a downgrade. However, three of those examples — Spain and Ireland in 2009 and Italy in 1991 — hardly compare to the United States, and the fourth, Japan in 1998, has yet to see significant economic growth.

5) Thomas Lawler of Lawler Economic & Housing Consulting is among those who discount S&P’s negative outlook, saying he would look at hard data on jobs and income for guidance. ”Who cares what they think? These are the same people who rated (subprime) bonds,” Lawler said. “I don’t view it as a BFD — a big financial deal.”

Oh, and 7,000 U.S. municipal ratings might also be downgraded, says Moody’s

Moody’s Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on U.S. Treasury debt obligations. On June 2, Moody’s had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.

In conjunction with this action, Moody’s has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the U.S. government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks. We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the U.S. government or the affected financial institutions.

Not good.

 

 

 

COMMENT

Here is an interesting site (probably not owned by Goldman Sachs):
http://www.usdebtclock.org/

Posted by FBreughel1 | Report as abusive

The roof is on fire! A mid-day debt ceiling update

Jul 14, 2011 17:47 UTC

A brief rundown on what’s happened so far today in the Mother of All Budget Battles,  and what folks are saying about it:

– Obama, lawmakers face fresh doubts on debt deal -Reuters | Key bit in the piece is a warning from JPMorgan CEO Jamie Dimon that a deal needs to get done

– Harry Reid And Mitch McConnell: ‘Hybrid’ Solution To Debt Standoff -HuffPo | Another way of trying to get $1.5 trillion in cuts through Congress.

– Nancy Pelosi, John Boehner reject Camp David – Politico | But it is unclear whether the WH was even going to suggest this.

– Few Americans Fear ‘Economic Catastrophe’ If Debt Ceiling Not Raised: Poll – HuffPo | Just 22 percent, but a lot more bankers and businessmen are extremely worried

– Gang of Six talks heat up as White House debt-limit talks melt down -The Hill |  Can  (now) Big Five pull out a $4 trillion deal? I really doubt it.

Reid slams Cantor – Roll Call | The Majority Leader couldn’t pay enough for great headlines like that one

China urges U.S. to protect creditor by raising debt -NYTimes |  I don’ t think the House GOP are going to be swayed by China’s foreign ministry wants

– S&P: U.S. Debt Could Reach ‘Junk’ Rating by 2030, Absent Entitlement Reform – CNSNews | Actually way before then because there will be a financial crisis if nothing is done.

Mark Dayton offers deal that could end Minnesota shutdown – WaPo | Dem chief exec gives in to GOP legislators. Definitely a must read today on Capitol Hill

Tea party vs. big Business in debt debate — WaPo |  This in an interesting bit:

The problem for McConnell is that the tea party wing of the party isn’t all that interested in giving the GOP nominee the best chance in 2012. It wants cuts, first and foremost, and damn the torpedoes. That’s the attitude the tea party was essentially founded on.

McConnell’s proposal and justifications amount to an acknowledgement that the political endgame has gotten away from the GOP. Whether through any fault of their own or not, Republicans are in a corner when it comes to a default, and as his colleagues suggest, McConnell is ceding major ground.

It’s becoming clear that he can’t please both sides of his party’s new coalition. The question is how it gets resolved, and how deep the wounds will be going forward.

The Great Debt Ceiling Gambit – The Weekly Standard | Tough stuff from Fred Barnes who accuses Obama are pushing a crisis for political gain.

 

 

 

 

Maybe Cantor should have stormed out instead

Jul 14, 2011 12:44 UTC

Here is how Reuters delicately describes the tense budget meeting:

The U.S. talks on Wednesday lasted nearly two hours and were the stormiest yet. They ended with Obama telling Republicans that “enough’s enough.”

Politico adds a bit more of the flavor:

When Cantor said the two sides were too far apart to get a deal that could pass the House by the Treasury Department’s Aug. 2 deadline — and that he would consider moving a short-term debt-limit increase alongside smaller spending cuts — Obama began to lecture him. “Eric, don’t call my bluff,” the president said, warning Cantor that he would take his case “to the American people.” He told Cantor that no other president — not Ronald Reagan, the president said — would sit through such negotiations. Democratic sources dispute Cantor’s version of Obama’s walk out, but all sides agree that the two had a blow up. The sources described Obama as “impassioned” but said he didn’t exactly storm out of the room.

