Tag: debt ceiling

The Debt Ceiling and the Balanced Budget Amendment

The Washington Post editorializes:

A balanced-budget amendment would deprive policymakers of the flexibility they need to address national security and economic emergencies.

A fair point. Statesmen should have the ability to “address national security and economic emergencies.” But the same day’s paper included this graphic on the growth of the national debt:

National Debt

Does this look like the record of policymakers making sensible decisions, running surpluses in good year and deficits when they have to “address national security and economic emergencies”? Of course not. Once Keynesianism gave policymakers permission to run deficits, they spent with abandon year after year. And that’s why it makes sense to impose rules on them, even rules that leave less flexibility than would be ideal if you had ideal statesmen. Indeed, the debt ceiling itself should be that kind of rule, one that limits the amount of debt policymakers can run up. But it has obviously failed.

We’ve become so used to these stunning, incomprehensible, unfathomable levels of deficits and debt — and to the once-rare concept of trillions of dollars — that we forget how new all this debt is. In 1980, after 190 years of federal spending, the national debt was “only” $1 trillion. Now, just 30 years later, it’s sailing past $14 trillion.

Historian John Steele Gordon points out how unnecessary our situation is:

There have always been two reasons for adding to the national debt. One is to fight wars. The second is to counteract recessions. But while the national debt in 1982 was 35% of GDP, after a quarter century of nearly uninterrupted economic growth and the end of the Cold War the debt-to-GDP ratio has more than doubled.

It is hard to escape the idea that this happened only because Democrats and Republicans alike never said no to any significant interest group. Despite a genuine economic emergency, the stimulus bill is more about dispensing goodies to Democratic interest groups than stimulating the economy. Even Sen. Charles Schumer (D., N.Y.) — no deficit hawk when his party is in the majority — called it “porky.”

Annual federal spending rose by a trillion dollars when Republicans controlled the government from 2001 to 2007. It has risen another trillion during the Bush-Obama response to the financial crisis. So spending every year is now twice what it was when Bill Clinton left office. Republicans and Democrats alike should be able to find wasteful, extravagant, and unnecessary programs to cut back or eliminate. They could find some of them here in this report by Chris Edwards.

In the Kentucky Resolutions, Thomas Jefferson wrote, “In questions of power, then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.” Just so. When it becomes clear that Congress as a body cannot be trusted with the management of the public fisc, then bind them down with the chains of the Constitution, even — or especially — chains that deny them the flexibility they have heretofore abused.

‘Cut, Cap and Balance,’ the Debt Ceiling and Federal Spending

Cato Institute scholars Daniel J. Mitchell and Chris Edwards evaluate the plans offered by Republicans for lowering federal spending using a so-called “Cut, Cap and Balance” proposal that would make small cuts to federal spending in the short run, cap federal spending, and balance the federal budget using a tax-limited balanced budget amendment to the Constitution.

I Hope I’m Wrong, But Here’s Why Republicans Will Lose the Debt-Limit Fight

There are three reasons why I’m not very hopeful about the outcome of the debt-limit battle.

1. There is no unity in the GOP camp.

Republicans have been all over the map during this fight. Some of them want a balanced budget amendment. Some want a one-for-one deal of $2 trillion of spending cuts in exchange for a $2 trillion increase in the debt limit. Others want some sort of spending cap, akin to Senator Corker’s CAP Act. Some want to mix all these ideas together in a cut-cap-balance package. Others want Obamacare repeal.  And the latest proposal is Sen. McConnell’s proposal to let Obama unilaterally raise the debt limit.

These are mostly good ideas, but the failure to coalesce around one proposal – preferably one that is easy to understand – has made the Republican position difficult to define, defend, or advance.

2. The fear of demagoguery is high.

As I explained months ago, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner are trying to spook financial markets with hyperbolic warnings about a risk of default. This is blatant dishonesty and demagoguery, but Republicans are nervous that this tactic might be successful if there is a high-stakes showdown as the government’s borrowing authority runs out.

