What Makes Up the Cost of a Gallon of Gas?

By Chris Persaud | Bankrate.com – Fri, Mar 23, 2012 3:01 AM EDT

 

$4 gas prices got your attention? If the cost of gasoline is already back at that lofty level where you are, or is simply headed in that direction, you’re probably asking where all the gas money you’re shelling out at the pump is going.

View infographic

There are a couple of ways of answering that.
Industry shows how gas price breaks down

The American Petroleum Institute, or API, has a general breakdown for you. According to the trade group’s February estimates, most of what you pay for gasoline — 71 percent — goes to refineries, to buy oil.

API says it takes one gallon of oil to make a gallon of gasoline. The price of oil is determined in commodities markets, where companies and traders buy and sell the petroleum for purposes that can include refining it into gasoline or holding it as an investment. The markets, and the prices they set, are influenced by supply-and-demand factors, such as trouble in the Middle East that could result in less oil coming from that region of the world.

After oil prices, the rest of the price of a gallon of gas comes from taxes (14 percent) and costs associated with refining, moving and selling the gasoline (15 percent), according to API.

At the time of API’s most recent study, in late February, the national average price of regular-grade gasoline was $3.58 per gallon. By the group’s estimates and percentages, about $2.54 of that price covered crude oil costs, 50 cents went to taxes, and about 54 cents went into refining, moving and retailing.
Get geeky for more exact gas cost analysis

If you want to get geekier about where your gas money is going, you can do a more exact and up-to-date calculation on your own.

Here’s how:

• Find the price of a gallon of gas. Go online to AAA’s Daily Fuel Gauge Report. For example, as of March 22, the auto club showed that a gallon of regular gasoline sold for about $3.88.
• Find the price of a gallon of oil. Head to Bloomberg.com’s Energy & Oil Prices page. As of March 22, it showed a barrel of oil selling for about $105.46. There are 42 gallons in a barrel of oil, so divide $105.46 by 42 to get $2.51 as the price of one gallon of oil. Again, a gallon of oil can be refined into one gallon of gasoline, according to API. So, about $2.51 of the March 22 price for a gallon of gas went toward the cost of the underlying oil. That works out to about 65 percent of what you paid at the pump.
• Find the cost of taxes. The federal tax on gasoline is 18.4 cents per gallon. On top of that, there are state taxes and, depending on where you live, local gasoline and/or sales taxes, too. If taxes are typical where you are, the API estimates you’re paying 49 cents per gallon in federal, state and local gas taxes, making up 12.5 percent of the average $3.88 gas price.

View interactive map of gas taxes by state

• Determine the cost of refining, transportation and retailing. The rest of the cost of gasoline goes to turning crude oil into fuel, moving it to gas stations and retail markup. Get this number by subtracting the amounts in steps 2 and 3 from the average price in step 1. In this case, that’s $3.88 minus $2.51 and minus 49 cents, which comes out to 88 cents for refining, transportation and retailing — or about 22.5 percent.

And that’s how you do the math. Keep in mind that taxes and other factors making up gas prices can differ by region, state, metro area and city. Check out our map on gasoline taxes by state to see how much of your gas money is going to federal and state taxes.

If you want more detail about your own local taxes, contact your city, county, and/or state department of revenue, department of finances, or the equivalent.

Who Killed the Debt Deal

By MATT BAI As reported In Huffington Post

Published: March 28, 2012

Almost immediately after the so-called grand bargain between President Obama and the Republican speaker of the house, John Boehner, unraveled last July, the two sides quickly settled into dueling, self-serving narratives of what transpired behind closed doors. In the months that followed, some of Washington’s most connected Democrats and Republicans told me in casual conversations that they didn’t know whose story to believe, or even what, exactly, had been on the table during the negotiations. A few mentioned, independently of one another, that the entire affair reminded them of “Rashomon,” the classic Kurosawa film in which four characters filter the same murder plot through their different perspectives. Over time, the whole debacle became the perfect metaphor for a city in which the two parties seem more and more to occupy not just opposing places on the political spectrum, but distinct realities altogether.

 Sunday, July 17, Oval Office. Speaker John Boehner, House Majority Leader Eric Cantor, White House Chief of Staff Bill Daley and Treasury Secretary Tim Geithner meet with President Obama, where the framework for a deal is agreed upon.

Tuesday, July 19, Capitol building. Senator Mark Warner, left, and the rest of the Gang of Six brief fellow senators on their plan.

Thursday, July 21, John Boehner’s office. Relations have grown tense between Boehner and the White House. Trying to salvage a deal, Boehner floats the idea of a counteroffer to Cantor.

Friday, July 22, Oval Office. After 24 hours of silence from Boehner, President Obama receives the call telling him the deal is off.

There is a practical reason for this. Both sides knew that if the most crucial and contested details of their deliberations became public, it would complicate relationships with some of their most important constituencies in Washington — or worse. It’s one thing for a Democratic president to embrace painful cuts in Medicare and Social Security benefits, or for a Republican speaker to contemplate raising taxes, if they can ultimately claim that they’ve joined together to make the hard decisions necessary for the country; it’s quite another thing to shatter the trust of your most ideological allies and come away with nothing to show for it. Obama and Boehner have clung to their separate realities not just because it’s useful to blame each other for the political dysfunction in Washington, but because neither wants to talk about just how far he was willing to go.

The Republican version of reality goes, briefly, like this: Boehner and Obama shook hands on a far-reaching deal to rewrite the tax code, roll back the cost of entitlements and slash deficits. But then Obama, reacting to pressure from Democrats in Congress, panicked at the last minute and suddenly demanded that Republicans accede to hundreds of billions of dollars in additional tax revenue. A frustrated Boehner no longer believed he could trust the president’s word, and he walked away. Obama moved the goal posts, is the Republican mantra.

In the White House’s telling of the story, Obama and Boehner did indeed settle on a rough framework for a deal, but it was all part of a fluid negotiation, and additional revenue was just one of the options on the table — not a last-minute demand. And while the president stood resolute against pressure from his own party, Boehner crumpled when challenged by the more radical members in his caucus. According to this version, Boehner made up the story about a late-breaking demand as a way of extricating himself from the negotiations, because he realized he couldn’t bring recalcitrant Republicans along. Boehner couldn’t deliver, is what Democrats have repeatedly said.

In recent weeks, as it became clear that I was planning to write a more nuanced and detailed account of the final week of negotiations, both sides — but primarily the speaker and his aides — went out of their way to give extensive accounts to reporters at other outlets, in an effort to reinforce their well-rehearsed narratives. And yet it’s possible now to get beyond these clashing realities. Over the last several months, I spoke with dozens of people who were involved in or were kept apprised of events that week, some of whom made available private documents from that time, including the various offers and counteroffers. I conducted most of these interviews on the condition that I would neither reveal nor quote the people who spoke to me, so that they would feel free to speak candidly.

What emerged from these conversations is a clearer and often surprising picture of exactly how close Obama and Boehner came to finalizing a historic agreement, what exactly was in it and why it ultimately fell apart — including a revelation that illuminates Boehner’s thinking in those final hours and directly contradicts a core element of the version he has told, even to some in his own leadership.

The truth here matters for more than its historical value. At the end of this year, no matter how the presidential election turns out, the two parties will face yet another Armageddon moment in the fight over debt and spending; this time, if they don’t settle on a plan to rein in the nation’s nearly $16 trillion debt, then a series of onerous budget cuts — worth about $1.2 trillion over 10 years, divided between defense and other programs — will automatically go into effect. If we understand what really went on last July, then we’ll have a better sense of how difficult it will be for the two parties to stave off the coming political calamity and why, too, the situation may not be quite as hopeless as it seems.

The Secret Negotiations Begin

You may recall that Washington last summer was verging on something resembling cold-war hysteria. Republicans in the House were refusing to meet an August deadline for increasing the nation’s debt limit by some $2.4 trillion unless they got an equivalent amount of budget cuts in return, raising the prospect of a default that, it was assumed, would send the financial markets into a death spiral. Vice President Joe Biden and Eric Cantor, the House majority leader and Boehner’s No. 2 in the Republican caucus, had been holding talks in hopes of finding some preliminary agreement that might avert disaster, but those talks broke down in late June, primarily over the issue of taxes; the two men and their staffs had identified something like $2 trillion in cuts over the next decade, but the White House wasn’t going to make a deal that didn’t include some new tax revenue, and Cantor was adamant that raising taxes — any taxes — was a deal-breaker.

By then, however, Obama and Boehner had themselves started meeting furtively in the White House, in secret negotiating sessions that grew out of a much-discussed golf outing in June. Over a few drinks at the clubhouse at Andrews Air Force Base, Boehner suggested they might be able to use the impending debt crisis to achieve something ambitious and significant — not just the kind of cuts that Cantor and Biden were discussing, but fundamental reforms to entitlement programs and the tax code too, a sweeping modernization of the federal budget. The president agreed that they should try to get something started, but the breakthrough that seemed to make a transformational deal possible didn’t come until mid-July, in the form of a cryptic e-mail.

Budget deals happen in much the same way you might haggle over the purchase of a house: one side bangs out a proposed contract and sends it to aides on the other side, who cross out some numbers and phrases and insert new ones in their place, until the two sides ultimately iron out their differences, or until someone delivers a final offer and walks away. In this case, Obama’s principal negotiators — Jack Lew, then his budget director, and Rob Nabors, his top aide on legislation — sent a proposal to Boehner’s team that included $1.5 trillion in new revenue over 10 years. The White House negotiators knew this had about as much chance of happening as a meteorite falling on the Capitol, but the real question was whether Boehner was willing to go some distance toward meeting them on the revenue side of the ledger, or whether he would stick to Cantor’s hard line against any form of new taxes.

When the response came back to Nabors, Boehner’s aides had, as expected, struck the $1.5 trillion from the offer. But in its place they had inserted a strange formulation: they were proposing to reduce federal revenue, “compared to current law,” by $2.8 trillion. On the surface, this sounded like a flagrant rejection of what the White House was proposing — “You’re asking for more in taxes, we’re giving you less” — but in fact Boehner was speaking in complex code.

