James Pethokoukis

Politics and policy from inside Washington

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.








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?

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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.


“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.

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Eat our peas? When will government eat its peas?

Jul 11, 2011 18:24 UTC

The President of the United States, this morning:

It’s not going to get easier; it’s gonna to get harder. So we might as well do it now, pull off the Band-Aid, eat our peas

In Obama’s most recent 10-year budget plan, according to the CBO, federal spending would never drop below (a historically high) 23 percent of GDP. And long-term budget plans by liberal think tanks all have spending at such a level, or higher, for decades to come:





What’s wrong with peas? Even my 16-month-old daughter eats them. The president probably doesn’t know how to cook veggies properly. Turn the heat down when they’re bright green, folks.

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No big budget deal? Blame Obama, not Boehner

Jul 10, 2011 20:29 UTC

President Barack Obama could have done two things that might have saved his Mother of All Budget Deals.

First, he could have embraced market-centered, consumer -focused reforms to Medicare. That was about as likely as him accepting an Obamacare rollback.  Second, he could have agreed — as House Speaker John Boehner and Republicans suggested —  to sharply reduce tax rates in return for fewer special tax deductions/breaks/loopholes/subsidies. Recall that is what his own debt commission recommended.

Instead, he apparently offered to keep top individual rates where they are, at 35 percent, in exchange for tax reform. Now that’s a big tax hike. But it’s also revealing. As a GOP source on the Hill put it:

Their fierce insistence on higher taxes is beyond bizarre.  …  The bipartisan consensus on tax reform (broader base & lower rates) was championed by President’s fiscal commission, and yet now is being rebuked by the President. Lowering top rates that would help make America more competitive was too large a leap for a true class warrior.

Obama agrees with the left-of-center consensus that America is dramatically undertaxed. Those tax rates from his fiscal commission would have resulted in revenue higher than the historical 18-19 percent of GDP, as seen in this chart:

But 21 percent of GDP — the highest in U.S. history — isn’t nearly enough for the Obamacrats. Even if Obamacare is successful in bringing down health costs, top liberal policy wonks think far more revenue will be needed to deal with an aging America. First, this budget from the Economic Policy Institute. It sees revenue at 24.1 percent of GDP, which still leaves a huge budget gap:

Then there is this plan from the George Soros-backed Center for American Progress, which operates as the White House’s outside think tank. It sees revenue at 23.8 percent of GDP, even adding a carbon tax and transaction tax into the mix.


In short, Obama sees a need for a permanently bigger government and a lot more tax revenue to fund it.  Had Obama agreed with his own debt commission and Republicans, a big agreement was possible. Or he could have proposed real reforms to entitlements. But he declined and there wasn’t a mega-deal. Don’t blame Boehner for that.


Blame the party of NO

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Like Reagan at Reykjavik, Boehner passes on a bad deal

Jul 10, 2011 04:56 UTC

So in the end, it was bit of a Ronald Reagan moment for John Boehner on Saturday. Just as the U.S. president walked away from a bad arms control agreement with Soviet leader Mikhail Gorbachev at Reykjavik, Iceland in 1986, the House speaker passed on President Barack Obama’s mega-debt reduction deal in Washington.

In both case, the asking price was just too high. For Reagan, it was lethal limitations on his Strategic Defense Initiative. For Boehner, it was a trillion-dollar tax distraction from America’s true fiscal threat: spending run amok: “Despite good-faith efforts to find common ground, the White House will not pursue a bigger debt reduction agreement without tax hikes.”

A GOP congressional source was a bit less diplomatic, telling me Saturday afternoon via email:

Their fierce insistence on higher taxes is beyond bizarre. After months of demanding ‘clean’ increase to avert economic calamity (default), WH threatens economic calamity (default) unless they get economic calamity (trillions in tax hikes). No wonder these guys are governing over an economic calamity (9.2% & growth malaise), w/ an economic calamity on the horizon (debt explosion as mapped out in president’s budget). The bipartisan consensus on tax reform (broader base & lower rates) was championed by President’s fiscal commission, and yet now is being rebuked by the President. Lowering top rates that would help make America more competitive was too large a leap for a true class warrior.

Indeed, as negotiations wore on, Obama got tougher on taxes (pushed hard by the hard left), and the deal he was cooking up almost certainly wouldn’t have been revenue neutral as he tweaked rates and reduced tax deductions. Not even close. Nor did it help that Obama reportedly balked at a spending-cut trigger if certainly tax reforms were not completed.

