Posts Tagged ‘msnbc.com’

Self-inflicted wounds: Nov. 23 edition

14 August 2011

Another Kabuki dance has commenced in Washington, now that Congressional leaders of both parties have made their selections for the Gang of Twelve charged with crafting $1.5 trillion in savings in 2013-2022. They have until Nov. 23 to agree on a package of savings. If Congress can’t pass that package, then $1.2 billion of automatic, across-the-board spending cuts (no tax increases) would kick in.

I’d place my bets on none of those things happening. Here’s what I foresee:

1. Negotiations among the twelve constantly are on the verge of breaking down along party lines, especially on the issue of tax increases. Possibly they are unable to reach a compromise at all. Even if they do, few of them will throw much weight behind it.

2. If a budget plan emerges, getting majority support in the House and 60 votes (or 51 votes, if nobody filibusters it) in the Senate will prove impossible. The partisan acrimony will look like open warfare.

3. With the specter of $1.2 trillion in across-the-board cuts, including maybe $500 billion in Pentagon cuts, the Secretaries of Defense, Homeland Security, and other agencies, joined by citizens and interest groups all over the nation, will howl that these cuts would devastate our country. Congress’s approval rating will plummet even further, to about the same level as the Taliban’s.

4. Congress will pass a new bill that says, um, nevermind about all those spending cuts. (This is an inherent problem in trying to tell future Congresses what to do, or even telling oneself what to do a little ways down the road.) Republicans will continue to pummel Obama and the Democrats for overspending, but neither side will be able to push a new deficit-reduction plan through both houses of Congress.

Now, what about the reaction of the markets to all this? I think that most of the market already expects something like this and has basically priced it in. It’s decades-old news that Congress has no stomach for long-term deficit reduction, and obvious by now that the partisan split in this Congress is among the worst ever. If the above predictions come to pass, then the markets and economy will get worse, as this failure becomes definite. As I’ve written before, I think the market is reacting less to the U.S. debt burden than to continued evidence that U.S. politicians are simply not doing their job when it comes to dealing with the Little Depression. I think they’re appalled that Congress and the White House are wasting so much time on this doomed debt deal and have basically painted themselves into a corner with this Nov. 23 deadline and automatic-spending-cuts mechanism. They see the writing on the wall; either Obama, Boehner, Reid, et al. don’t or each side is cynically thinking that they can spin this fiasco-in-waiting to their advantage. Either way, they’re not doing their job. They’ve set themselves up to fall, each side hoping that the other falls further.

No reason to get excited

1 August 2011

President Obama and Congressional leaders have apparently reached a deal on reducing the deficit, which might end the debt-ceiling crisis for now, assuming Congress passes it. Cause for celebration? More like cause for heavy sighs. I’ve been saying over and over that cutting government spending in an economic slump makes the slump worse. The best that can be said about it is that the (real-world political) alternative is worse, i.e., not raising the debt ceiling.

In a front-page article in today’s NYT a chorus of economists make the same point. In a time of slack demand, don’t weaken demand further by cutting government spending. The headline (from MSNBC.com’s republished version):

“Economists warn cuts to federal spending ill-timed:
Debt deal to spend less on US economy puts recovery at risk, experts say.”

The Times could have put this story on its front page months ago. Too late — by now, slashing social spending has gone from Republican fantasy to Washington Wisdom.

Raise the damn debt ceiling already

12 April 2011

As if the new agreement between the president and Congressional Republicans — to cut $38 billion in spending while the economy is still in a near-depression — weren’t bad enough, now the word is that the Republicans say they won’t vote to raise the debt ceiling, at least not without extracting several pounds of flesh first. Worse still, the overwhelming majority of the public opposes raising the debt ceiling.

I’ve blogged about this topic before. Not raising the debt ceiling would be like pushing the economy off a cliff. With a deficit of $1.5 trillion (and GDP of about $14 trillion), Congress would have to cut spending or raise taxes (or some combination thereof) by more than 10% of GDP. You don’t get that money back. That would be a depression of titanic proportions.  It would be ruinous under virtually any circumstances, but all the more so now, at a time of high unemployment. Herbert Hoover’s and FDR’s budget-balancing blunders during the Great Depression would be trivial by comparison. And Congress probably couldn’t come up with $1.5 trillion or anything close to that anyway. Normally we pay off our Treasury bonds as they come due by selling more bonds, which we would not be able to do anymore if the ceiling is kept constant. So we would default on all the maturing debt, and our new bonds would lose their AAA status, instantly and permanently, and we’d have to pay higher interest rates on our new bonds. With enough defaults our bonds would quickly be junk bonds, paying sky-high interest rates. This would add to the federal deficit and debt, possibly a lot.  So much for looking out for future generations.

If the Republicans pull the same game of brinkmanship that they did last week in nearly shutting down the government, by convincingly threatening to not to raise the debt ceiling and then raising it at the last minute, the bond market will still go oink (as one of my grad school professors used to say), and interest rates on Treasury bonds will still shoot up, meaning higher interest payments and a higher burden of paying them off. Bond investors hate uncertainty, and if default even looks possible, they will no longer regard Treasuries as riskless.

All of this opposition to raising the debt ceiling is a combination of cynicism, ignorance, and self-sabotage. We do have a long-term debt problem that needs to be addressed, but blowing up the economy is the most idiotic and counterproductive solution imaginable. Threatening to blow up the economy is not much better. As long as the economy is in a slump, the optimal amount of spending cuts is $0 (if continued stimulus is out of the question), not $1.5 trillion. And it would be even more optimal to have no more debt ceiling.