James Pethokoukis

Politics and policy from inside Washington

Ignore Geithner’s debt ceiling scare tactics

May 16, 2011 18:00 UTC

To employ the phrasing of Gov. Chris Christie, America hit the debt ceiling and didn’t vaporize. New borrowing has put the U.S. Treasury right up against its $14.3 trillion borrowing limit, but financial markets aren’t crashing over fear that this will lead to default.

So, given that non-reaction so far, just who is the Treasury Secretary kidding? This whole fear-fest over the U.S. debt ceiling is starting to resemble the bank bailout in 2008 when warnings of financial apocalypse shoved Congress into approving TARP. Here is how Timothy Geithner put it in a  letter to Sen. Michael Bennet:

Failure to raise the debt limit would force the United States to default on these obligations. … A default would inflict catastrophic, far-reaching damage on our nation’s economy, significantly reducing growth, and increasing unemployment. … Default would not only increase borrowing costs for the federal government, but also for families, businesses and local governments. … Default would also have the perverse effect of increasing our government’s debt burden. … It would increase rates on Treasury securities, which would increase the cost of paying interest on the national debt.

But why, exactly? There is no reason for the U.S. to miss a debt payment, even after the supposed Aug. 2 deadline. Team Geithner has plenty of flexibility about which bills to pay and plenty of dough with which to do it. Here is economist Ed Yardeni:

Over the past 12 months through April, net interest expense of the federal government was $213.1 billion. Will there be no money to make these payments if the debt ceiling isn’t raised? There will be plenty. Over the past 12 months through April, the Treasury collected $2.27 trillion in revenues. In April alone, when individual tax returns are due, revenues totaled $289.5 billion, a bigger than expected gain, confirming that the economy recovered smartly over the past year.

It would be criminally insane for the Treasury to stop making interest payments on our debt just because Congress failed to agree on raising the ceiling when the revenues are certainly available to make the payments and auctions will continue to rollover maturing debt. It is insane for administration officials to suggest otherwise.

And just how badly would markets take it anyway if there was a temporary payment delay but the result was a deal which significantly cut spending today and capped spending tomorrow? Famed investor Stanley Druckenmiller is willing to take his chances:

Here are your two options: piece of paper number one—let’s just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don’t know, six days, eight days, 15 days, but I know I’m going to get it. There’s not a doubt in my mind that it’s not going to pay, but it’s going to be delayed. But in exchange for that, let’s suppose I know I’m going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured,” he says.

Then there’s “piece of paper number two,” he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. “I don’t have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we’re going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it’s a no-brainer. It’s piece of paper number one.

The White House would love a clean up-or-down vote on raising the debt ceiling. But David Walker, the hawkish former U.S. comptroller general said this today:

While the debt ceiling must be increased, any extension should include appropriate conditions to reduce short-term spending while also addressing the huge structural deficits that lie ahead. This should involve bringing back tough statutory budget controls, including new debt-to-GDP targets with automatic enforcement mechanisms beginning in 2013. Adopting a number of initial steps designed to reduce direct spending and tax expenditures as down payments to meet the new target would also be appropriate.

We must not allow what has already happened in Greece and Ireland to happen in the U.S. No one really knows when the markets will lose confidence in the willingness and ability of the federal government to put its finances in order. If it does, we will see a sudden and dramatic increase in interest rates that will only increase our already serious economic, fiscal and unemployment challenges.

The debt ceiling provides an opportunity to make a big dent in America’s dangerous debt situation.  Not taking advantage of this moment is what scares me.


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Romney: Values vs. data

May 12, 2011 17:48 UTC

A very tough WSJ editorial today looking at RomneyCare, but it was the summary that really caught me:

For a potential President whose core argument is that he knows how to revive free market economic growth, this amounts to a fatal flaw. Presidents lead by offering a vision for the country rooted in certain principles, not by promising a technocracy that runs on “data.” Mr. Romney’s highest principle seems to be faith in his own expertise.

More immediately for his Republican candidacy, the debate over ObamaCare and the larger entitlement state may be the central question of the 2012 election. On that question, Mr. Romney is compromised and not credible. If he does not change his message, he might as well try to knock off Joe Biden and get on the Obama ticket.

If a series of studies somehow (unlikely) showed that high taxes and nationalization of business would produce a higher standard of living, would I be for those policies? I would not, because that sort of society would be a far more oppressive one where a person would not be free to pursue happiness as he or she saw it.  While numbers should inform decisions, it’s not always about following the data wherever it takes you. Not at all. I remember talking with a libertarian econ professor who said he used to believe that his side “had the better studies.” As he got older, he became a bit less sure of that. But he also really didn’t care since at the core of cosmology was a belief in the value of freedom.