Boehner’s Cryptic Message

There are two “base lines” — or sets of assumptions — that policy makers generally use when they try to make projections about future revenue, and in order to understand some of the most critical moments in the negotiations, it’s necessary to understand the arcane difference between them. One is “current law,” which refers to what’s supposed to happen in the years ahead, assuming that certain temporary tax cuts or increases really do expire as planned. The other is “current policy,” which refers to what the numbers would look like if you took the rules as they are today and froze them in place. The most important difference between these two projections has to do with the Bush tax cuts, which Obama and Congressional Republicans agreed to extend, temporarily, at the end of 2010. Under “current law,” those tax cuts would expire at the end of this year, leading to a projected total revenue of more than $39 trillion over the next decade. But few people in Washington actually expected Congress to let most — if any — of the Bush tax cuts lapse anytime soon, and through the more realistic lens of “current policy,” under which all the tax cuts would remain in place, that same 10-year number became something like $35.5 trillion, or $3.5 trillion less.

In his offer, Boehner had used the higher, less relevant “current law” base line. Then he’d proposed lowering revenue by $2.8 trillion, which reduced the 10-year number to just under $36.3 trillion. What mattered from the White House perspective was that this number was about $800 billion more in revenue than either party was actually expecting to generate under “current policy.”

This was an exceedingly convoluted way of coming at the tax question, and even Nabors, who is one of a small number of genuine budget experts in Washington, wasn’t sure, as he stared at Boehner’s language, whether it meant what he thought it meant. Sitting in his spacious West Wing office, Nabors might as well have been one of John F. Kennedy’s advisers in 1962, reading and rereading the cable from Khrushchev, trying to divine the carefully worded message within. He showed it to Lew, and they quickly reached the same conclusion: Boehner was saying that he was willing to accept $800 billion more in tax revenue. Or, to put it another way, Boehner was proposing to increase the government’s haul by the same amount you would get if you reversed Bush’s tax cuts for the most affluent Americans, but he was proposing to do it by lowering rates and eliminating loopholes and subsidies instead — a revenue increase by other means. There was no other way to read this except to conclude that the speaker was now backing off his party’s hard line against additional revenue.

Excited White House aides suddenly felt that a deal might really be possible. But even with more revenue now on the table, Boehner and Obama continued to go back and forth over the Rubik’s Cube-like structure of a comprehensive deal — whether entitlement cuts would have to come before tax reform, whether most of the cuts would accrue in the first decade or the second and so on. Meanwhile, political pressure was building from inside Boehner’s leadership circle. Cantor, who had heard about the Obama-Boehner talks only when Biden happened to mention it, was nonplused at having been excluded and appalled that Boehner was offering more revenue. He and others pressed the speaker to drop the idea of a comprehensive deal, and on July 9, Boehner did just that, calling Obama at Camp David to tell him that the grand bargain was dead. He issued a statement immediately after, saying it was time for both parties to set their sights on a less ambitious solution to the debt-ceiling crisis, which now loomed less than a month away.

Except the speaker couldn’t bring himself to settle for something less ambitious. Five days later, on July 14, he called the president yet again.

Decoding Boehner’s Proposal

Why couldn’t Boehner let it lie? It’s a question that still puzzles a lot of his closest allies in Washington, not to mention his fellow Republican leaders on the Hill. Obama’s reasons for chasing the grand bargain were clear enough. Not only was he bent on avoiding a catastrophic debt default, but he needed to get out from under the debt issue, to demonstrate that he cared about reducing deficits before public concerns about government spending, stoked by rhetoric on the right, overwhelmed his presidency. Boehner’s motives were less obvious. The speaker occupied what may have been the toughest spot in Washington — trying to control a nihilistic rebellion in his own caucus while watching the approval ratings for Congress fall into the teens, all the while surrounded by young, ambitious leaders who doubted his ideological resolve. The last thing Boehner needed, you would think, was to close his eyes and take a Thelma-and-Louise-style plunge with a president whom no one in his party could stand.

Nothing better illustrated Boehner’s position than his clandestine, convoluted overture to the president on taxes. The offer for $800 billion in additional revenue — as opposed to, say, $700 billion or $900 billion — was no accident. On one hand, Boehner’s people must have known that Obama probably couldn’t settle for anything less than that, because Democrats in Congress would demand that any deal recoup the cost of Bush’s least defensible tax cuts. At the same time, Boehner’s aides had calculated that, at $800 billion, they could plausibly argue to their own caucus that the government could raise more money without actually raising anyone’s taxes.

How could you make that case? Boehner would argue that some sizable chunk of that money — if not all of it — would come to the government as a result of economic growth spurred by new, lower tax rates, and from better compliance, since the new tax code would be less confusing. Thus, by this feat of actuarial magic, Boehner contended that raising revenue did not require raising taxes, and in fact would enable you to lower them. The math was debatable, certainly, but it was a central tenet of any deal Boehner would negotiate.

But then, having worked out a theoretical way to get to the $800 billion that he knew the White House needed, Boehner wasn’t comfortable even putting the figure down on a piece of paper. The idea of any new tax revenue was so heretical to his party, and Boehner was so fearful of the reaction, that his aides felt compelled to come up with a roundabout way of expressing the offer in terms that few people in Washington would be able to decipher, just in case the paper should fall into the wrong — that is, his own party’s — hands. Boehner knew that his position might well imperil his standing as speaker, whether it led to a deal or not, and yet he was taking it anyway.

Boehner would later tell me that he was determined to do this because he was tired, after 20 years in Washington, of seeing one Congress and one president after another ignore the coming explosion of spending on entitlement programs and the growing public debt. He also shared Obama’s view that a grand bargain would actually be easier to pass than a smaller deal — that if lawmakers were going to have to make a bunch of politically explosive cuts, they were more likely to go through with it if they could go tell voters that they’d achieved something truly transformative. As Biden put it, “There’s no point in dying on a small cross.”

The Trouble Getting to ‘Yes’

But politics is often as much about self-perception as it is about policy, and it wasn’t hard to discern a more personal reason for Boehner’s attachment to the idea of a grand bargain. Having fashioned himself as a reformer since coming to Congress in 1991, Boehner was now 61, and with Congress flipping back and forth between the parties, it wasn’t a given that he would hold the speakership for more than a few years. What would Boehner’s legacy be, or would he even have one? Some speakers, like Tip O’Neill or Newt Gingrich, carve out places in history as indispensable partners in creating momentous legislation. Others, like Denny Hastert, are destined to be lost to the ages. Those who know Boehner say that what he saw in the grand bargain was a chance to be remembered as a statesman who helped set the country on a different course, rather than as a party functionary who shakily presided over a fractious caucus.

Obama and Boehner had spent little time together before the talks began, and they had only a vague sense of each other. Aides on both sides described a kind of forced familiarity between the two men, who would begin meetings with the shallowest of chatter — “Play any golf this weekend, John?” — before moving quickly into the substance of budget politics. White House aides thought Boehner looked as if there were someplace he’d rather be, while Boehner’s aides were put off by what they saw as Obama’s lecturing style. Still, the two men — Midwesterners, former state legislators, introverts by nature and smokers by habit — seemed to think they could trust each other.

In fact, when Boehner called back on that Thursday afternoon, the 14th, in hopes of restarting the negotiations, it wasn’t Obama but rather one of his chief aides who Boehner had decided was the problem. For weeks leading up to the breakdown in talks, Boehner and his top lieutenants — Barry Jackson, his chief of staff, and Brett Loper, his policy aide — had been talking principally to Jack Lew and Rob Nabors at the White House. But they had become exasperated with Lew, who, in their view, talked a lot but offered few concessions. Lew, whose detailed knowledge of the budget outpaced anyone else’s in the room, always seemed to have a better idea than whatever Boehner was proposing, and these ideas seemed to Boehner like more complicated ways of describing positions they had already rejected. The problem with Lew, Boehner bluntly told the president when he called, is that he just didn’t know how to get to “yes.”

Boehner thought he had a better shot with Bill Daley, the president’s chief of staff, and Timothy Geithner, the Treasury secretary. Daley had made a point of reaching out to Boehner since joining the administration, and he was known to be a pragmatist and a dealmaker. Geithner, clearly rattled by the possibility that Treasury might default on its debt, had been issuing almost daily warnings to Congressional leaders about the mounting fear in the markets. Send me Daley and Geithner, Boehner told the president, and let’s see what we can do.

The next afternoon, a Friday, Daley and Geithner went to the Capitol to meet with Boehner and Cantor. In addition to requesting a change in negotiators, Boehner’s team had come up with a new, simpler way to structure the deal that they hoped would eliminate some of the persistent conflicts over timing in the earlier talks. Before, Boehner had wanted to legislate cuts in annual spending and entitlements up front, while leaving tax reform for Congressional committees to work out over a period of months — a formulation that worried Obama and his allies. But now the speaker’s team suggested that the two sides come up with a framework of broad principles and specific target numbers on both the cuts and revenue, and then let Congress work out all the details at the same time. Using that template, the two sides quickly found a large swath of common ground. Two days later, on Sunday afternoon, Boehner and Cantor went to the White House to continue the conversation, and Obama joined the group after he returned from church.

No one was under the illusion that a final agreement had been nailed down and was ready for signatures, but when Obama and Boehner shook hands that afternoon, there was a general feeling that they would work through the remaining details relatively easily. Before the meeting at last broke up, Obama mentioned to the others that they would have to carefully think about how to roll out the deal, to make sure that both sides were saying the same thing publicly. That night, Jackson and Loper sent over a three-page proposal based on the discussions; in exchange for agreeing to the $800 billion in additional revenue, they asked for more than $450 billion in combined cuts to Medicare and Medicaid over the next decade alone, as well as a series of changes to Social Security, including a new formula for calculating benefits and a higher retirement age.

There was no question that the framework negotiated by Obama, Daley and Geithner — and laid out in the Republicans’ offer sheet — unsettled the stomachs of some White House aides. No one liked the idea of acceding to Medicare cuts, and most didn’t think Social Security should be part of the deal at all. (Democratic orthodoxy holds that Social Security has nothing to do with the federal debt, since it generates its own revenue from the payroll tax.) But Obama’s senior aides, including the political adviser David Plouffe, had come to believe that a grand bargain, however imperfect, was preferable to a smaller deal — and far preferable to a debt default. The debate now was about what it would take to get the votes. Nabors and his legislative team had real doubts that Democrats in Congress would go for anything close to what Boehner was asking for, and they were just as skeptical that Boehner could get his own caucus behind it. As Jackson and Loper waited anxiously at the Capitol for a counteroffer, the internal White House discussions dragged on into Monday night.