For those with short memories, this is what happened with TARP back in 2008. The initial bailout proposal was rejected, leading to short-run market gyrations, and many Republicans panicked and switched their votes to yes.

3. Republicans don’t control the Senate or the White House.

I’m stating the obvious, of course, but people seem to forget that any debt limit increase will need to get through the Senate and get signed by Obama.

Imagine you are Harry Reid or Barack Obama. Is there any reason why you would acquiesce to Republican demands? Yes, you need to at least pretend to care about big government, wasteful spending, and red ink, but why not hold firm and then strike a deal based on make-believe spending cuts? That’s exactly what happened during the “government-shutdown” debate earlier this year.

This post, incidentally, is not an attack on Republicans. I’m very willing to attack GOPers when they do the wrong thing, but I’m not sure they deserve to get hammered in this case.

Simply stated, I don’t think there’s a winning strategy, so I don’t see any point in going nuclear.

If nothing else, at least Republicans resisted the siren song of tax increases, which is not a trivial achievement since Democrats clearly were hoping to trick GOPers into giving up one of their strongest political positions.

McConnell’s Cave-In and Boehner’s Opportunity

Senate Minority Leader Mitch McConnell has offered the president a way to raise the debt ceiling by $2.5 trillion without having to cut spending. The WaPo reports that “McConnell’s strategy makes no provision for spending cuts to be enacted.”

This appears to be an epic cave-in and completely at odds with McConnell’s own pronouncements in recent months that major budget reforms must be tied to any debt-limit increase.

House Republicans should obviously reject McConnell’s surrender, and they should do what they should have done months ago. They should put together a package of $2 trillion in real spending cuts taken straight from the Obama fiscal commission report and pass it through the House tied to a debt-limit increase of $2 trillion. Then they shouldn’t budge unless the White House and/or the Senate produce their own $2 trillion packages of real spending cuts, which could be the basis of negotiating a final spending-cut deal.

For those who say that House tea party members won’t vote for a debt increase, I’d say that $2 trillion in spending cuts looks a lot better than the alternative of having Democrats and liberal Republicans doing an end-run around them with McConnell’s no-cut plan.

For those who say that House members are scared of voting for specific spending cuts, I’d say that they’ve already done it by passing the Paul Ryan budget plan. I’d also say that you can’t claim to be the party of spending cuts without voting for spending cuts.

Obama’s Fiscal Commission handed Republicans ready-made spending cuts on a silver platter—Republicans will never get better political cover for insisting on spending cuts than now.

Debt Ceiling: Political Games

Back in January I noted that some analysts believe that the statutory debt ceiling should be eliminated. They view the potential for political brinksmanship as creating an unnecessary risk that financial markets will get rattled if there’s a chance the government won’t make good on its debt obligations in a timely manner. I argued that “forcing policymakers to spar publicly over fiscal policy is healthy, especially at a time when analysts generally agree that the country is headed toward an economic catastrophe if Washington’s mounting debt isn’t brought under control.”

I maintain that view four months later, but an article in Politico illustrates the absurd political shenanigans that accompany debt ceiling deliberations.

Sen. Bob Corker (R-TN) is building bipartisan support for a plan that would cap federal spending at a declining percentage of GDP over ten years. Spending as a percentage of GDP would eventually be reduced to 20.6 percent, which is equal to the average from 1970 to 2008. No tax increases.

Corker has been touring his state pitching the plan as part of a deal to raise the debt ceiling. Democratic Senators Claire McCaskill (D-MO) and Joe Manchin (D-WV) have endorsed it, as has Sen. Joe Lieberman (I-CT) who caucuses with the Democrats. Good news, right? Not according to Republican apparatchiks.

From the article:

“Corker’s heart may be in the right place on this legislatively, but it would help if he was more focused on winning back a Senate Republican majority, than hurting the feelings of vulnerable Democrats who recognize the political cover this affords them,” said one senior GOP aide. “McCaskill, Manchin and others can vote for it, and campaign on it, knowing full well that Harry Reid and Chuck Schumer have enough votes to kill it.”