Talk about no factual argument given, just platitudes…

Tell us exactly how much money is going to pay exactly which commissars [or is it czars], which union kickbacks, which political favors, and which other graft. And be specific.

This is the usual spoon fed babble the ditto-bots get drummed into their little heads every day, two hours ever morning, and four hours every afternoon, followed by three hours of prime time, every single day.

So yes, let’s look at all the examples around the world, and compare them to America’s system. America treats healthcare as a risk, while the rest of the civilized word treats it as a cost. That’s why Americans pay twice as much for health services as the rest of the world, and get results that are no better.

There is no risk of getting sick. Disease does not care if people have health “insurance” or not. People get sick, they get care, and society pays the COST. Adding a layer of for-profit business to “manage the risk” is insanity.

And yet, Republicans are willing to spend whatever capital, political or otherwise, to protect this racket.

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Cutting entitlement benefits to wealthier Americans

May 12, 2011 14:49 UTC

Good stuff on means testing from Charles Blahous over at e21:

As it happens, the two largest and fastest-growing areas of federal spending, Social Security and Medicare, are both ones for which the wealthiest Americans are fully eligible for rising benefits. Both programs are, to be sure, of extreme political sensitivity. But the financial imbalances in these two programs require correction by elected officials in any event. To the extent that spending on the wealthy is constrained within these programs, it will reduce the financial pressure for even more politically-sensitive changes to them.

1) The essence of what is required is for the two parties to agree on how many high-income individuals to affect, and on how much. Social Security provides a ready case study in how this could be done. Many Democrats, for example, have expressed sympathy with the concept of raising the current $106,800 limit on the amount of wages subject to the Social Security tax. Such a measure would affect roughly 20% of workers (the number who have wages above the current limit at some point in their careers). Legislators could therefore choose instead to slow the growth of benefits – perhaps for that same number of workers, or the top 20% of the wage spectrum.

How much should the growth of such benefits be slowed? It is not financially necessary to reduce Social Security benefits from current levels. Current Social Security proposals, for example, that employ “progressive indexing” would only impose price-indexation on less than 1% of workers, with everyone else receiving faster benefit growth. Limiting the highest-income 20% to inflation-adjusted benefits and allowing gradually faster growth for workers below that level could by itself eliminate well more than half of the entire Social Security shortfall.

2) As for Medicare, Democrats and Republicans fiercely disagree on whether cost containment is best achieved via a premium support model, or by the federal government’s imposing price controls within the program’s current design. But they do agree on the need for cost containment itself. Already certain features of federal health care law, such as the exemption from the “Cadillac plan tax” and the vouchers provided under the new health entitlement, will grow only with the Consumer Price Index (CPI), despite the fact that historically health cost inflation has exceeded economy-wide CPI. If it is politically acceptable to restrict these forms of federal health care support to CPI growth, surely Medicare direct spending on the highest-income beneficiaries could similarly be limited. (This cost containment could be achieved most neatly by changing the rate of growth for income-related Part B premiums so as to hold the growth rate for total Medicare per-capita expenditures to CPI for the highest-income beneficiaries).

3) Though these are the largest federal spending programs, and though most other direct spending is not targeted on the rich by any definition, savings from direct payments to higher-income individuals need not end there. Agriculture support payments, for example, are currently made to farmers with adjusted gross farm incomes as high as $750,000 (and allowing for an additional $500,000 in non-farm income). At a time when so many continue to struggle amid a weak economy, when federal finances are in desperate condition, and when many talk of the necessity of raising taxes on millionaires, it is difficult for taxpayers to understand why direct payments to millionaires continue. It is encouraging that reports on nascent bipartisan deficit talks indicate that such excessive farm subsidies are potentially on the chopping block.

A bipartisan effort to restrain entitlement spending on the rich will not draw unanimous praise. Some on the far left will see such reforms as part of an insidious plot to weaken popular support for cherished programs. But even objection from these quarters is potentially useful and informative. As a nation we must decide whether our loyalties attach to the programs in the abstract or to the individuals affected by them both as beneficiaries and as taxpayers. We need an informed debate over whether the costs of government should rise to unprecedented levels simply because of the political importance some might attach to buying the support of those who least need assistance.