Enter the Gang of Six

For more than six months, ever since Alan Simpson and Erskine Bowles, the chairmen of Obama’s fiscal commission, offered their stark recommendations for remaking the budget at the end of 2010, a group of senators — Mark Warner, Richard Durbin and Kent Conrad on the Democratic side, along with the Republicans Saxby Chambliss, Tom Coburn and Mike Crapo — had been trying to build some consensus around a plan. Over dozens of dinners and negotiating sessions, some of which were held at Warner’s stately home in Alexandria, Va., the so-called Gang of Six labored over a compromise they could sell to their colleagues, while leaders of both parties eyed them warily.

But a deal remained maddeningly out of reach, mainly because it was proving impossible to bridge the distance between the two members of the gang who were furthest apart on the ideological spectrum. Durbin, a member of the Democratic leadership and a close friend of the president’s — and the only avowed liberal in the group — was determined to protect tax credits for the poor and the working class. Coburn, a rigid fiscal conservative from Oklahoma, wanted $130 billion more in cuts to entitlements than the rest of the group. In May, Coburn excused himself from the deliberations in order to come up with his own deficit-slashing plan.

By mid-July, just as Boehner was preparing to invite Daley and Geithner up to the Hill, the group’s informal chairmen, Warner and Chambliss, decided they couldn’t wait any longer to share the gang’s uncompleted work with the rest of the Senate. They scheduled a briefing for senators only — no staff — on Tuesday morning in the Capitol.

The White House knew about the briefing (Durbin had kept the West Wing informed), but it didn’t seem especially consequential to aides who were now thoroughly immersed in their own secret negotiations. After all, the gang had made noise about being close to a deal many times before, and nothing had ever come of it. Even now, its members admitted to having only the broadest outline of a plan, and the briefing was slated for 8:30, when most senators are still groping for coffee or pounding the treadmill. Even Warner thought it was bound to be more of a sideshow than a main event.

And so no one was more surprised than the gang members themselves when almost half the Senate, roughly divided between the parties, trickled in as Warner and Chambliss outlined the new revenue and spending cuts in their emerging plan to cut $4.6 trillion from the budget. The first one to rise, after the presentation was finished, was Coburn. The unpredictable sixth man gave an impassioned endorsement of the plan, telling his colleagues it wasn’t perfect, but it was the best they were going to accomplish. Then Durbin stood up and echoed the sentiment. One by one, senators from both parties added their support.

It’s not hard now to understand what happened in the room. As House Republicans and the administration debated the debt, most of the Senate felt sidelined and powerless. What the Gang of Six was offering was the promise of action, a way for the Senate to re-emerge as a serious player in a national drama.

A Costly Miscalculation

Word quickly traveled down Pennsylvania Avenue to the White House, where Nabors, who was still honing a response to Boehner’s offer from Sunday night, called Barry Jackson in the speaker’s office and asked what was going on. Jackson wasn’t sure. Within a few hours, though, the White House had the sense that something important had shifted. More than 20 Republican senators, by some counts, had stood up in favor of a plan that would raise more revenue, and Obama thought he now had an opportunity to exert more pressure on House Republicans by highlighting the widening split inside their own party. Shortly after noon, Obama took the unusual step of marching out to the briefing room to declare his support for the Gang of Six, instantly elevating what was supposed to have been an informal, sparsely attended briefing into the day’s national news. It was, in retrospect, a costly miscalculation.

Even before the president had stopped speaking, it was beginning to dawn on White House aides that what had looked like an opportunity was actually a serious problem. Like Boehner, Obama was risking an insurrection in his own party once the details of their plan became public. For a lot of Democratic lawmakers, even conceding the central Republican point about the debt — that it was the hallmark of unsustainable government spending — was a kind of apostasy. The way they saw it, Republicans had created the deficit problem with ill-advised tax cuts and disastrous wars, and now they were using it as a pretense to roll back social programs for the poor and middle class. And as for Medicare, leading Democrats on the Hill hoped to make it a pivotal issue in House and Senate races in 2012, now that Paul Ryan, the Republican chairman of the House budget committee, had proposed replacing the program with a voucher system. (A sign in the window at the Democratic headquarters in Washington read: “Vote Republican, End Medicare.”) Why, they wondered, would the president want to forfeit that advantage by agreeing now to cut those programs himself?

If it was never going to be easy for the White House to sell the grand bargain to Democrats on the Hill, then the plan put forward by the Gang of Six was likely to make it impossible. On the surface, the gang had proposed an overall revenue increase of $1.2 trillion, 50 percent more than the $800 billion Obama and Boehner were talking about. Democrats were bound to ask why the president had settled for less in taxes than the Gang of Six did.

But once Obama’s aides looked more closely at the numbers, they understood that the political problem posed by the gang’s plan was actually far worse. This is where the whole distinction between base lines — “current law” and “current policy” — comes in again. The gang had settled on a base line that was somewhere between “current law” and “current policy”; it had assumed the Bush tax cuts for the most affluent were expiring, while the other, less costly tax cuts would persist. The White House, meanwhile, had been calculating their figures based on “current policy,” under which all the tax cuts would remain in place. This meant that when you actually compared the two plans in an apples-to-apples way, the Gang of Six was proposing to raise revenue by about $2 trillion — $1.2 trillion more than the president and the speaker had tentatively agreed to.

How could Obama possibly ask Democratic leaders to pass a deal with $800 billion in new revenue, when a bunch of Republican senators — not to mention the president himself, on national TV — had just stood up to applaud a plan with $2 trillion attached? Never mind that the Gang of Six plan was little more than a memo, with no chance of becoming an actual bill — let alone passing the House or Senate. Liberals would laugh the president out of the room. The numbers would confirm the suspicion, already voiced by some lawmakers privately, that Obama wanted a bipartisan victory too badly and would accept a deal on any terms, even if it sold out his party’s principles.

Early Tuesday afternoon, Nabors called Jackson, this time sounding grim. They were going to have a problem on the balance between revenue and spending, he said. Daley delivered a similar message to Jackson. What do we do now? he wanted to know. The president just wouldn’t be able to sell that deal to enough of his own senators and congressmen to get it across the finish line.

As White House aides would later present it, Boehner’s guys took this news with equanimity, indicating they were skeptical but willing to talk. The speaker’s aides, however, say they were reeling. A deal is a deal, a mystified Jackson told Daley. He and Loper hoped the alarm in the White House might be a temporary overreaction and that Obama might relent once he and Boehner had a chance to talk. They were still trying to process what had happened when, later that night, an e-mail from Rob Nabors popped into Jackson’s in-box. The president’s counteroffer had finally arrived.

The Grand Bargain Within Reach

For all the talk since last July about who blew up the deal, it has been difficult to get a clear sense of what specifically the agreement was supposed to include. And so the three-page counteroffer that Rob Nabors sent to Barry Jackson and Brett Loper that Tuesday night, which turned out to be the last set of numbers exchanged between the two sides, represents the most detailed picture yet of what a grand bargain might have looked like. It’s a remarkable snapshot of the moment, not for the points of contention it exposes, but rather because it illustrates how much agreement Obama and Boehner had actually managed to find.

They had agreed to reduce discretionary spending — meaning both the defense budget and money used to finance the rest of the government — by about $1.2 trillion over 10 years; it would be up to Congress to figure out how. They also agreed to a list of programs from which they could cut at least $200 billion more in the coming decade. These included an estimated $44 billion from pensions for civilian and military employees of the government; $30 billion from Fannie Mae and Freddie Mac; $33 billion from farm subsidies and conservation programs; and $16 billion from reforming the Postal Service.

On entitlements too they had moved closer to a final deal. The White House agreed to cut at least $250 billion from Medicare in the next 10 years and another $800 billion in the decade after that, in part by raising the eligibility age. The administration had endorsed another $110 billion or so in cuts to Medicaid and other health care programs, with $250 billion more in the second decade. And in a move certain to provoke rebellion in the Democratic ranks, Obama was willing to apply a new, less generous formula for calculating Social Security benefits, which would start in 2015. (The White House had rejected Boehner’s bid to raise the retirement age.) This wasn’t quite enough for Boehner, nor was it as extensive as what the Gang of Six had proposed. But the speaker’s team didn’t consider the differences to be insurmountable, assuming the two sides could also settle on a revenue number.

The section on revenue, though, was one of two significant disagreements that were less easily brushed aside. Boehner’s offer two days earlier, on Sunday, included several points to which he believed Daley and Geithner had essentially agreed. But in his counteroffer, written hours after the Gang of Six briefing, Obama had made some extensive changes to this section. To the $800 billion figure, he said he now wanted to add an amount equal to the cuts in Medicare and Medicaid — an additional $360 billion, at least — for a total of $1.16 trillion in total revenue. Aside from increasing the sheer amount, what Obama was doing, for the first time in the negotiation, was explicitly linking the amount of new revenue to the cuts Boehner wanted in entitlement programs. In other words, Obama’s new formula meant that for every additional dollar in savings Boehner wanted to negotiate from Medicare or Medicaid, he was going to have to add a dollar of revenue.

This in itself was certainly enough to throw the deal into jeopardy. But the White House made still other changes that were problematic. Most notably, Boehner’s team had insisted that when lawmakers sat down to design a new tax code, the $800 billion in additional revenue had to be a “ceiling” rather than a “floor” — in other words, the final number generated through tax reform couldn’t be more than $800 billion, but it could be less. That’s because, as part of revising the code, Boehner intended to ask Congress for something called a “macro estimate” of the grand bargain’s impact — basically, a best guess as to the future revenues that would accrue once the lower rates kicked in and the economy started humming along. Democrats normally despise such projections, because they are used to support the conservative theory of supply-side economics. But the macro estimate was essential to Boehner; he needed it to make the argument that a decent chunk of the additional revenue could come through growth and stepped-up compliance, and thus Congress wouldn’t need to actually raise anybody’s rates to get it done. Boehner left that Sunday meeting convinced that Geithner, in particular, understood and accepted this condition.

