James Pethokoukis

Politics and policy from inside Washington

Gloomy CBO forecast is now Obama’s best-case scenario

Aug 24, 2011 20:16 UTC

After reading one bearish Wall Street economic report after another, the new Congressional Budget Office budget and economic forecast looks absolutely glowing by comparison. The CBO sees the U.S. economy growing 2.4 percent this year, 2.6 percent next — and then a brisk 3.6 percent through 2016.

By comparison, Goldman Sachs forecasts just 1.5 percent growth this year and 2.1 percent next. JPMorgan is even gloomier with a prediction of 1.5 percent this year and 1.3 percent next. If only the CBO knew something the bank didn’t. Actually, it’s just the opposite. The CBO forecast doesn’t include any of the deteriorating economic data from recent weeks, nor does it take into account the stock market’s stomach-churning volatility of late.

Yet even CBO’s dated optimism still shows the average annual unemployment rate staying above 8 percent until 2016. If the budget scorekeeper saw the world like Goldman and JPMorgan, its unemployment prediction would be more like their’s. Goldman sees the jobless rate hitting 9.25 percent in 2012, while JPMorgan thinks it will climb to 9.5 percent.

The rosy economic forecast is one reason I place little confidence in the CBO’s budget projections. The CBO now sees just $3.48 trillion in additional borrowing over the next decade, allowing the debt burden to fall to 61 percent a decade from now. Back in January, the CBO baseline forecast saw the federal government borrowing another $6.97 trillion from 2012 to 2021, pushing the country’s debt-to-GDP ratio to 76.7 percent from 69.4 percent in 2011. (Two-thirds of the difference between the two forecasts is due to the recent Budget Control Act. Keep your fingers crossed on that one.)  If CBO overestimates growth by just 0.1 percentage point a year, the debt will be $300 billion larger. A full percentage point equals $3 trillion in additional deb

In addition, CBO thinks that with a more realistic policy forecast,  annual deficits from 2012 through 2021 would average 4.3 percent of GDP instead of 1.8 percent. And with cumulative deficits of 8.5 trillion, total public debt would be 82 percent of GDP by the end of 2021. Once you add in the slower growth forecast, we might easily be talking about $10 trillion in new debt over a decade. And that would likely push the debt-to-GDP ratio to around 100 percent of total output (not counting Social Security IOUs.) There is nothing in this report to make one feel better about the economy, debt trajectory …  or President Obama’s chances for reelection.



James, James you keep predicting Obama as being a one-termer. Well, I wouldn’t ’cause I see him stacking
his cards and playing the angles again. One little nod from Oprah and he’s in again. It doesn’t matter if he created a birth certificate or not. It doesn’t matter if the economy is tanked. Voters aren’t that bright anymore and thinking someone else is always going to pay.
Life is going to be getting worse, trust me.

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The U.S. debt situation vs. AAA governments

Aug 10, 2011 19:43 UTC

This chart from the Committee for a Responsible Federal Budget shows the U.S. situation could be considered the most dire:



This data set from the Economist provides a different picture:

http://www.economist.com/blogs/buttonwoo d/2010/06/indebtedness_after_financial_c risis

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On the debt ceiling deal, direction more important than degree

Aug 1, 2011 13:55 UTC

If you want to read the bill yourself, here you go. And here is a nice summary from MF Global:

Ø Debt Ceiling increase in three tranches for a $2.4T total:

o Immediate $400B raise

o Second $500B raise, subject to congressional disapproval (the old McConnell-Reid Plan)

o Third and final $1.5T raise, subject to congressional disapproval

Ø $917B in cuts through the Boehner Plan’s spending caps

Ø Special Committee of 12 Members of Congress with mandate to recommend $1.5T in deficit reduction by November 23, 2011 and Congress is required to vote on recommendations by December 23, 2011

o Simple majority to pass recommendations out of committee

o Fast Track process for votes on House and Senate Floors

o Trigger/Sequester modeled after Gramm-Rudman model

§ If Special Committee can’t agree to recommendations, triggers $1.2 trillion in across-the-board cuts, half would be Defense cuts and the other half would be non-Defense cuts. Non-defense cuts would exempt Social Security and Medicaid, and only impact providers in the Medicare cuts.