First they came for the flash traders …

May 12, 2011 14:31 UTC

Democrats want to raise taxes on oil companies. They want to slap fees on high-frequency trading firms. And they want to raise taxes by$2 trillion over the next 10 years, including a 3 percent surcharge of millionaires.  All of which will solve nothing since we either need to radically restructure entitlements (such as through the Paul Ryan approach) or hit the middle class with broad new taxes (the true “progressive” approach which they will not fess up to.) For now, though, liberals are focusing on the easy targets for higher taxes: Big Oil, Wall Street and The Rich. But that is not where they will stop …


Really, using the start of a phrase that stated “First they went after the Communists” then “Trade Unions” and “Jews” (left-wing groups) as a statement about the evils of the Nazis to support a right wing agenda is not just classless, it belittles the evil that was Nazi Germany.

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The fantastic assumptions of the “The People’s Budget” by House Democrats

May 9, 2011 15:25 UTC

What’s the true opposite of Rep. Paul Ryan’s “Path to Prosperity” budget plan?  Well, there’s the Obama “Framework,” but that is little more than a speech and a bunch of bullet points.  For a more serious and comprehensive liberal response, take a look at the “People’s Budget” produced by the Congressional Progressive Caucus.

Here’s the short version of the plan: It claims to achieve primary balance (not counting interest costs) by 2014 and overall balance by 2021. It does this via huge tax hikes (on income, corporate profits and investments) and by cutting defense spending by $2.3 trillion over a decade – and then shifting $1.7 trillion of those savings into nondefense outlays.  Those nearly $2 trillion in new “investments” would boost the growth potential of the economy by 0.3 percentage point per year over the next decade. Or so the CPC and the Economic Policy Institute claims.

The economic consulting firm Macroeconomic Advisers is dubious, to say the least, that the Peoples’ Budget would boost growth rather than kill it. Among its criticisms (as excerpted by me):

1) The analysis ignores near-term fiscal drag sure to arise if the plan is implemented when the Federal Open Market Committee has little room to accommodate a strong fiscal contraction.

2) Nor does it even mention the potential deleterious supply-side effects of raising marginal tax rates

3) The $1.7 trillion is nominal, not real, spending. Furthermore, in the CBO baseline inflation averages 2% per year. Adjusting for inflation reduces the $1.7 trillion in current dollars to $1.5 trillion in 2005 dollars.

4) This is gross investment, some of which depreciates away over time. The average or effective depreciation rate on private nonresidential fixed capital is about 7.5% per year. Assuming this rate of depreciation, and then accumulating the real gross investment flows by perpetual inventory into a net stock leads to an increase of roughly $0.7 trillion in the level of the real capital stock over the coming decade.

5) In our own long-run forecast, the real private nonresidential capital stock is roughly $21 trillion at the end of 2021, of which $0.7 trillion would represent an increase of about 3%.

6) This is for the private nonfarm business sector, which accounts for only three-fourths of total GDP. Hence the impact on the level of GDP at the end of ten years would be 0.75 times 1%, or 0.75%.

7)  When this increase is spread over ten years, the average impact on growth is less than 0.1 percentage point per year, or only about a third of the impact the EPI analysis suggests would result from the federal government spending the same amount of money on nondefense activities.

But wait, there’s more:

There are additional reasons to be suspicious. Much of the literature estimating the return to public investments focuses on the productivity of tangible investment like infrastructure, in part because there are data on the tangible public capital stock that facilitate such research. However, of the $1.7 trillion of new nondefense spending proposed in the People’s Budget, only $0.2 billion is specifically earmarked for physical infrastructure that would be included in official estimates of the public capital stock. The remaining $1.5 trillion is for “job creation, education, clean energy and broadband infrastructure, housing, and R&D.” Our National Accounts would count almost all of this either as current consumption or current transfers, not gross investment, and certainly there must be some consumption element in such spending. Do we really think that an increase in “foreign assistance” delivers the same productivity gain as expanding or repairing the inter-state highway system?

In addition, the analysis doesn’t argue that the $2.3 trillion of cuts in defense spending are a reduction in public investment that reduces economic growth. In essence, the EPI analysis implies that, at the margin, nondefense spending is all investment but that defense spending is all consumption. Both sides of this proposition might be closer to the truth than not, but if some nondefense spending is consumption and some defense spending is investment, the EPI calculus on the growth effects of the People’s Budget can be quickly undermined.[7] Suppose, for example, that 75% of the extra nondefense outlays really are new investments, but that 25% of the proposed savings in the defense budget actually reflects cuts in public investment. Then, the net change in public investment is reduced from the $1.7 trillion advanced in the People’s Budget to just $0.7 trillion (=.75*$1.7 trillion – .25*$2.3 trillion).