But in his counteroffer, Obama had reversed the formulation so that the tax revenue figure — now at $1.16 trillion — would be the minimum that rewriting the code could achieve (a floor), rather than a maximum (a ceiling). With a slight turn of phrase, he rejected Boehner’s entire premise that growth could be counted on to deliver some of the revenue. Boehner could seek all the macro estimates he wanted if it made him feel better, but he wouldn’t be able to use those estimates to lower the amount of new tax revenue that Congress would need to collect.

White House aides would later insist that, despite their rough agreement on a framework the previous Sunday, the discussion about tax reform had always been fluid and unsettled, an ongoing negotiation in which both sides were still feeling out each other’s limits. The Gang of Six briefing had no doubt complicated this negotiation, they agreed, but it wasn’t as if they had signed on to something and then taken it back. If this is true, though, then it’s true only in the technical sense. If you shake hands with a guy on the price of a car, and you agree to talk again after the car has been inspected and the loan has been approved, you don’t really expect to show up and find out that car now costs $5,000 more. This is essentially what happened to Boehner. What both Tuesday’s panicky calls from the White House and the subsequent counteroffer make clear is that Obama knew he was changing the terms and felt he had no choice.

The other remaining area of contention had to do with the problem of enforcement provisions, or “triggers,” in the deal. Because tax reform would take some time for Congress to puzzle out, while the spending cuts were relatively straightforward, the White House had been concerned from the start about being double-crossed. How could Democrats be assured that the Republican-controlled House wouldn’t simply announce a deal, enact only the spending cuts they wanted and then sabotage the revenue piece? The answer, Obama’s team decided, were a couple of “triggers” — something both sides really hated — that would automatically kick in if they didn’t come up with a version of tax reform that each party could stomach.

Specifically, Obama had two triggers in mind. The first, for Democrats, would have rescinded the Bush tax cuts for the highest earners. Boehner rejected this idea. He pointed out that Democrats themselves would have little incentive to pass tax reform if, by not passing it, they could achieve one of their most cherished policy objectives — the elimination of the Bush tax cuts.

The second trigger, to appease Republicans, would include an automatic $425 billion in cuts to Medicare and Medicaid over 10 years. But Boehner repeatedly said that he wanted his own “political trophy” as a trigger, something that had the same resonance for the right as the Bush tax cuts had for the left — namely the elimination of the “individual mandate,” the central plank in Obama’s health-care law that required every American to be insured. Striking down the provision was a top priority for the Tea Partiers in Congress, who saw it as evidence of Obama’s tyrannical tendencies. Obama wouldn’t entertain the possibility. The argument had been going on since the first round of negotiations between the two men and their staffs, but now that a deal seemed imminent, the question of how to enforce it had taken on a new urgency. At its core, the trigger debate was a matter of trust; each man had to be assured that the other wasn’t going to let his party renege on the tax-reform agreement when the inevitable arguments arose. And because they hadn’t worked together much and barely knew each other on a personal level, the only way for Obama and Boehner to feel reassured was if the political cost of pulling out was intolerably high to both of them.

Obama and Boehner argued heatedly but respectfully over both sticking points — the revenue number and the triggers — during a two-hour meeting in the Oval Office on Wednesday, July 20. By the next morning, both men were facing rebellions on the Hill. The Times’s Carl Hulse and Jackie Calmes had written a front-page article disclosing the existence of the new round of talks and asserting that a deal was very near. Arriving for the weekly lunch of the Democratic Senate caucus, Jack Lew found himself berated by senators who were angered by the talk of entitlement cuts in exchange for the relatively paltry $800 billion in tax money, and livid at having heard about it from The Times. Senator Harry Reid, the majority leader, had been fully briefed (along with the House leader, Nancy Pelosi) only the night before. He remained stonily and pointedly silent in the meeting, while Lew absorbed one verbal blow after another.

At that very moment, Boehner was dialing Rush Limbaugh’s radio show, unbidden, in an effort to quell the eruption on the right. It wasn’t only the additional revenue that conservatives hated. Having campaigned in 2010 against Obama’s health-care plan, which included future Medicare cuts, conservatives in Congress were no more eager than Democrats to give the issue away in advance of 2012. (Their resistance to this part of the grand bargain highlighted what is perhaps the central paradox of budget politics on the right: Republicans have defined themselves almost entirely by their determination to reduce debt, but virtually every means of actually getting there — taxes, defense cuts, restructuring entitlements — strikes them as politically unpalatable.) “There is absolutely no deal,” Boehner assured Limbaugh on air.

And yet, even then, as powerful contingents in both parties rose up to oppose a deal that was already tenuous, negotiations were proceeding amiably and apace. At the White House that Thursday morning, July 21, Jackson, Loper, Nabors, Sperling and Lew, among other aides, agreed to set aside the revenue question and focus on hammering out some of the smaller discrepancies in the two offers. By now, a level of trust had grown among them; the mere fact that they had exchanged so much paper, and that none of it had been leaked to reporters or bloggers, seemed to cement their working relationship. To hear aides on both sides tell it, anyone who wandered into Nabors’s West Wing office would have thought they were moving, inexorably and constructively, toward a final agreement.

In fact, Obama felt confident enough to tell Reid and Pelosi, during a meeting in the Oval Office that Thursday evening, that a grand bargain was imminent. The president told his Congressional leaders that he had given Boehner a choice: either the two sides could go for the bigger bargain that Obama wanted, with the nearly $1.2 trillion in revenue and the spending cuts they were already close to nailing down, or they could do a smaller version, with the original $800 billion in revenue but a smaller slate of cuts. Obama told Reid and Pelosi that he understood that this would seem like a choice between a bad deal and a worse deal, but he wanted a commitment from them that they would get behind the agreement. Neither of the Congressional leaders was wild about the prospect, but they quietly pledged they’d have the president’s back.

Cantor and the Counteroffer

Like much of Washington, White House aides were perplexed by the relationship between Boehner and the man who was 14 years younger and next in line for his job, Eric Cantor. During one of a series of tense White House meetings with Congressional leaders in July, Obama’s aides had been stunned — even a little embarrassed — to see Cantor, when asked for his opinion, directly contradict the speaker in front of the president. He insisted that the caucus would not accept the kind of sweeping deal that both leaders wanted. It struck Obama’s aides as breach of Washington decorum, and it appeared to betray deeper divisions inside the Republican caucus. When Daley and Geithner were first invited by Boehner to his Capitol office to restart the negotiations in mid-July, they were surprised to find Cantor there too. It was one of the main reasons that the White House dared to hope a deal might work. They assumed that Cantor’s presence meant that the two Republican leaders were now speaking with the same voice.

Cantor hadn’t changed his mind about the grand bargain, however. Boehner had invited him to the meeting, just as he had invited Daley and Geithner, and there was little the majority leader could do in that situation other than accept. And from Cantor’s perspective, it was better to be inside the room than not, which is what had happened during the first round of talks, when for 10 days he had been ignorant of the negotiations going on.

Cantor’s objections weren’t simply obstructionist. He didn’t like the revenue piece — partly on principle, and partly because he thought it would reignite the grass-roots insurgency that Washington Republicans had been desperately trying to keep under control, endangering the re-election of some members. A fight over taxes — with the party’s leaders arguing that government should get more money, rather than less — might lead to outright insurrection and a breakaway third party. Cantor also didn’t trust the White House to stand by a deal, warning that they would ultimately come back with more demands. Perhaps most important, Cantor was highly skeptical that a grand bargain — with Boehner’s $800 billion gambit already being called a tax increase by The Wall Street Journal’s editorial page — had any chance of passing the House.

This last point hinted at what was perceived inside the caucus as Boehner’s primary vulnerability. Boehner had traveled an idiosyncratic path to the speakership, having never served as a House whip, the pivotal job of corralling and counting votes. He wasn’t much of a closer, either; the more aggressive tactics that “getting to yes” sometimes required didn’t come naturally to him. Boehner seemed to believe that his prestige as speaker would carry the day on key votes, but already that assumption had gotten him into trouble a few times, and other members of his leadership team had little faith in his predictions. Before the Gang of Six fiasco, Boehner estimated that he could round up something like 150 votes (out of 240 Republican members) for the grand bargain. Cantor and many other senior Republicans thought the number could be less than half of that.

By Thursday afternoon, when Cantor entered Boehner’s office to consult on their next move, the speaker was in something of a box. The White House position was leaving Boehner little room to maneuver within his own caucus, and yet he was loath to see the deal unravel after getting so close, and with so little time left before the debt-limit standoff became a full-blown national crisis.

The speaker’s story about this moment in the negotiations has always been remarkably consistent, and he and his aides have repeated it frequently in recent weeks, including to me. The additional revenue that Obama demanded was a “nonstarter,” he says. He did a “gut check” and decided that he could no longer trust the president, who obviously didn’t have the courage to stand behind the deal they had made. And so Boehner had no choice but to walk away from the negotiations. He and Cantor, of like mind, reached this conclusion together.

It’s a clean story of a man standing by his conservative principles. And yet the additional revenue wasn’t, strictly speaking, a nonstarter. After all, Boehner wanted a deal badly enough to stay at the table for 48 hours after Obama “moved the goal posts,” which casts doubt on his claim that this breach of trust was an obvious dealbreaker. And at some point that Thursday, Boehner and his most senior aides at least entertained what would have been an astounding counteroffer to the president.

As part of a broader proposal, which has remained until now a closely held secret, Boehner was apparently open to meeting the president at the new, higher revenue target — a concession that most likely would have meant abandoning the idea that no taxes would have to be raised. Had that counteroffer ever made it to Obama’s desk, it’s not hard to imagine that the grand bargain would have gotten done within 24 hours, at great political risk to both men. Whether it could have passed the House — whether, in fact, any deal would ever have reached the president’s desk — is a question that will never be answered.