And here how a GOP aide describes it to me:

Over the last several days the White House has been walking back the savings on the Biden number.  Thursday it was $2 trillion, Monday it was $1.7-1.8 trillion, Tuesday it was $1.6-1.7-1.8 trillion.  This morning our staff met with White House folks and the wrap up from that meeting said that the WH is now at $1.5 trillion.

Given those figures, [Cantor] pointed out that wherever we are-  it’s a long way from the $2.4 trillion needed to meet House GOP goals of dollar for dollar so he suggested a possible short-term goal in order to avoid default.  He then said to the President that since we can only reach so much in savings and you (President) keep moving the goalposts, I will move off my position of only doing one vote in order to avoid default.

And that’s when Obama started to “lecture” the House Republican majority leader. But either way, it sounds to me like  a final deal might be $1.5 trillion in cuts for a debt ceiling extension through the election. In exchange for no tax hikes, Republicans give on their “dollar for dollar” demand. Maybe this even gets somehow combined with the McConnell plan. Good enough to pass the spending-hawk House Republicans? Given the growing Republican perception that they are dealing with a president with no interest in cutting debt — or even one who wants a debt crisis to help him win reelection in a repeat of 2008 — I think  they just might.

 

 

 

COMMENT

It is about time that the President shows some passion. His negotiating tactic has met a recalcitrant Republican, and he needs to change tactics. A little bullying cannot hurt.

Posted by 0okm9ijn | Report as abusive

Can the Ryan plan rescue Republicans?

Jul 13, 2011 20:42 UTC

So what are Republicans, particularly those in the House, going to do? Debt ceiling deadlines are fast approaching. And many in the GOP leadership, particularly in the Senate, think the party’s anti-tax resolve will dissolve if markets start to tumble, resulting in a deal far less appetizing than any discussed during the Biden talks. Certainly no hard spending caps or structural changes to entitlements or any other of the big things on the tea party wishlist.

It now looks like somewhat of a strategic error for Republicans to have pushed for so much in exchange for a hike in the debt limit. The Obama White House seems perfectly willing to take negotiations right up to — and past – the Aug. 2 deadline because it thinks it can win the political fight. And certainly many GOP leaders agree, including Mitch McConnell who told Laura Ingraham today:

[W]e knew shutting down the government in 1995 was not going to work for us. It helped Bill Clinton get reelected. I refuse to help Barack Obama get reelected by marching Republicans into a position where we have co-ownership of a bad economy. …  What will happen is the administration will send out to 80 million Social Security recipients and to military families and they will all start attacking members of Congress. That is not a useful place to take us. And the president will have the bully pulpit to blame Republicans for all this disruption. If we go into default he will say Republicans are making the economy worse. … My first choice was to do something important for the country. But my second obligation is to my party and my conference to prevent them from being sucked into a horrible position politically that would allow the president, probably, to get reelected because we didn’t handle this difficult situation correctly.”

Not only did the GOP likely overplay its hand – Republicans control just one house of Congress, after all – but it opened the door for Obama to push for a “grand bargain” that almost resulted in agreement on a big tax increase. House Speaker John Boehner and Majority Leader Eric Cantor deserve great credit for standing firm against those tax hikes.

But perhaps it’s not too late for Republicans to salvage something significant. Stop pushing unpopular – for the moment – entitlement reform and out-year spending cuts that may never happen. (All of which will get relitigated in 2013 anyway.)

Instead, just try to sharply cut discretionary spending next year. House Budget Chairman Paul Ryan’s bold and visionary Path to Prosperity calls for non-security discretionary spending cuts of $1.8 trillion over ten years, starting with an $76 billion cut in 2012 vs. the CBO’s baseline. Those cuts would then be incorporated in the CBO baseline, helping create big savings as the years go by and an institutional bulwark against new Democratic spending plans. (As of right now, remember, the Obama White House is proposing just $2 billion in cuts for 2012.) Certainly plenty of Democrats wants to be seen as tough on spending, too, in exchange for raising the debt limit which is highly unpopular. Indeed, “just 37% of Americans favor raising the debt ceiling vs. 56% opposed, according to the July IBD/TIPP poll.”

And perhaps Republicans could go even further. The Ryan plan calls for a total of $111 billion in 2012 cuts. Up that by $1 billion and you have a slogan: “Let’s cut $112 billion in 2012!”