Fine fine. I don’t doubt all these numbers. That’s why it’s called a *Peoples’ Budget*, not a real budget and don’t forget, it was put together by the *Progressive Caucus*. Lefties never give up. A simple laugh and a wave of the hand at this budget proposal would have been adequate.

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The Obama Misery Index

Apr 29, 2011 19:45 UTC

The Misery Index (inflation plus unemployment) through March was 11.48 percent (2.68 percent, 8.8 percent). By comparison, it was 10.52 percent in 1992 when Bill Clinton handily beat George Bush.  (It was nearly 21 percent in 1980 when Ronald Reagan crushed Jimmy Carter.) In fact, it has not been double digits for an entire year since Bush I’s first term. This goes along way in explaining why trust in Obama’s handling of the economy has collapsed. And a new Gallup Poll finds that Americans prefer the GOP budget approach to that of Democrats by 48 percent to 36 percent.

Also keep in mind how rising gas and food prices are eating into incomes. Real disposable income (personal income after taxes and adjusted for inflation) increased only 0.1% after being flat in February.






The Misery Index (inflation plus unemployment) through March was 11.48 percent (2.68 percent, 8.8 percent). By comparison, it was 10.52 percent in 1992 when Bill Clinton handily beat George Bush.


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Obama’s approval ratings on economy are plunging

Apr 28, 2011 16:37 UTC

This new Marist poll has to rings some alarm bells in the White House (and  keep in mind this tracks registered voters):


Minus 17! The sooner Obama is gone evidently the better. But who’ll replace him? The GOP better get crackin’.

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Why liberals owe Reagan a huge apology

Apr 27, 2011 02:29 UTC

It’s the ur-talking point for modern liberals: The 30-year, free-market tilt of U.S. economic policy has been a failure. Tax cuts failed. Deregulation failed. Free trade failed. President Ronald Reagan failed.

Their so-called evidence: U.S. incomes and the American standard of living have been flat for a generation. The rich got richer, the poor got poorer.

Except they didn’t. The rich did richer, but so did everyone else, it seems. That moldy, left-wing talking point is based on a very narrow estimate of income – one that does not take into account household size, taxes or benefits. When you make that adjustment, a very different picture emerges. This chart displays the findings of economists Dr. Richard V. Burkhauser of Cornell University, Dr. Jeff Larrimore of the Joint Committee on Taxation and Dr. Kosali Simon of Indiana University:


Instead of the income of the average American being flat (+3.2 percent) from 1979-2007, it actually rose 37 percent. And all quintiles scored gains. Here’s what one of the economists told The Daily Caller:

The bottom line is [conventional wisdom] asks what’s been happening to private personal income over time and they are right if you look at that for tax units, things do not look very good for the middle class. … But if you take other things into account, the reason the country has not gotten in a civil war is because things are not that bad. In fact everybody has done better. … This isn’t a zero sum game, where one group wins at the expense of others. The growth in productivity of Americans in the top twenty percent of tax units increased the size of the economic pie sufficiently to register major gains across the entire distribution of after-tax income.

Also, let me refer to something I wrote awhile back:

From another vantage point, a study by the Federal Reserve Bank of Minneapolis finds that wages for the median worker went up by 20 percent between 1975 and 2005. What’s more, critics of the economy tend to ignore benefits when figuring how well or poorly workers are being paid. By that measure, according to the Fed bank, total compensation has gone up by 28 percent. Apparently up is the new flat.

If the standard of living of the average American really had not improved for more than three decades, wouldn’t there have been a tremendous political backlash by now? Wouldn’t the Democratic Party have fully mutated into a full-scale social democratic party—nationalized healthcare, a return to superhigh tax rates—rather than moving right over the past three decades? Would centrist or right-wing candidates have won six of the past seven elections? I think not.

I wonder if this new study were to be recalculated with better inflation estimates, what the numbers might be.

And consider this: Back in 1979, American elites from Wall Street to Washington to Hollywood were convinced America’s best days were behind it and the start of a long decline was in full swing. If they had been shown this new data, they would have thought it described a fantastically optimistic scenario. Keep that in mind when you hear predictions that the 21st Century will be something other than the American Century. With the right free-market policies that enable entrepreneurial capitalism, America can continue to have the Indispensable Economy.


Posted by juboy111 :

1) Huh?

2) Did you even read this article?

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Why Paul Ryan could enter the 2012 presidential race

Apr 26, 2011 16:43 UTC

It’s not just Bill Kristol, gang. There’s desire at the highest ranks of the Republican Party, according to my reporting and sources, to see House Budget Chairman Paul Ryan seek the 2012 presidential nomination. Here’s why:

1) Since Democrats are determined to hang Ryan’s bold “Path to Prosperity” budget plan around the neck of every Republican running for office in 2012,  why not have its author and best salesman advocate for it directly vs. President Obama?