What happened, instead, based on extensive reporting, was this: Boehner raised the possibility of his counteroffer with Cantor on that Thursday afternoon, and Cantor dismissed the suggestion out of hand. He had always warned that the White House couldn’t be trusted and would come back for more, and Obama’s reversal on the revenue number had vindicated that view. Cantor made it clear he wasn’t going to support any more counteroffers. He was pretty sure the caucus wouldn’t either. No longer was Cantor content to be the skeptic in the room. He was now certain that the grand bargain was a practical impossibility.

Boehner talked to Obama a short while later. The president laid out the options as he would later relay them to Reid and Pelosi: more revenue and a bigger package, or the $800 billion and a smaller one. Boehner heard him out, but by then he must have known, from his discussions with Cantor and others, that neither option was going anywhere in his own caucus. It was one thing to risk your speakership on a grand bargain, which Boehner had without question been willing and even eager to do. It was another thing to throw that speakership away with little chance of success, which is what Obama was now asking of him.

The final act of the saga played out like the awkward undoing of a brief teenage romance, minus the texting and Facebook un-friending. At about 10 p.m. that Thursday, Obama placed a call to Boehner’s cellphone to check in; when Boehner didn’t pick up, the president left a voice-mail message. Late the next morning, Obama casually asked Daley if he’d heard from Boehner; Daley told him there was no word, and he added that he couldn’t reach any of the speaker’s aides either. And so the president waited anxiously, wondering why the speaker wasn’t returning his call. As the hours passed, the mood in the West Wing turned from puzzlement to concern to anger. By the middle of the afternoon, rumors began to reach the White House from the Hill. Boehner had scheduled a briefing for reporters. He was telling people the deal was dead, and he was meeting with Reid and Mitch McConnell, the Republican leader in the Senate, to see if there was some other way to raise the debt limit.

When Boehner finally called back late that Friday afternoon, it was a perfunctory call between wounded suitors. Each man hung up and immediately went out to tell his side of the story, offering the versions — Obama moved the goal posts, Boehner couldn’t deliver — that would soon become fixtures of Washington’s double-sided reality. Both were essentially true, and yet incomplete.

Why didn’t Boehner call back earlier on Friday? Any kid who has ever traded a Pokémon card knows that you don’t walk away from a negotiation without at least leaving your best offer on the table. Boehner would say that he had run out of time and was certain Obama wouldn’t budge. But there’s a more persuasive theory, which is that Boehner didn’t want to talk with Obama because he feared exactly the opposite — that Obama would respond by offering him the original terms from the previous Sunday, and that Boehner would then find himself trapped. He had to now know that, despite his sense of himself as a persuasive statesman who could get his caucus to follow his lead, he couldn’t get any deal past even his own leadership. It was safer for Boehner to walk away and accuse Obama of having sabotaged the deal than to risk that Obama would retreat to the earlier terms on which they had agreed, forcing the speaker to backtrack himself.

In the end, that’s essentially what happened, anyway. The following day, Congressional leaders informed Obama that they were ready to offer a deal on their own. It would force another vote on the debt ceiling in 2012, and it would create a “supercommittee” of six lawmakers charged with finding massive spending reductions; if the committee failed, a slate of painful cuts would go into effect at the end of 2012. (Ultimately, the debt ceiling vote was pushed back to 2013, but the rest of the bill passed.) Obama hated it and made his anger known to the lawmakers who laid it out for him in the Oval Office. After that meeting, he called Boehner yet again, asking if they could just go back to the previous Sunday’s handshake agreement. Boehner told him it was time to move on.

Boehner Betrayed?

From Boehner’s perspective, it’s not hard to see why he came away feeling Obama betrayed him. “He had to have known that this was going to set my hair on fire,” Boehner told me when we sat together in his office on the first day of March. He was seated in a leather chair by a marble fireplace, his cigarette smoldering in an ashtray at his side. Three aides sat nearby.

“You have to understand,” he went on, “there were hours and hours of conversation, and he would tell me more about my political situation than I ever would think about it, all right? So when you come in and all of a sudden you want $400 billion more — he had to have known!” Boehner shook his head, as if he was still puzzled by it all.

“Well, he did know,” the speaker finally decided. “He had to have known that he was driving this thing off a cliff.”

And yet, in the end, while both leaders had profound reservations about a grand bargain that would threaten their parties’ priorities, what’s undeniable, despite all the furious efforts to peddle a different story, is that Obama managed to persuade his closest allies to sign off on what he wanted them to do, and Boehner didn’t, or couldn’t. While Democratic leaders were willing to swallow either a deal with more revenue or a deal with less, Boehner’s theoretical counteroffer, which probably reflected what he would have done if empowered to act alone, never even got a hearing from his leadership team.

Shortly before this article was published, Boehner issued a statement to me saying there was “zero chance” of them actually making a counteroffer late that week. But when I asked Boehner on the first day of March whether he had floated his counteroffer past Republican leaders other than Cantor, his reply was more ambiguous.

“I don’t know that it ever got that far,” Boehner said after a pause. “Eric and I were comfortable with where we were. Did we think we were out on a limb? Yes. Did we think the president, if we came to an agreement, was going to be out on a limb? Yes. But I don’t think us sitting in this room with the rest of the leaders, discussing exactly where we were . . . I’m not going to say it didn’t happen. But the reason I feel that way is because I had a pretty good feel for what I thought the reaction was.” Later, he told me flatly, “I look at what happened last summer as the biggest disappointment I’ve had as speaker.”

Now, with another debt battle looming, the chance of resurrecting some kind of grand bargain doesn’t seem very promising. Obama and Boehner have spoken only a handful of times. The administration’s most driven dealmaker, Bill Daley, never recovered from the episode, which poisoned his relationship with Harry Reid, who blamed Daley for having kept him and other Senate leaders in the dark as the negotiations unfolded. Daley resigned in January and was replaced by Jack Lew — the guy whom Boehner and his aides tried to sideline.

When I talked to Boehner about the two potential crises coming at year’s end (the possibility of automatic budget cuts and, weeks later, another vote on the debt ceiling), he told me he was placing his hopes on getting a new president. “I don’t see any real evidence that this president has the courage to lead,” he growled. He added that any comprehensive deal might be even harder to sell to his members this time around.

And yet the failed attempt at a grand bargain wasn’t necessarily an unmitigated disaster. The ugly, months-long process of trying to avoid a meltdown over the debt ceiling may have further embittered a lot of ordinary Americans, but it also forced policy makers on both sides to wrestle with their own capacity for compromise. For weeks, in both the White House and in the speaker’s office, the most influential aides in the country burrowed into spreadsheets and considered, in unusually specific terms, what kinds of budget cuts and revenue numbers they could live with.

They didn’t get the sprawling deal they were after, but they did produce a serious blueprint for bipartisan reform, a series of confidential memos that left them just a few hundred billion dollars apart. That may sound like real money, and it is, but when you consider that the government can get some $25 billion back just by selling its broadcast spectrum, you begin to understand how bridgeable that difference is. What’s clear now is that the only thing holding Washington back from a meaningful step toward reducing debt and modernizing government isn’t any single policy dilemma, but rather the political dynamic that makes compromise such a mortal risk.

That dynamic could change after November. And however counterintuitive this may seem, it may be more apt to change if the cast of characters remains the same. Assume for the moment that Mitt Romney is elected president and is forced to confront, even before staffing his administration or taking the oath of office, an imminent budget crisis. Romney would have been elected despite the deep ambivalence of his own party’s conservative base, whose support he would need in order to govern, and who would be watching his every blink for proof of ideological fealty. Does anyone really think he could risk infuriating that base, in his first move as president-elect, by hammering out a compromise that increases tax revenue and cuts Medicare?

Should Obama win re-election, on the other hand, he would face the impending crisis knowing that he had just run the final campaign of his life and that he had 18 months, at best, to solidify his legacy. Boehner might well find himself, two years removed from the Tea Party elections of 2010, with fewer extremists in his own caucus. And for all their residual bitterness and mistrust, they would both know that they still had a draft agreement that left them about 80 percent of the way there.

Near the end of our interview, I asked Boehner what he thought would happen when the two sides clashed again in several months. He took a drag on his cigarette.

“We’re heading toward a very big moment, where big decisions are going to have to be made about the future of our country,” he said blandly. Then he surprised me by rising quickly to his feet and clapping his hands. “All right!” he said, reaching for my hand. He was through talking, at least for now.

‘We’ll Fight This To The Death’: The Vicious Capitol Hill Battle Between Banks and Credit Unions

As reported by Zach Carter and Ryan Grimm of the HuffingtonPost

 

WASHINGTON — In early February, Alabama Republican Spencer Bachus called for a meeting between two of the most quietly influential interest groups in the nation’s capital: credit unions and community banks.

Bachus, chairman of the powerful House Financial Services Committee, was looking to ensure the passage of a slew of federal favors benefiting both sides. All the lobbyists had to do was show up at a meeting and figure out how to work together.

It was too much to ask.

The Credit Union National Association and the Independent Community Bankers Association immediately agreed to the sit-down, but as the meeting approached the community bankers abruptly cancelled the event, according to lobbyists and congressional staffers familiar with the plans.

“There was supposed to be a couple of joint meetings with different congressional offices and with the leadership of Financial Services. And the banks decided that we had too many bills in play and they didn’t want to meet with us,” says Linda Armyn, a senior vice president for Bethpage Federal Credit Union.

It’s no small matter to cancel on a committee chairman. ICBA had performed the Capitol Hill equivalent of cussing out the boss at an office Christmas party. Still, the group has no regrets.

“There won’t be any meetings. There won’t be any compromise. There won’t be any deals. There won’t be any discussions,” says ICBA chief economist Paul Merski.

To most folks, community banks and credit unions are indistinguishable. Both are often viewed as good-guy alternatives to Wall Street banks, eschewing the too-big-to-fail crowd’s phantom, subprime profits in favor of safe, consumer-friendly products. After the 2008 financial crash, that strategy allowed them to reap financial rewards and reputational halos. The “Move Your Money” movement and Bank Transfer Day shifted billions of dollars worth of business from Wall Street to these small lenders.

But community banks and credit unions each operate under different government charters and regulatory regimes. They compete for the same good-guy customer base, and are openly hostile  with each other on Capitol Hill. Their mutual animosity is frequently unmoored from profit margins and bottom lines, a passionate conflict that at times seems like a Washington version of the Hatfields and McCoys.