 

 

 

 

 

 

COMMENT

The so-called ‘big tax increases’ being talked about are actually just a return to normalcy, i.e. rolling back the ill conceived Bush tax cuts. Bush claimed his tax cuts were going to stimulate the economy so much that it would more than make up for the lost revenue. It’s the old Reagan scam; Supply side economics don’t work. If you cut taxes, you run up deficits. It happened under Reagan, it happened under Bush, and its still happening now. Besides, no one is talking about raising taxes on the poor, only people making over $250 thousand a year. So, please, before you throw around phrases like ‘big taxes increases’ like your hair is on fire, please give some perspective on the matter.

Posted by Shiva_L | Report as abusive

The McConnell Plan and the GOP House

Jul 13, 2011 17:30 UTC

So just how hostile  is the GOP House toward McConnell’s new debt ceiling gambit (not to mention tax increases)?  Here are some excerpts from a chat I had early yesterday evening with a GOP Hill source with good knowledge of the caucus. I think it gives some pretty good color:

Members are really, really dug in. Even a deal with $2 trillion in cuts would be a tough sell.  Obama going on TV and repeatedly and being the champion of America’s debt crisis has resulted in members getting frustrated. They have sort of latched onto Obama’s $4-5 trillion [debt cut] number, they just don’t want to do it with tax increases. They longer Obama plays that, the more likely it is we end up not getting anything done.  It might have been possible to sell members on the [$2-2.5 trillion] deal two weeks ago but I don’t think that is the case right now.  He raised the stakes. The White House does not seem to be taking [Boehner and Cantor] at their word when they say tax increases won’t pass the House.  They think it’s a negotiating ploy.

The [McConnell plan] is shrewd but it doesn’t help the House majority. I don’t see how members could vote for that — tough enough selling them on a $2 trillion cut with no tax increases. If markets start reacting, it’s more likely Republicans  will get blamed. But even in that scenario, there would be trouble getting a tax increase through the House. Someone will blink if markets start tumbling, but I don’t see House members voting for a tax increase. If Obama puts out a detailed policy proposal, his own party will revolt against him.

But the ball is now in the House’s court. What will it do? Bill Kristol sees some options:

Plan A: They pass their optimal version of a debt ceiling increase—some version of the Cut/Cap/Balance proposal, with major domestic discretionary and entitlement spending cuts, spending caps, and at least a vote on a balanced budget amendment to the Constitution. Voting for this, like passing the Ryan budget, puts House Republicans in the position of claiming to have a serious and comprehensive governing plan

Plan B: The House (also?) passes a short-term debt ceiling increase of “only” several hundred billion dollars, accompanied by several hundred billion dollars of domestic discretionary cuts.  …

Plan C: The problem with both Plans A and B is that they do involve voting for an increase in the debt limit, which many House Republicans don’t want to do in the first place. … So why, some of them will say, ever vote for any debt ceiling increase at all? What’s in it for Republicans to be part of any process whose ultimate effect will be to authorize the federal government, under the management of President Obama, to plunge the nation ever deeper and more dangerously into debt?

One could answer that voters did send House Republicans to Washington to at least try to govern responsibly, and that Plans A and B embody such an effort. And that in voting for the Ryan budget, the House GOP has in effect voted to raise the debt ceiling. But that leads us to Plan C, which could either stand alone (i.e., one could skip Plans A and B) or be a follow-on to Plans A and B if they fail.  … House Republicans could allow Democrats to pass a no-tax-hike, no-gutting-of-defense version of a debt ceiling hike in the House. Speaker Boehner would have to round up (if I’ve done the math correctly) 48 Republican members who would agree to vote present on such a debt limit increase. The other 192 GOP members would vote no. The 193 Democrats would be welcome to vote yes and to pass the bill.

 

COMMENT

Defense is a CORE responsibility of government per the Constitution. Education, health care, Social Security, Medicare, all the various bloodsucking departments and agencies (NEA, EPA, Energy, most cabinet positions/depts., etc., ARE NOT. Make cuts in defense but only if making commensurate cuts in all other areas. And survival of the republic likely will require defunding and abolishing most of the Death Star size of the socialist state created in the past 80+ years.

Your entire dogma is crumbling and you along with it, Unsympathetic. I was probably far more lefty than you for 26 years. It’s a fraud and a nihilistic way to live, and its endgame is elimination of humanity. But none of you is willing to live in reality and SEE what you are doing. We are.

Posted by Peg_C | Report as abusive

The issue isn’t default but government shutdown

Jul 12, 2011 18:27 UTC

Here’s a great chart from Goldman Sachs that shows how government revenues and obligations will likely match up in August:

As is clearly shown, there is enough cumulative money coming to pay interest, SS, Medicare and defense. Not that there wouldn’t be cash managements issues. That and several other issues are addressed in a Q&A from a GS report last week.  Some excerpts (bold is mine):

Q: What happens on August 3 if the debt limit is not increased?