2) Ryan — to borrow a favorite Simon Cowell phrase — is “current.” He’s smack in the middle of budgetary and ideological clash between Democrats and Republicans and would immediately energize conservative and Tea Party activists.

3) Ryan is a strong national defense conservative, as well as pro-life.

4) Ryan is from a battleground state, Wisconsin, and a battleground region, the upper Great Lakes.

5) Ryan’s youth, vigor, likability and Jimmy Stewart persona — well, a wonky version of George Bailey — would be an immediate shorthand signal to voters that he’s a different kind of Republican. He also has a compelling life story to tell.

6) Obama suddenly and unexpectedly to Washington insiders looks beatable — by the right candidate.

The counter-argument here, of course, is that Ryan a) has repeatedly ruled out a 2012 run for family reasons (small kids) and b) may instead run for U.S. Senate in 2012. He also just turned 41 and may not want to go all in so quickly, especially against an incumbent president expected to try and raise $1 billion for re-election. But if Mitt Romney, Tim Pawlenty, Newt Gingrich — maybe Mitch Daniels, too — fail to catch fire, expect the pressure on Ryan to run to rise.


Well, if the economy continues to tank, the GOP could put up a farmyard animal and still win. But assuming it’s competitive, Paul Ryan would be a really bad candidate. I happen to agree with him on most things, and I think he knows lots of good stuff about how to cut the budget. But having seen him on TV a few times, he needs at least five years and a lot of media training to be ready for prime time. Among his most obvious faults are – he talks too fast, he explains complicated issues in long complicated sentences – ie he doesn’t have the gift of explaining complicated things in a simple way, he tries to answer the question rather than get his own talking points across making him a gift for a hostile interviewer (which will be about 98% of them), he gets distracted onto side issues, he distracts himself with subclauses. His manner is eager and puppyish and he totally lacks gravitas. Obama is in reality an empty suit, but he can play a man with gravitas quite well (though the act is beginning to grate pretty badly.) In short, Ryan would look like a clever eager likeable kid against Obama and would be eaten for breakfast. He should stay where he is, sort out the budget process, which certainly requires his cleverness and wonkishness, and come back and stand for President in his fifties when he’s acquired some gravitas. In the meantime, I suggest that the GOP doesn’t put up a farmyard animal just in case it is competitive. I don’t agree with Romney as much as I agree with Ryan (or Perry) but with a GOP Senate and House (which is what there will be if there’s a GOP President) Romney will do just fine. He’ll blow with the wind, and the wind will be coming from Ryan’s direction.

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Why the GOP shouldn’t cave on taxes

Apr 25, 2011 17:42 UTC

Let me start off by saying I have no doubt that Sen. Tom Coburn wants smaller government — much smaller government. But is giving more money to government — and hoping against precedent that Washington just doesn’t spend the new cash –  the best way of doing it? Here is a bit from his Meet the Press interview yesterday:

GREGORY: Let me stick with you on the point of contention, particularly with senators like you, Republicans, conservatives, and outside groups having to do with taxes. Could you support a deal here out of this Gang of Six on the budget that includes tax increases?

COBURN: Well, we’re not talking about it. I think if you go back and look at the commission’s report, what we were talking about is getting significant dynamic effects by taking away tax credits, lowering the tax rate and having an economic increase that will actually increase the revenues to the federal government. We’re not talking about raising tax rates at all. … So if there is a net effect of tax revenue, that would be fine with me. I experienced that during Reagan’s period in 1986.

Except that we’re not just talking about more revenue from economic growth. Coburn’s Gang of Six would reduce various tax breaks and loopholes so that taxpayers would be supplying more revenue to Washington.  Apparently Coburn believes this is a price that must be paid to get a debt reduction agreement with Democrats.

But what exactly would spending hawks get in return? Are Democrats offering to dump Obamacare or agree to a revamp of Medicare like the one proposed by Paul Ryan. Highly unlikely. If that were the case, Coburn would have a much stronger arguement. If not,  a better compromise might be lower defense spending in exchange for other cuts discretionary or mandatory spending.

And remember the context: The reason America is on an unsustainable fiscal track is that spending, not revenue, is moving away from the historical average.



Your evidence:

http://www.deptofnumbers.com/blog/2010/0 8/tax-revenue-as-a-fraction-of-gdp/

Tax rates and tax revenues are different animals.

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