“The credit unions have become the skunk at the garden party,” Merski says.

“The hypocrisy of the bank lobby appears to have no end,” Credit Union National Association (CUNA) CEO O. William Cheney said during a November hearing.

But while the dispute between the two groups goes back decades, their most recent clash serves as a window into the way American government works — or doesn’t work — in the 21st century. Legislative scuffles between entrenched interest groups occasionally gather enough momentum to attract public attention. Last year’s blowout over debit card swipe fees hijacked the Senate schedule for nearly six months, and the Stop Online Piracy Act sparked furious online protests.

Most of the time, the special interest stranglehold over Congress is exercised relatively quietly, in small-bore negotiations that never really get off the ground. Even if the bills go nowhere, they present lucrative fundraising opportunities for lawmakers, while devouring the time and attention that elected officials could be using to attend to the public good — say, solving the jobs crisis, ending homelessness or improving the standard of living for the one in four American children who currently live in poverty.

Instead, lawmakers expend tremendous amounts of energy trying to bridge emotional divides between favored interest groups that are accustomed to getting their way and have little interest in compromise — like, for example, credit unions and community banks.

Few fight harder in Washington than your cuddly local lenders.

“People always say it’s Wall Street, but the big banks aren’t the most potent lobbyists, because everybody hates them,” says Rep. Barney Frank (D-Mass.). “It’s the credit unions and the community banks because of their grassroots networks.”

A big bank like Citigroup appears to have oceans of lobbying clout that a small community bank lacks. But every congressional district has a community bank and a local credit union. As united forces, the ICBA and CUNA can (sometimes) defeat even their Wall Street competitors on the Hill.

This week, they will flex that muscle. CUNA expects 4,000 members of the credit union community to fly in to Washington for the group’s annual lobbying convention — including at least one from every congressional district.

Like the credit unions, community banks will be making their annual descent on Capitol Hill later this year. Both groups have profitable requests pending in Congress.

The Communities First Act, introduced in April 2011, reads like ICBA’s wish-list for the entire year. During a November hearing on the bill, Georgetown University Law School professor Adam Levitin criticized the bill as a set of unearned giveaways for small financial firms — tax cuts, accounting gimmicks to hide losses, weaker capital requirements and even immunity from some forms of scrutiny by the Securities and Exchange Commission. But whatever its impact on communities, the bill would undoubtedly help banks pad their profits.

“It does nothing for communities,” Levitin said, calling the bill “narrow, special-interest pleading.”

Credit unions, meanwhile, are seeking legislation that would allow them to expand their business lending operations. Credit unions are currently barred from issuing business loans in excess of 12.25 percent of their total assets, an arbitrary rule that banks were able to slip into a 1998 law over the objections of both credit unions and President Bill Clinton’s administration.

Over the past year, credit union lobbyists have amassed 121 co-sponsors — 46 Republicans and 75 Democrats — for the Small Business Lending Enhancement Act, a bill that would raise that business lending cap to 27 percent. Credit unions argue that allowing them to make more business loans will help small firms hire, claiming the bill will create 140,000 jobs.

Community banks and credit unions need each other. Neither the Communities First Act nor the Small Business Lending Enhancement Act is likely to pass on its own, prompting Rep. Bachus’ attempt to combine them. (Bachus’ office did not return requests for comment). The only trouble? The credit unions and community banks have been at each other’s throat for decades.

“It’s a very visceral reaction they have,” says Ryan Donovan, a top CUNA lobbyist, referring to community bankers. “The ICBA would rather have their entire legislative agenda burned than let our small bill pass.”

On the bill that would lift the lending cap on credit unions, ICBA’s Merski says,”We’ll fight this to the death because of the fundamental philosophical unfairness. It’s almost un-American, really.”

Banks have little to lose from the credit union bill, and large potential profits to gain from their own legislation. Credit unions do very little business lending. For the most part, they stick to simple, standardized consumer products like checking accounts, mortgages and credit cards. Credit unions are generally small, even compared to community banks, and account for just 1 percent of the commercial lending market nationwide, according to CUNA, with an average loan amount of only $220,000.

“We’re not talking shopping malls,” explains CUNA senior vice president for communications Mark Wolff. “We’re talking landscaping and bakeries.”

Even community banks that compete head-to-head with specific credit unions simply will not lose very much if the credit union bill passes. The credit union group only pegs the gains from their legislation at 140,000 jobs — a drop in the bucket relative to the jobs crisis. Yet the legislative arm-wrestling continues.

“If you look at the marketplace, the banks have 95 percent of the market share. There isn’t a whole lot of data that supports we’re taking their business,” says Armyn of the Bethpage Federal Credit Union. “I mean, we’re taking a piece of their business, but if you look at it on the grand scale, they still have 95 percent of the market share.”

But the battle isn’t really over balance sheets. It’s over those “philosophical” differences Merski cites. Talking to members of both groups, bankers essentially think credit unions are tax cheats, while credit unionists see bankers as greed-mongers.

Credit unions are nonprofits owned by their customers, a unique status among financial institutions which allows them to be exempt from income taxes. But a credit union charter comes with major drawbacks — they can’t pay dividends to shareholders, since they don’t have any shareholders, nor can their executives enjoy wild paydays in the form of stock options. They also only have one option for growth: profit. Banks can take on debt or issue stock to capitalize on profit opportunities, but credit unions have nothing but year-end earnings to draw on.

Bank executives do enjoy higher paydays. Among credit unions with at least $100 million in assets, the median CEO pay comes out to $211,558, according to CUNA. According to data compiled by SNL Financial, publicly traded banks with less than $10 billion in assets (a common threshold in regulation and legislation to define a “community bank”) pay out  median CEO compensation of $385,577.

As with most CEO pay in the financial industry, the bigger the bank, the better the potential payday, but community banks with less than $500 million in assets still paid a median of $248,437 — about 15 percent better than the median for all credit unions over $100 million in assets, according to the SNL Financial data. The largest credit union is Navy Federal, with $46 billion in assets.

But both sides use such relative metrics to criticize the other.

“They don’t pay taxes!” says ICBA’s Merski.

“They don’t get that we really are a different model,” counters CUNA’s Wolff.

Both sectors, of course, have always been free to change their charters whenever they wish. Credit unions file to become banks all the time, and there is no law barring banks from adopting a credit union model.

This year’s skirmish between community banks and credit unions will almost certainly dwindle into obscurity, a common fate for special interest legislation. Next year the two groups will undoubtedly concoct new slates of legislative demands, as is the nature of lobbying. But the public has still paid the opportunity cost for the lobbying push.

The dispute between credit unions and community banks is one of an endless array of Washington feuds that tend to not connect with the broader public interest. Even if the two groups had been able to put aside their differences and move their legislation forward, the tangible benefits for everyday Americans would have likely been minor. It doesn’t make much difference for most businesses whether they get their loan from a small bank or a credit union, so long as they get their loan. And the benefits that ICBA was seeking amount to a set of unhelpful deregulation.

Even if the uncounted hours of attention that were devoted to introducing the bills, garnering co-sponsors, holding hearings and briefing lawmakers had borne fruit, the public would still have been left out of the equation. Similar disputes take place every year between dozens of special interests, on every committee in Congress. And, in this case, the special interests groups themselves say the fuss has largely proved to be just that.

“We all just want to move forward and grow,” says Armyn, the Bethpage Federal Credit Union executive, frustrated with the political gridlock. “To me, it’s just silly.”

House GOP Looks To Give Obama Power Of Line-Item Veto

By JIM ABRAMS 02/ 8/12 10:00 AM ETAssociated Press

WASHINGTON — The Republican-led House is trying Wednesday to give President Barack Obama the line-item veto, a constitutionally questionable power over the purse that has been sought by both Republican and Democratic presidents.

The legislation, expected to pass, allows the president to pick out specific items in spending bills for elimination. Currently, the president must sign or veto spending bills in their entirety.

The president’s choices for removal would then have to be approved by Congress.

Congress has made several attempts in the past to enact line-item veto bills, saying that surgical cuts to spending bills are useful both in removing wasteful earmarks and in reducing spending. Most state governors have some kind of line-item veto power.

The House bill, offered by Budget Committee Chairman Paul Ryan, R-Wis., and the top Democrat on the committee, Chris Van Hollen of Maryland, stipulates that all savings from eliminated programs would go to deficit reduction. House Republicans have included the bill as part of a package of measures to overhaul the budget process so as to save money.

In 1996, a Republican-controlled Congress succeeded in giving line-item veto authority to another Democratic president, Bill Clinton. He exercised that authority 82 times, and although Congress overrode his veto on 38 instances, the moves saved the government almost $2 billion.

But in 1998, on a 6-3 vote, the Supreme Court ruled that the law was unconstitutional, saying it violated the principle that Congress, and not the executive branch, holds the power of the purse.

Supporters say the bill has been written to meet constitutional standards. They say that while the president can propose items for rescission, or elimination, Congress must then vote on the revised spending package and then the president must sign what is in effect a new bill.

Under the proposal, the president has 45 days within the enactment of a spending bill to send a special message to Congress proposing cuts to any amount of discretionary, or non-entitlement, spending. Legislation to consider the proposed cuts would move quickly to the House and Senate floors for automatic up-or-down votes with no amendments.

The White House, in a statement, said it “strongly supports” passage of the bill, praising it for “helping to eliminate unnecessary spending and discouraging waste.” It said the bill was similar to a line-item veto proposal that Obama sent to Congress in May, 2010.

One top Democrat, minority whip Steny Hoyer of Maryland, voiced opposition, saying that while he had supported line-item veto bills in the past, he thought the bill was too restrictive in requiring that money saved from a rescission go to deficit reduction and could not be used to fund other priorities.

The bill, if it passes the House, faces an unclear road ahead in the Senate. Four senators – Republicans John McCain of Arizona and Dan Coats of Indiana and Democrats Tom Carper of Delaware and Mark Udall of Colorado – pushed to have a line-item veto provision considered by the supercommittee which last year was unable to come up with a comprehensive plan to reduce the deficit.