A:  …  Using August 2010 spending and receipts as a proxy, the Treasury will probably take in $5-$10 bn in revenue on August 3, leaving insufficient revenues to make Social Security payments partly unfunded even if all other spending is deferred. Since the Treasury has carried a minimum cash balance of about $20 bn since 2009, and currently carries a balance of $74 bn, Social Security payments might still be made by drawing down the Treasury’s cash balance.

Q: Are Treasury interest payments at risk?

A: We do not think so. … There are two basic reasons that interest payments should not be called into question: First, if the August 2 deadline is missed, it is very difficult to see the debate dragging to August 15, when interest payments are made, since we doubt there will much congressional appetite for a protracted lapse in borrowing authority.  … Second, the Treasury is likely to prioritize payments. While the sharp fiscal contraction that would result from prioritization would have negative short-term economic consequences and would be difficult to implement, it nevertheless seems likely if necessary.

Q: If other non-interest payments are missed, would that constitute a default?

A: Probably not, at least from the rating agency perspective. The rating agencies have not been entirely clear on this point, but S&P, Moody’s, and Fitch all appear to view a failure to pay other obligations to be different from a default. S&P has already put the US on negative outlook due to longer-term fiscal issues, and the other two rating agencies have indicated they will move to a negative outlook if no agreement is reached by August 2.

 

 

 

 

 

asdffd

COMMENT

Is the other government spending, things like the FBI, CIA, CDC, FAA, and Homeland security? We ok with all these things going away instantly so we can still issue Social Security, Medicare,and interest on the debt? No air traffic controllers and not FBI agents?

Posted by stevemast | Report as abusive

Goldman Sachs: Debt default is “extremely unlikely”

Jul 11, 2011 23:31 UTC

Here is what President Obama said this morning:

As all of you know, I met with congressional leaders yesterday. We’re going to be meeting again today, and we’re going to meet every single day until we get this thing resolved.

The good news is that all the leaders continue to believe, rightly, that it is not acceptable for us not to raise the debt ceiling and to allow the U.S. government to default. We cannot threaten the United States’ full faith and credit for the first time in our history.

But markets don’t seem concerned. Interest rates remain at rock-bottom levels. Why? Investors know the financial and budgetary math makes a default the longest of long shots. Here is a bit from a research note just out from Goldman Sachs (bold is mine):

There are essentially two plausible outcomes. One is that the two sides agree on a deal in coming weeks, with headline cuts of $2+ trillion over a 10-year horizon, probably mostly composed of discretionary spending caps that gradually squeeze projected outlays in a highly back-end loaded fashion. The other outcome – whose probability has unfortunately risen in recent weeks – is that there is no deal by August 2. Even in this case, we continue to believe a default is extremely unlikely, as the Treasury would likely prioritize interest payments, Social Security and Medicare payments, and “essential” defense payments over other types of spending, and should have enough revenues to cover the essentials. But make no mistake: the negative consequences of failing to make other payments would be very severe. In the month of August, projected outflows exceed projected inflows by about $150bn (not annualized), or about 12% of GDP. Even if we allow for a further decline in cash holdings in the Treasury’s account with the Fed, this means that a failure to reach a deal would imply a huge, immediate fiscal retrenchment. The economic consequences of such a retrenchment would likely force a deal within a few days.

Again, the issue is a government shutdown, not a default.

COMMENT

“the Treasury would likely prioritize interest payments, Social Security and Medicare payments, and “essential” defense payments over other types of spending, and should have enough revenues to cover the essentials. But make no mistake: the negative consequences of failing to make other payments would be very severe.”

Yes, I’m sure making the government prioritize spending and quit spending 150% of revenue every month is “severe” to government officials.

It’s like taking a crack pipe away form an addict… let me tell you he’s convinced he’ll die if you do that, it’ll be the worst thing ever… and just give him back his pipe.

Some important questions to consider:

Do you think the government can keeps spending 150% of it’s revenue forever without prioritizing spending?

Do you think that the government will really make meaningful steps to reduce spending and stop the continued waste?

Do you think prioritizing your spending and reducing it to your income when you’re in dire financial straits is a bad thing?

I don’t see which of these is even a negative, much less something we shouldn’t consider letting happen… they all look like pretty good things to be doing to me.

Posted by ertdfg | Report as abusive
  •