On Tuesday, Corker got into a squabble with the National Republican Senatorial Committee, which ridiculed Manchin for backing the plan by saying it had “zero chance” of passing because it was opposed by Reid. An angry Corker believed the NRSC was squashing the plan’s growing momentum, and had a series of phone calls with NRSC officials expressing his frustration. A spokesman for the NRSC later said that the political committee shouldn’t have “underestimated Sen. Corker’s legislative skills and certainly hope he is successful in this effort.”

Sad as it is, that’s the way it works in Washington, folks. Hey, nevermind that Corker is at the very least planting on Democratic soil the idea that a debt ceiling deal should be focused on reducing spending and not tax hikes. Nope, what’s really important is making sure that Democrats do the wrong thing in order to bolster Mitch McConnell’s Senate Majority Leader prospects. After all, spending and debt didn’t go through the roof when Republicans controlled the House, Senate, and White House, right?

Pardon my sarcasm and obvious contempt, but this is the sort of nonsense that I repeatedly experienced during my days as a Senate staffer. Americans tend to get all hot and bothered over this or that politician, but much of what “gets done” in Washington is actually carried out by party operatives, sycophantic staffers, and lobbyists. All of this leads to a refrain I increasingly end media appearances with: Why do we give these people so much control over our lives?

Response to Joe Weisenthal’s Critique of My Politico Opinion Piece

Yesterday I had an op-ed in Politico suggesting that U.S. lawmakers should consider not raising the federal debt limit (at least for now). I argued that freezing the ceiling would assure investors that the United States is serious about reducing its debt, and that it would serve as a commitment device for lawmakers and President Obama to forge and follow a serious debt-reduction strategy.

A financial website writer named Joe Weisenthal strongly disagreed with my column. He seems to misunderstand several of the points that I was making, and so I offer the following response to his comments:

From Weisenthal’s post:

Another day, another economist advocating that the US default on its debt.

The latest is Jagadeesh Gokhale of the Cato Institute, who has a big piece advocating an immediate freeze of the debt ceiling.

It’s so convoluted, we hardly know where to begin, but let’s just address a few sloppy parts.

Many knowledgeable federal officials, like Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, as well as left-leaning lawmakers, insist that the answer lies in lifting the debt limit. They warn Congress about the dire consequences if it fails to do so. President Barack Obama has chimed in — though he voted against raising it when he was a senator.

They all assert that failing to increase the debt limit could sharply undermine the economic recovery.

But that view could be wrong. A temporarily frozen debt limit could instead signal U.S. lawmakers’ resolve to get our fiscal house in order. It may even reassure investors about long-term U.S. economic prospects.

This line about “reassuring investors” is nonsense. Investors are already reassured, which is why interest rates have only fallen amidst all the squawking from the political class about this “crisis.”

From the start, Weisenthal doesn’t follow my argument. I am not concerned about the state of market confidence today, but what it would be if the debt limit were frozen. The contrarian view that I expressed in my op-ed is that participants would interpret a debt-limit freeze positively, just as they appear to have interpreted the recent downgrade of the U.S. economic outlook by Standard and Poor’s positively — U.S. equities, U.S. treasuries, and the dollar are up less than 48 hours after S&P’s downgrade announcement.

He also misunderstands why interest rates have declined. It is because of the Federal Reserve’s sustained intervention in bond markets, not because there is little investor concern over the United States’ long-term fiscal outlook.

Returning to Weisenthal’s post:

He then gets to the discussion of a default.

…the current prospect of a technical default, from failing to increase the debt limit, would not be due to any real national insolvency. Given today’s low interest rates, the federal government could easily raise the resources needed to meet today’s contractual government obligations.

This doesn’t make any sense. How do “low interest rates” matter to the government in a situation where it’s legally unable to borrow?

Here, Weisenthal misunderstands what it means to freeze the debt limit. It does not mean, as he believes, that the government is “legally unable to borrow.” It only means that the government cannot issue any additional debt beyond the limit. But the government can (and will) continue to roll over its existing debt, and must do so at current interest rates, which makes those rates relevant to the discussion.