But the Senate, traditionally more protective of its constitutional powers, has not always been receptive to the line-item veto idea. In 2007 former Sen. Judd Gregg, R-N.H., picked up 49 votes for a line-item proposal, well short of the 60 needed to break a Democratic-led filibuster.

Working Poor: Almost Half Of U.S. Households Live One Crisis From The Bread Line

Written by Alexander Eichler Reported in Huffington Post

 

What does it mean to be poor?

If it means living at or below the poverty line, then 15 percent of Americans — some 46 million people — qualify. But if it means living with a decent income and hardly any savings — so that one piece of bad luck, one major financial blow, could land you in serious, lasting trouble — then it’s a much larger number. In fact, it’s almost half the country.

“The resources that people have — they are using up those resources,” said Jennifer Brooks, director of state and local policy at the Corporation for Enterprise Development, a Washington, D.C., advocacy group. “They’re living off their savings. They’re at the end of their rope.”

The group issued a report today examining so-called liquid asset poverty households  — the people who aren’t living below the poverty line, but don’t have enough money saved to weather a significant emergency.

According to the report, 43 percent of households in America — some 127.5 million people — are liquid-asset poor. If one of these households experiences a sudden loss of income, caused, for example, by a layoff or a medical emergency, it will fall below the poverty line within three months. People in these households simply don’t have enough cash to make it for very long in a crisis.

The findings underscore the struggles of many Americans during what has often seemed like an economic recovery in name only. While the Great Recession officially ended more than two years ago, unemployment remains high and wages have barely budged for most workers. For more people, whether they draw a paycheck or not, a life free of deprivation and financial anxiety seems perpetually out of reach.

That’s not to say that everyone who is liquid-asset poor spends all their time fretting. On the contrary, because many have regular paychecks coming in, they may not grasp the precariousness of their situation.

“They don’t necessarily realize how close people can be to one interruption to income or one interruption to health benefits,” said David Rothstein, the project director for asset building at the non-profit Policy Matters Ohio. “They’re one paycheck away from being in debt.”

Rothstein, who also serves on a steering committee at the Corporation for Enterprise Development, told The Huffington Post that payday lenders — who loan money to desperate borrowers at high interest rates, drawing people into hard-to-escape cycles of debt — are “a huge problem” in Ohio, as in many other states. People often turn to payday lenders to cover one-time, unexpected expenses, but can end up in a long and costly relationship.

“People say things like, it’s just one mechanical problem with their car,” said Rothstein. Before they know it, he said, “every other week, they’re back at the payday lending shop.”

The Corporation for Enterprise Development findings echo other recent studies showing that many Americans are ill-prepared for financial emergencies. Analysts said the reasons include flat wages, the high cost of medical treatment and the nationwide drop in housing values leaving homeowners with less wealth than they believed they had.

Andrea Levere, the president of Corporation for Enterprise Development, told HuffPost that greater financial literacy might have helped prevent the current situation.

People can “graduate high school and not know how to write a check,” Levere said, adding that an increased emphasis on personal responsibility for budgeting and spending sould be an important part of any step forward.

At the same time, Corporation for Enterprise Development officials were quick to argue that public policy needs to address the scope of the problem. Levere cited the example of asset limits in public benefit programs, which restrict services like food assistance and public health insurance to households with few or no assets — a policy that critics say denies help to many people in need.

“In some cases,” said Levere, “it means they can’t even own a car that is in good enough shape to get them to work.”

Brooks agreed. “A family that loses its job, that was maybe solidly middle class, in a state where they have restrictive asset tests, is going to have to liquidate all their assets, all their savings for the future” in order to qualify for benefits.

The report maintains that there are a number of measures that could alleviate liquid asset poverty, from strengthening consumer protections against payday lenders to making greater assistance available to first-time homebuyers. Levere said even minor policy adjustments could have “revolutionary implications.”

“There’s a lot of ways forward. It doesn’t mean it’s not tough,” Levere said. “I’m a great believer in one step at a time.”

 

Teacher Aid Is First Piece Of Obama’s Jobs Plan To Get Senate Vote

As reported by Jennifer Bendary from Huffington Post

WASHINGTON — Senate Democratic leaders have settled on which piece of President Barack Obama’s jobs plan they want to move on first: $35 billion for state and local governments to rehire teachers, police and firefighters.

“Our expectation [is] that the first measure will be teachers,” White House Press Secretary Jay Carney said during a Monday press gaggle aboard Air Force One.

“I didn’t want to get ahead of Senator Reid,” Carney said of breaking the news. “We have been in consultation with him, but it’s his prerogative and we’re very pleased that he will be taking it up.”

During a conference call, Senate Majority Leader Harry Reid (D-Nev.) said he plans to unveil the Teachers and First Responders Back to Work Act later Monday and decide “in the next day or two” when to hold a vote on it. He said the bill would keep 400,000 teachers and first responders on the job, and would be paid for by imposing a 5 percent tax on millionaires.

Asked which pieces of Obama’s jobs plan are next in line for Senate votes, Reid demurred. But he said he has already settled on the next four votes on pieces of Obama’s bill and is waiting to meet with the Democratic Caucus on Tuesday before discussing his plan publicly.

“There is no reason we cannot finish the appropriations bills before the end of the week, and have a vote on this jobs bill,” Reid told reporters on the call. “I am happy to keep the Senate in session as long as needed to make sure we get a vote on this jobs bill.”

Reid’s office also sent out a fact sheet that highlights past votes and statements by Republicans in favor of jobs bills similar to the teacher/first responders aid bill. The fact sheet cites a May 2010 press release by Senate Minority Leader Mitch McConnell (R-Ky.) saying he was “proud” to help secure funds for first responders. It also points to a March 2007 vote to fully fund the COPS program; it included the support of 16 GOP senators.

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During a speech earlier Monday in Fletcher, N.C., Obama knocked Senate Republicans for voting down his entire $447 billion jobs package last week. All Republicans opposed a procedural vote to begin debate on the bill, along with two Democrats. Obama said his push to break out pieces of his bill and hold individual votes on them gives Republicans “another chance” to act on jobs.

“Maybe they just couldn’t understand the whole thing all at once,” Obama said, drawing laughs from the crowd of supporters. “So we’re going to break it up into bite-sized pieces so they can take a thoughtful approach to this legislation.”

“So this week, I’m going to ask members of Congress to vote on one component of the plan, which is whether we should put hundreds of thousands of teachers back in the classroom and cops back on the street and firefighters back to work.”

Of course, the reality is that Republicans are poised to vote against any piece of Obama’s plan because they don’t like how it is paid for: by raising taxes on millionaires and ending subsidies for the oil and gas industry. But with the 2012 elections in mind, Obama and Democratic leaders plan to keep lining up votes anyway to build the case that Republicans are voting against jobs and the economy in the name of protecting corporate interests.

This story has been updated with information on Senate Majority Leader Harry Reid’s conference call Monday.

Senators meet privately on urging broad debt-reduction plan from supercommittee

By  Peter Wallsten, Published: September 8

More than two dozen senators from both parties met privately this week to revive hopes of a grand debt-cutting bargain — exploring how to push the newly formed debt “supercommittee” to find far more than its assigned goal of $1.5 trillion in deficit reductions.

The senators want at least $3 trillion slashed from the deficit over the next decade. In addition, they plan to press the committee to pass a major tax overhaul to lower rates and close special-interest loopholes, as well as changes to entitlement programs such as Medicare, according to several participants.

The effort comes as the 12-member supercommittee begins what is expected to be a grueling process to map out its plans before a November deadline — and it threatens to undercut the chances for President Obama to win passage for portions of a jobs plan expected to cost hundreds of billions of dollars in the short term.

“I don’t think I’m speaking out of school that it was a unanimous feeling among a large group of senators from both sides of the aisle,” said Sen. Bob Corker (R-Tenn.), one of the meeting participants. “Most people are far more focused on this supercommittee than any speech the president’s going to give.”

Another in the group, Sen. Joseph I. Lieberman (I-Conn.), said the senators want to “encourage” the supercommittee “to reach for a higher number.” He said the committee should “compromise with one another and do what parts of each party will not like, for the greater good, because that’s really what most of the people in the country want.”

Obama, too, is expected to press the committee to exceed its deficit-reduction goal. In his speech Thursday night, he called on Congress to increase the super­committee’s deficit-cutting goals to cover the costs of his jobs plan, and he said that a week from Monday he will announce a more detailed plan “that will not only cover the cost of this jobs bill, but stabilize our debt in the long run.”

Several people familiar with the discussions said the lawmakers felt that, after the pomp and ceremony of Obama’s joint-session speech fades, the center of political and policy gravity on Capitol Hill will be the work of the special committee, chaired by Sen. Patty Murray (D-Wash.) and Rep. Jeb Hensarling (R-Tex.).

Under last month’s debt-ceiling deal struck by Obama and GOP lawmakers, deep cuts would automatically take effect in national security and other areas if the supercommittee fails to reach agreement or if Congress fails to pass legislation by December.

One senior Democratic aide called Obama’s jobs plan largely “dead on arrival” because its expected price tag would roughly cancel out the one year’s worth of savings many lawmakers hope the supercommittee will find.

The Senate on Thursday blocked a resolution of disapproval for an additional $500 billion increase in the debt ceiling. The procedure is required by the legislation to raise the borrowing limit in phases by at least $2.1 trillion.

A Senate staffer familiar with the senators’ private discussions said the effort was intended to be “complementary” to the work of the supercommittee but also to offer a gentle nudge.

The staffer said the senators’ push would “demonstrate there can be some support and safety if they choose to go beyond their charge.”

Both aides spoke on the condition of anonymity in order to discuss the private deliberations.

The private gathering this week, held Wednesday in a Capitol meeting room, included about 25 centrists from both parties. It was organized by Sens. Mark R. Warner (D-Va.) and Saxby Chambliss (R-Ga.), two members of the “Gang of Six,” which tried unsuccessfully to engineer a grand deal patterned loosely after the plan laid out by the deficit commission headed by former Clinton White House chief of staff Erskine Bowles and former senator Alan Simpson.

At least a third of the Senate at one time had indicated some level of support for the broad framework being negotiated by the Gang of Six, according to people familiar with that group’s discussions.