Ø Balanced Budget Amendment votes on House and Senate floors

Having now arrived at the beach in the Outer Banks, NC, I am trying to write as little as possible, so brief thoughts only:

a)  This deal does not fundamentally change America’s fiscal trajectory. But that said, it does keep the momentum going for further fiscal fixes. I have been comparing it to the War in the Pacific. This deal is Guadalcanal or, probably more accurately, Tarawa. Hopefully, this new congressional committee to cut spending will be the next island, maybe Saipan. Iwo Jima and Okinawa come in 2013. That will be the time for fundamental entitlement or tax reform.

b)  As far as 2012 election impact, the deal might be more like the killing of OBL — an ephemeral boost rather than a political game changer. Obama is probably happy that few of the cuts happen next year. The White House would view major cuts as a drag on the economy. (Yet liberals still really hate this bill.) Far more important is that time is running out for a major economic acceleration that would dramatically lower unemployment or boost wages. It is growing more likely the jobless rate will be closer to 9 percent at the end of 2012 than 8 percent. As it is, Obama’s approval rating is down around 40 percent, according to Gallup.  The GOP nomination is certainly worth having.

c) Next up: Figuring out deficit neutral ways of boosting the economy. If unemployment stays where it is or the economy veers toward recession, I don’t expect Washington to sit on its hands.  The idea of a tax holiday on foreign earnings of U.S. corporations will get a further hearing. The inflow of money would be used for hiring, buying equipment or stock buybacks/dividends.  Republicans would be greatly in favor. All would have a positive economic effect on the economy. And the tax revenue — some $40-50 billion — could be used for some stimulus plan Democrats would like. Maybe this one from economist Ed Yardeni:

(1) The federal government should provide a $20,000 matching subsidy toward a down payment on a house to any homebuyer who puts up at least the same amount and is approved for a mortgage loan. The program would be capped at two million existing single-family homes. So the cost of the program would be $40 billion. The purchased property would have to be the primary residence of the buyer.

(2) This program could be paid for by slashing the corporate tax rate on repatriated foreign earnings from 35% to 10%. We estimate that doing so could easily raise the $40 billion necessary to finance the program. Moody’s research recently estimated that at least half of US companies’ record $1,240 billion in cash balances is held overseas. It’s over there and not here because of the large repatriation tax. In recent conversations with top executives of several major US technology companies with cash overseas, Carl was assured that lowering that tax to 10% would bring most of the money to the US.

(3) Rental income would be tax free for 10 years for homebuyers who purchase existing single-family houses as rental properties. They would not be eligible for the down payment subsidy. The 10-year tax-free status of the rental income would be transferable to new owners during that period. The number of rental units under the program would be capped at one million.







“Moody’s research recently estimated that at least half of US companies’ record $1,240 billion in cash balances is held overseas. It’s over there and not here because of the large repatriation tax. In recent conversations with top executives of several major US technology companies with cash overseas, Carl was assured that lowering that tax to 10% would bring most of the money to the US.”
Oh, he was ASSURED, was he? Let’s play a little game called “what’s more likely?” If the US lowered corporate taxes to 10%, would it be more likely that business owners would repatriate all that money and hand the government $124 billion out of the goodness of their hearts and a fine sense of civic responsibility, or would it be more likely that they would leave that money right where it is and continue to pay 0% like they’ve always done?

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Debt ceiling update: What Wall Street thinks is happening

Jul 22, 2011 16:15 UTC

One reason financial markets have been relatively sanguine about the debt ceiling negotiations is that investors have been almost certain that something gets done by August 2. Here is what one bank lobbyist told me today:

1-1.5T in spending cuts and an equal 1-1.5T on debt ceiling lift (a short term reprieve) — with the next 120 days battling over the Grand spending/revenue Deal (that uses Bowles/Simpson – Gang of 6 as the starting point).

And this is what BankofAmericaMerrillLynch is saying:

We expect a deal to come in two stages: a smaller up-front deal of possibly $50-100bn per year in deficit reductions (relative to the President’s initial budget offered in February 2011) over the next decade, combined with a more comprehensive deal to be passed either at the end of the year or early next year. The comprehensive deal would include both tax and entitlement reform and cuts to discretionary spending. However, our concern is that policymakers struggle to come up with a credible longer-term plan before year-end, particularly since it is an election year. This would mean we could face the risk of another debt ceiling crisis and ultimately rating agency downgrades.

With this plan, we believe the debt ceiling will be raised before August 2nd, but probably by only $500bn to give Congress six months time to write and pass the new legislation. Any agreement to raise the debt ceiling by a much larger amount in the future would likely be conditioned upon passage of the more comprehensive legislation.

We expect the US credit rating to remain on negative outlook and for a downgrade to AA to occur only when the rating agencies believe there will be no serious follow through. This means a downgrade would not likely occur until after the six month period of negotiations which puts us in early next year. Following any federal downgrade, we would expect downgrades of insurance companies, government related enterprises and state governments that depend heavily on federal funding. S&P has taken a more aggressive stance then the others, and may downgrade to AA+ as early as August if there remain significant risks to implementing a $4 trillion longer term fiscal plan.