Or maybe Boehner also realized he was becoming a role player in an Obama-directed drama whose dramatic focus was securing a second-term for Obama. Either Obama got his big tax-hike deal and a) created a tea party revolt in the GOP, b) looked like a statesmen and c) partially deprived Republicans of a valuable line of attack in 2012 … or there was no deal, and Obama could hammer the GOP until Election Day for caring more about tax cuts for the rich than fiscal responsibility.

Boehner apparently will take his chances with door #2 and push for a roughly $2.4 trillion deal (with a debt ceiling hike, too) based on spending cuts already agreed to and some non-tax revenue raisers. Deeper spending cuts and structural entitlement reform would be better, but that is going to have to be a 2013 thing. Indeed, what entitlement reforms Obama was agreeing to were insufficient to Republicans.

Indeed, there were arms control agreements after Reykjavik, just as there will assuredly be more debt deals in the future. There must be or, as the Congressional Budget Office forecasts, debt as a share of GDP will explode from 70 percent today to as high as 250 percent by 2035 — assuming no economic implosion first. And no amount of tax increases will stop that. Some will push for just such options, of course. Liberal think tanks are devising plans to increase the total U.S. tax burden by at least 30 percent or more over the next two decades.

The other course is to reform entitlements and boost revenue by growing the economy faster. Boehner and the GOP, hopefully, took a step in that direction on Saturday and will take another one when they meet with Obama Sunday night.



Reagan walked away from a deal with the Russians so he could keep on playing with his very expensive silly toy, Star Wars. Whoop-de-do! A fine model of Republican thinking.

What Boehner walked out on was Obama’s attempt to get a Republican Congress to pay for eight years of Republican mis-management, two unbudgeted wars, Bushlet’s mega-payoff to Big Pharma, and eight years of borrowing from the Chinese to finance tax cuts for the rich.

Buncha spoiled brats, whining, puking and mewling.

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Will Boehner pull a ‘Reagan at Reykjavik’ and walk?

Jul 10, 2011 00:00 UTC

Will House Speaker John Boehner commit Republicans to raising $1 trillion in taxes as part of President Obama’s last-minute push for as much as a $4 trillion debt reduction deal? Obama and the GOP meet Sunday evening, but things continue to develop quickly:

1) Various news accounts Saturday morning made it sound as if Boehner was flirting with some convoluted deal where some taxes would be raised – including the high-end Bush tax cuts – but lowered later as part of major tax reform, with maybe some of the savings from fewer deduction going to reduce debt.

2) Then on Larry Kudlow’s radio show this afternoon, the WSJ’s Steve Moore said his paper’s reporting was accurate and the GOP were being “tempted” by this offer.

3) Then I got this from a GOP congressional source later in the afternoon:

WH is demanding major, unambiguous tax hikes. To get spending caps & entitlement tweaks, greater economic pain appears to be the WH’s asking price. It is increasingly likely that we aren’t going to see a ‘big’ deal if the WH doesn’t budge. Speaker looks to be holding strong. …

Their fierce insistence on higher taxes is beyond bizarre.

After months of demanding ‘clean’ increase to avert economic calamity (default), WH threatens economic calamity (default) unless they get economic calamity (trillions in tax hikes). No wonder these guys are governing over an economic calamity (9.2% & growth malaise), w an economic calamity on the horizon (debt explosion as mapped out in president’s budget).

[Update 7:39 PM] Appears that the basic framework for future tax reform could not be resolved.

The bipartisan consensus on tax reform (broader base & lower rates) was championed by President’s fiscal commission, and yet now is being rebuked by the President. Lowering top rates that would help make America more competitive was too large a leap for a true class warrior.

That Team Obama wants higher higher taxes is not news.  But the growing GOP allergic reaction is. I think these comments gives good insight into how the GOP perceives the evolving deal. And I hope that second part is true. Tax reform should only be done in the context of lowering marginal tax rates, especially if Democrats aren’t offering entitlement reform that would move things toward a more market-based system such as the one outlined in Rep. Paul Ryan’s bold and visionary Path to Prosperity.

I also doubt whether the spending cuts being offered by the Obamacrats are largely legit and not a manipulation of the CBO baseline by a) cutting defense spending that was never going to happen and b) pushing cuts to Medicare providers that Congress will later undercut. My best guess remains a smaller spending cut deal + no tax increases + a hike in the debt ceiling.

This is Obama in his weekly radio address today:

Both sides are going to have to step outside their comfort zones and make some political sacrifices,” Obama said. “And we agree that we simply cannot afford to default on our national obligations for the first time in our history.