More Weisenthal:

Anyway, here’s the biggest whopper of them all:

How might investors really view this ersatz U.S. debt crisis? If some lawmakers’ refusal to vote for increasing the debt limit without also passing prudential fiscal policies resulted in a technical U.S. default, it would demonstrate their significant political strength.

Might that not actually induce investors to buy long-term U.S. debt — reducing long-term interest rates and improving the U.S. investment climate?

Oy, where to begin? First of all, the notion that a “technical default” would induce investors to buy long-term U.S. debt is prima facie absurd.

Perhaps he knows something I don’t, but I don’t see this as absurd at all. I’d expect that a serious commitment by political leaders to get the nation’s fiscal affairs in order would inspire investor confidence in U.S. securities. If anything, it’s absurd to think that investors would be encouraged by Weisenthal’s preferred policy of the nation continuing to expand its borrowing without a plan to manage its debt.

Back to his post:

Second, as we stated above, longterm US interest rates are at historical lows, so the idea of needing to reduce them further to improve the US investment climate is rubbish. And finally, why do we want people to buy more long-term US debt? Ideally we want people going out and actually investing in things with their money: companies, employees, lending to corporations, etc. Aren’t debt hawks supposed to hate the idea of government borrowing crowding out private spending. [sic]

The problem with this comment is that today’s historically low interest rates are not a reflection of freely operating market forces. They result from the Fed’s massive interventions through its Quantitative Easing policy.  The Fed has increased its portfolio of market assets — now approaching a staggering $2.7 trillion — in part by purchasing treasuries with longer maturity than it used to purchase before 2008. Without that injection of liquidity (note to Ben Bernanke: I didn’t say the Fed is “printing money”), market rates would be much higher.

Weisenthal does rightly worry about the effect of U.S. government finance on other sectors of the financial market. Fortunately, investors are beginning to branch out beyond government securities. But even as the Fed has been purchasing so many Treasuries to keep interest rates artificially low and fund the government, it has also purchased private assets because investors have not been buying U.S. private assets as much as they used to. The Fed has been propping up particular U.S. sectors (e.g., securitized finance, insurance, auto, home, credit card loans) to keep them from failing. If you removed the Fed’s $2.7 trillion liquidity injection from markets, interest rates would be much higher today. (How the Fed should conduct monetary policy is a different topic, beyond the scope of this post.)

Government officials are afraid that investor exits from Treasuries (and U.S. assets in general, both government and private) will accelerate if the debt limit is frozen, as I mentioned in the Politico article. I’m suggesting that view might be incorrect.

Weisenthal concludes:

Basically, Gokhale is just throwing a bunch of stuff at the wall, failing to produce an argument, and hoping you don’t really get it. Sorry.

Respectfully, I think my argument is quite coherent, though I admit it’s not the conventional view offered by many other commentators. Indeed, that’s why I wrote the op-ed.

It’s Bigger Than the Budget

Today POLITICO Arena asks:

Do the cuts (and increases) contained in the six-month spending bill House Republicans posted overnight make sense, and do they go far enough in attacking the deficit and national debt?

My response:

Today’s Arena question captures perfectly what’s missing from our current budget debate. In listing a few of the compromises contained in the six-month spending bill House Republicans posted overnight, and asking whether those cuts (and increases) go far enough in attacking the deficit and national debt, it invites us to imagine that America is one big family, arguing over how “we” should spend “our” money.

We’re not. As I wrote in last Thursday’s Wall Street Journal, we’re a constitutional republic, populated by discrete individuals, each with our own interests. Today’s question, perfectly understandable in the current climate, socializes us. The Framers’ Constitution freed us, to make our own individual choices.

To be sure, we have to start where we are today. But if that’s as far as we go, we’re doomed to never grasping the real problem. The Constitution was written precisely to check our appetite for “public goods.” It authorizes only a few, truly public goods. Not health care. Not education. Not most of what we spend “our” money on today. We’ve ignored the discipline it imposes, and we’re paying the price.