Also, my pal Phil Klein had this takeaway from his chat with House Speaker Boehner today:

I asked Boehner whether some sort of short-term agreement would be necessary given that they’re closing in on the Aug. 2 deadline, and even if a late deal were struck, it would have to be written, scored by the Congressional Budget Office, and passed by the House and Senate.

“It is not what the goal here is,” Boehner responded. “As I said, there are two challenges here that we have to overcome. We have to raise the debt ceiling, and we have to have a serious down payment on reducing our budget deficit and our debt.”

Saying it isn’t the goal is different than saying it isn’t going to happen. Some sort of short-term extension seems inevitable, if nothing else but to give them time to do all the procedural things if they’re close to a bigger deal. There’s nothing ideologically preventing either side from this, and as I’ve noted, both chambers have already voted for deficit spending through Sept. 30, so there’s an easy argument for extending it at leas through then.

Read more at the Washington Examiner.



The British minister was correct in stating that “right-wing nutters” in the House of Representatives are responsible for the position we find ourselves in as tea-party Republicans are trying to implement their far right-wing agenda by holding the American economy, and working American men and women, hostage with actions that could seriously damage the economy and the middle class and poor. To those of you who voted for these nuts, I hope you’re satisfied with what you got because the bottom line is the actions of these fools will hurt you too unless you happen to be part of the 2% that hold most of our country’s wealth. To the rest of you, I ask that you consider the proposition that there needs to be a redistribution of wealth in this country by making the wealthy pay their fair share of taxes. We cannot keep going the way we’re going or we’ll end up an extremely polarized country wherein 98% of the citizens live at a third-world level and 2% live a life of unimaginable luxury. This country will then become completely dysfunctional as we’re close to being right now, and there will be violence as the 98% take wealth from the rich whether they like it or not. Don’t think it can’t happen because it has happened many times throughout history. And, it will soon happen in this country, if Republicans continue their nonsense.

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How would U.S. react to a debt crisis?

Jul 20, 2011 17:20 UTC

If the U.S. doesn’t get a handle on federal debt, there will be a financial and economic crisis. By 2035, debt as a share of GDP could be 250 percent, though a panic would surely happen long before that point was reached. But if a crisis came, how would Washington react? What drastic measures would be taken? I think there would be a huge push for a massive tax increase, probably via a value-added tax. Here is some of what the Comeback America Initiative sees happening:

Social Security

• The higher retirement eligibility ages for Social Security would be increased to 70 for normal retirement and 65 for early retirement, and fully implemented by 2030 and 2020, respectively.

Most of the proposed reforms under the Preemptive (Prudent) Framework would be retained with the following significant differences:

• Repeal the Affordable Care Act of 2010.

• Repeal the Medicare Modernization Act of 2003.


Most of the illustrative reforms under the Preemptive (Prudent) Framework would be retained with the following significant differences:

• Accelerate the planned draw down of U.S. troops from Southwest Asia from the end of 2014 to the end of 2012.

• Accelerate the reduction of U.S. overseas military and civilian presence.

Taxes and Revenues:

• Impose temporary deficit reduction revenue increases in fiscal 2013-2014 to accelerate deficit reduction and debt/GDP stabilization efforts.

• Phase-in the special income and payroll tax exclusion on employer provided and paid health care by 2018.

• Take any other actions needed to comply with annual revenue targets.

And the result:

The result is a balancing of the total budget by 2015, and reduction of debt/GDP to about 51 percent of GDP in 2021 and declining rapidly, versus about 76 percent of GDP and increasing rapidly under CBO’s current law baseline, and to about 28 percent and declining in 2035 versus about 91 percent and rising under the baseline.  … Overall spending under the framework would be reduced to 20.1 percent of GDP in 2021, from 23.9 percent under the current law baseline, and to 21.8 percent of GDP and leveling in 2035 from 28.3 percent and rising under the baseline. Nominal public debt would be less in 2023 than 2015 and essentially stable.The Reactive (Crisis Management) Framework also involves having to impose a temporary deficit reduction revenue increases to accelerate deficit reduction and debt/GDP stabilization, while maintaining an overall cap on federal revenues at 21.5 percent of GDP



Re healthcare – As long as we’re in simplification mode, why not simply put the entire US population into a single risk pool? Then let insurance companies compete for customers and the providers to serve them. As it stands, each state sets its own regulations and the result is that insurers play the system by cherry picking markets, charging higher premiums in states where they can get away with it, and dictating how providers are compensated. Tear down the barriers and prices will fall.

The only thing certain about repealing Romneycare and not replacing it with another plan is that healthcare costs will soar off the charts and ever increasing numbers of people will be denied access.

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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.





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.

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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.





Here is an interesting site (probably not owned by Goldman Sachs):

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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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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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