Obama says he wants a big deal, maybe because he needs an economic win to counter the faltering economic recovery and deprive the GOP of the “big spender” line of attack in 2012. Maybe he is finally listening to Tim Geithner and Jack Lew.  It all reminds me of President Ronald Reagan and Soviet leader Mikhail Gorbachev at the 1986 arms control summit in Reykjavik, Iceland. Reagan walked away from a deal that would have eliminated nuclear ICBM’s in a decade because it would hobbled research into the Strategic Defense Initiative. Reagan was right to walk away then, and Boehner would be right to do the same now.



Wow. Peanuts when we need boulders.

On the issue of taxes … much money goes uncollected each year. IRS estimates at least a third of a trillion dollars go uncollected under current tax law; uncollected taxes on cash-paid services, uncollected taxes on tips, double deductions by small business owners. That alone would cover much of the $4 trillion over 10 yr. target, were the IRS equipped to make it collectable. Further, we have heard of the poster-child cases of GE and Forest Labs paying zero using legal shell-based loopholes. Today, Reuters reported that Fox / News Corp. paid not just zero taxes, but was actually paid back $4 billion in refunds. While I pay north of 40% per year in combined federal taxes, I am sure Mr. Rupert Murdoch pays 18% or less per year on his much more sizable income. Cutting benefits for disabled vets and tossing grandmothers off Social Security is not an answer. Eliminating regulatory inspectors is not an answer; time and again, industry has shown a contempt for consumer safety e.g. Toyota. Enough is enough with revenue cutting … collect taxes fairly on those enjoying the benefits of a United States, as imperfect as it may be.

This is not only about the me’s; it’s about US.

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Ezra Klein accidentally argues against GOP accepting tax hikes

Jul 7, 2011 19:39 UTC

The WaPo’s Ezra Klein has cooked up a chart attempting to show previous debt deals had plenty of tax increases in them, even more than what Obama is demanding:


As you can see on the graph, in each case, taxes were at least a third of the total, and in Reagan’s case, his massive tax cuts were followed by deficit-reduction deals that actually relied on tax increases. Today, tea party conservatives would be begging Sen. Jim DeMint to primary the Gipper. … The one-third rule doesn’t break down until you get to the deal Obama reportedly offered Republicans in the first round of debt-ceiling talks: $2 trillion in spending cuts for $400 billion in taxes, or an 83:17 split. And that, if anything, understates how good of a deal Republicans are getting.

This isn’t going to persuade conservatives of anything, the bit about Reagan in particular. The Gipper was promised big spending cuts in 1982 that never materialized. And the Bush deal has gone down in infamy among those on the right. Here is Grover Norquist:

The spending interests in Washington, D.C., convinced President Ronald Reagan in 1982 that they would cut $3 of spending for every $1 of tax increase that Reagan would permit. The tax hikes were real, painful and permanent; the spending restraint never materialized. Then only eight years later, the same spending interests concocted the infamous Andrews Air Force Base budget summit that negotiated a supposed deficit reduction deal with President George H.W. Bush. It was to cut spending by $2 for every dollar of tax increase. Again, the tax hikes were real and spending increased more rapidly after the deal than before.

As for the Obama offer, I have no idea what that red line is supposed to represent. How much, for instance,  is baseline tinkering due to the wind down of the wars in Iraq and Afghanistan? That could account for as much as $1.4 trillion of the $2.0 trillion in cuts Obama is offering. Permanent tax increases in exchange for accounting chicanery?


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U.S. debt crisis might be on fast track

Jul 7, 2011 15:59 UTC

One of the outside economic-analysis firms that the White House likes to quote is Macroeconomic Advisers. Here’s what the firm said yesterday about where the U.S. economy is heading (bold is mine):

Assuming current fiscal policies remain in force, our economic model suggests that interest rates will rise considerably over the next decade, with the yield on the 10-year Treasury note reaching nearly 9% by 2021.

– Private interest rates will rise as federal borrowing competes for saving that might otherwise finance private investment.

– In addition, yields could rise if there is growing risk associated with current fiscal policy.  If such risk is systemic, it raises yields generally.  If it reflects a growing probability of sovereign default, it raises Treasury yields relative to private yields.

Rising rates would be a precursor to something worse: a full-fledged fiscal crisis with further sharp increases in yields, declines in stock prices, and a plummeting dollar.

This is bad. Really bad. The official budget forecasts ones typically hears about in the media are from the Congressional Budget Office. And those forecasts assume Uncle Same can borrow at low interest rates, like, forever. The super-cautious CBO baseline predicts the U.S. government will add an additional $6.8 trillion in debt over the next decade, bringing cumulative debt held by the public to $18.2 trillion. Debt as a share of the economy would be 76.7 percent. The forecast also assumes short-term interest rates average 3.3 percent, long-term 4.8 percent.

But MA thinks long rates will hit 9 percent. This would cause U.S. indebtedness to explode. The CBO, at the request of Rep. Paul Ryan, recently looked at how various interest rate scenarios would affect U.S. debt (chart and graph via the Committee for a Responsible Federal Budget):

Note the scenarios that has interest rates at close to 9 percent. It would add an additional $5 trillion to the national debt by 2021. That would push the U.S. debt-to-GDP ratio to an alarming 98 percent of GDP.

But those calculations tend to understate the problem because they are based on the CBO’s baseline forecast. Its “alternative fiscal scenario” – which many budgeteers think is a more accurate – assumes debt-to-GDP will already be 101 percent in 2021.

But again, this is assuming low interest rates. The MA scenario could push that level even higher. And again, this also assumes all that debt would not effect economic growth. Here is how the CBO says various economic variables affects its forecasts

CBO estimated that 1 percent higher interest rates each year could increase deficits by $1.3 trillion over ten years. CBO also estimated a few other “rules of thumb” to show how changes in inflation and economic growth have significant impacts on budget forecasts. The projections show that lower economic growth of just 0.1 percentage point each year could increase deficits by $310 billion over ten years, while 1 percentage point higher inflation each year could add almost $900 billion to deficits.

Turns out, the CBO looked at how at the deluge of debt from its “alternative fiscal scenario” would impact the economy (and, in turn, total indebtedness). The results are absolutely frightening:

Of course, the U.S. would have a debt crisis long before we hit that 250 percent of GDP level. And if MA is right,  the crisis might come sooner rather than later.


Credit Writedowns responded with an article entitled Scared To Death.
http://www.creditwritedowns.com/2011/07/ scared-to-death.html

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Obama’s $4 trillion Grand Bargain

Jul 7, 2011 13:44 UTC

The president says it’s time to go big (via Reuters):

After weeks of impasse, President Barack Obama and top congressional leaders are aiming for “something big” as they resume budget talks on Thursday to avert an imminent default. With Republicans showing new flexibility on taxes, Democrats say Obama will push negotiators to double their target to $4 trillion in budget savings over 10 years. That would be an ambitious goal, but there have been a few hints of progress since talks hit a brick wall two weeks ago.

1) If Obama wants a $4 trillion debt reduction package, how about the one his own debt commission produced last December:


2) But I don’t think Obama will agree to  or propose anything as sweeping as that. Instead, I would expect more than $1 trillion in savings from defense cuts, most of which will be tweaking the baseline of projected spending, which assumed perpetual war in Iraq and Afghanistan. Along with interest savings, that would be put you right around $2 trillion. Republicans may be offering $200 billion in new revenue from user fees and asset sales.

3) So how to close the remaining gap of roughly $2 trillion? Maybe another $400 billion in Medicare and Medicare savings.  And tweaks in how you measure inflation for Social Security benefits and tax brackets gets you another $150 billion, assuming Rs don’t view that as a tax hike.  And in his April speech, Obama called for $770 billion in non-security discretionary spending cuts over 12 years. To me, it still looks close to $1 trillion gap.

4) And recall that Obama’s debt speech which called for $4 trillion in debt cuts over 12 years would actually cut debt by just $2.5 trillion over ten years.

Geithner has plenty of dough to pay debt interest, Social Security …

Jun 29, 2011 20:48 UTC

My pal Conn Carroll points to this study from the Bipartisan Policy Center which has this killer slide:

The math seems pretty clear, though BPC adds that the whole process of prioritizing would be pretty messy and chaotic.



Geez Louise! Y’all “policy people” just don’t get it. If you were a creditor and KNEW that the your debtor (e.g., US government) couldn’t pay ALL its bills and was having to pick and choose which of its bills it pays, you would not have much confidence that you would be paid ALL of what was owed to you EVEN if the debtor said that they would put your bill at the top of its list of bills!!!

For example, if you missed a payment on ONLY your Bank of America credit card bill, guess what Amex and every other creditor would do to you EVEN IF you never missed any other payments? That’s right! Even a moron knows that they would lower your credit limit AND increase your interest rate. Plus no one else would lend you money at favorable rates in future. You’ll pay through your nose.

Contrary to the slide above that looks that it was produced by an imbecile, your credit rating is NOT a mathematical formula!

These people doing these analyses are just poor, fools and clowns. So Congress can go ahead and play with fire? We are the idiots who will get burned.

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