NJ Energy plan goals debated

As reported in Courier Post 8/19/11

 

New Jersey’s proposed energy policy calls for 22.5 percent  of the state’s power to come from renewable sources within 10 years  a goal that was the subject of heavy debate at a legislative hearing  attended by nearly 100 people Thursday.

Environmentalists said they want a 30 percent target, but business  leaders said that would drive their costs up.

State Sen. Jennifer Beck, R-Monmouth, defended the goal proposed  in Gov. Chris Christie’s draft energy master plan, calling it fair  and an “aggressive standard.”

Only eight states have higher renewable portfolio standards  than 22.5 percent, according to the U.S. Department of Energy website.  The standards are state policies that require electricity providers  to obtain a minimum percentage of their power from renewable energy  resources, including the sun and wind, by a certain date.

After Jeff Tittel of the New Jersey Sierra Club made a case for  the higher benchmark, Beck said: “I’ve been told on many occasions  that’s a stretch for us. We know solar and wind are great sources,  but they’re not particularly reliable, and that’s a challenge.  There’s also a responsibility for us to be realistic to set goals  that can be met.”

New Jersey currently obtains less than 10 percent of its electricity  supply from renewable energy sources.

But Tittel noted that New Jersey has ramped up, with more than  10,000 solar arrays installed. Only California has more.

“We’re No. 2 in solar installations. We shouldn’t go back,”  said Tittel, who added that he fears Christie’s policy could jeopardize  funding for renewable energy projects for homeowners and small  businesses and affect more than 200 solar companies in New Jersey.

Corporate executives who testified said the current relative  high costs of solar energy should not be discounted.

Michael Egenton, senior vice president of government relations  for the New Jersey Chamber of Commerce, said the poor economy underscores  the need for an energy policy that loosens restrictions. He praised  Christie’s plan.

“I think you have to look at everything in context,” said Egenton,  who said money spent on higher energy costs by companies would lead  to less money spent on operations and investments. “You have to  look at the bigger picture.”

The joint legislative hearing took place at the Toms River town  hall and was co-chaired by Sen. Bob Smith and Assemblyman John McKeon,  both Democrats.

State energy regulators also are holding hearings this month  and will vote to adopt a final energy policy later this year.

The lawmakers on the panel received an admonishment from Janet  Tauro, an environmentalist who is co-chairwoman of Grandmothers,  Mothers and More for Energy Safety.

With the topic turned to energy conservation, Tauro made a common  sense suggestion:

“We can turn down the air conditioning and turn off lights,”  said Tauro, also of the New Jersey Environmental Federation.

Most of the panel members were in jackets or sweaters.

There was little reaction from the panel after Tauro, a Brick  resident, made her comment. Later the room became colder, and more  lights were turned on.

Restoring Fiscal Sanity in the United States: A Way Forward

As presented in InvestorsInsight.com

 

One of the great privileges of traveling and speaking as I do is getting to
meet a wide variety of very interesting people. Of late, I have become friends
with David Walker, former Comptroller General of the US, who is now
crisscrossing the country warning of the deficit crisis. It is a message that my
book Endgame resonates with. If we do not bring the deficit down below
the growth rate of nominal GDP, we become Greece. We hit an economic wall and
everything collapses. It will be a real and true Depression 2.0. Fixing this is
the single most important topic and task of our generation. If we do not,
worrying about P/E ratios, moving averages, long-term investments – anything
else, in fact – is secondary. Solve this and we can go back to the usual
issues.

This week’s Outside the Box is a presentation that David made recently.
Powerful stuff. I urge you to forward this on. The message must be heard so that
we can as a nation get this right. The world does not need a crippled USA.

David released a short statement about the Navy Seals getting Osama
(finally!). It echoes my own thoughts.

“All Americans should come together in appreciation for the work of America’s
intelligence agencies and special forces who planned and executed yesterday’s
Osama Bin Laden operation. While his death is a key milestone in the fight
against terrorism, the battle is far from over. More importantly, as I said in a
CBS 60 Minutes segment in 2007, ‘The greatest threat to America is not a
person hiding in a cave in Afghanistan or Pakistan, it is our own fiscal
irresponsibility.’ That statement was true then and it is even more true now.
It’s now time for the President and the Congress to work together and address
the fiscal debt bomb that represents a much greater threat to our country’s and
families futures.”

My flight was cancelled, so I am in Toronto for one more night. The folks at
Horizon Funds have graciously offered to take me to an early dinner and a
private wine cellar, as I have a 4:30 AM (ugh) wake-up call and will turn in
early. I hate 4:30 AM. That is not a civilized time of day. If I wanted to live
like Dennis Gartman I could learn to deal with it, but I guess occasionally one
does what one must.

One final thought. While getting OBL is a wonderful thing, it does little to
change the reality of the Middle East, and may even finally create a true martyr
(albeit one who was living well, and not in a cave). The world remains
unsettled. Every speaker at my recent conference was asked what keeps them up at
night. Every speaker mentioned the Middle East, some rather pointedly. It is a
true wild card. But let us enjoy for the moment some token of pleasure for the
just end of the planner of the 9/11 tragedy.

I will report more about the conference in future letters.

Your having a lot to think about analyst,

John Mauldin, Editor
Outside the Box

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Restoring Fiscal
Sanity in the United States: A Way Forward

By: Hon. David M. Walker, Founder and CEO of the Comeback
America Initiative and Former Comptroller General of the United States
(1998-2008)

Two hundred and twenty two years ago, the American Republic was founded. The
United States had defeated the world’s most powerful military force to win
independence, and over a several year period, went about creating a federal
government based on certain key principles, including limited government,
individual liberty, and fiscal responsibility. That government was established
by what is arguably the world’s greatest political document – the United States
Constitution.

Our nation’s founders understood the difference between opportunity and
entitlement. They believed in certain key values including the prudence of
thrift, savings and limited debt. They took seriously their stewardship
obligation to the country and future generations of Americans.

The truth is, we have strayed from these key, time-tested principles and
values in recent decades. We must return to them if we want to keep America
great and help to ensure that our future is better than our past.

Believe it or not, to win our independence and achieve ratification of the
U.S. Constitution, the U.S. only had to go into total federal and state debt
equal to 40 percent of the size of its then fledgling economy. Fast forward to
today, when the U.S. is the largest economy on earth and a global superpower –
but total federal debt alone is almost 100 percent of the economy and growing
rapidly. Add in state and local debt, and the total number is about three times
as much as the total debt we held at the beginning of our Republic – and it is
headed up rapidly. As the below graphic shows, our total federal debt has more
than doubled in just the past ten and a half years.

America has gone from the world’s leading creditor nation to the world’s
largest debtor nation. We have also become unduly dependent on foreign nations
to finance our excess consumption. Many of these foreign investors have shunned
our long-term debt due to concerns over future interest rates and the
longer-term value of the dollar. And PIMCO, the largest Treasury bond manager in
the U.S., also recently sold their Treasury security holdings due to a lack of
adequate return for the related interest rate risk.

And who is now the largest holder of Treasury securities? It’s the Federal
Reserve. I call that self-dealing. The Fed may be able to hold down interest
rates for a period of time; however, they cannot hold them down forever. The
Fed’s debt purchase actions are just another example of how Washington
policymakers take steps to provide short-term gain while failing to take steps
to avoid the longer-term pain that will surely come if we fail to put our
nation’s fiscal and monetary policies in order.

The Fiscal Fitness Index

In March 2011 the Comeback America Initiative (CAI) and Stanford University
released a new Sovereign Fiscal Responsibility Index (SFRI) – or as my wife Mary
refers to it, a Fiscal Fitness Index. We calculated each country’s SFRI based on
three factors – fiscal space, fiscal path, and fiscal governance.

Fiscal space represents the amount of additional debt a country could
theoretically issue before a fiscal crisis is imminent. Fiscal path is an
estimate of the number of years before a country will hit its theoretical
maximum debt capacity. (The U.S. will hit its maximum within16 years, but will
enter a “fiscal danger zone” within 2-3 years). Fiscal governance is a value
based on the strength of a government’s institutions, as well as its
transparency and accountability to its citizens. Unfortunately, the U.S. ranks
far below the average in all three of these categories – in particular, the
fiscal governance category.

The overall SFRI index showed that the U.S. ranked 28 out of 34 nations in
the area of fiscal responsibility and sustainability. And when you see which
countries rank around us, it’s clear that we’re in a bad neighborhood. We’re
only a few notches above countries like Greece, Ireland, and Portugal, all of
which have recently suffered severe debt crises. That report also showed that
the U.S. could face a debt crisis as soon as two to three years from now, given
our present path and interest rate risk. Below is the full list of rankings.

On the positive side, the CAI and Stanford report showed that if Congress and
the President were able to work together to pass fiscal reforms that were the
“bottom line” fiscal equivalent of those recommended by the National Fiscal
Responsibility and Reform Commission last year, our nation’s ranking would
improve dramatically, to number 8 out of 34 nations. In addition, we would
achieve fiscal sustainability for over 40 years!

So what are our elected officials waiting for? Do they want a debt crisis to
force them to make very sudden and possibly draconian changes? If not, they need
to wake up and work together to make tough choices. That’s what New Zealand did
in the early 1990s, when that country faced a currency crisis. Due to tough
choices then and persistence over time, New Zealand now ranks number 2 in the
SFRI – second only to Australia, which the Kiwis are not happy about! If New
Zealand can do it, America can too!

The Recent Budget Policy Proposals

In order for us to begin to restore fiscal sanity to this country, President
Obama has to discharge his leadership responsibilities as CEO of the United
States Government. He got into the game with his fiscal speech on April 13, in
which he largely embraced the work of his National Fiscal Responsibility and
Reform Commission, although with a longer timeframe for implementation and less
specifics on entitlement reforms. The President also endorsed the debt/GDP
trigger and automatic enforcement concept that CAI had been advocating. Under
this concept, Congress could agree on a set of statutory budget controls that
would come into effect in fiscal 2013. Such controls should include specific
annual debt/GDP targets with automatic spending cuts and temporary revenue
increases in the event the annual target is not met. In my view, a ratio of
three parts spending cuts, excluding interest savings, to one part revenue would
make sense.

House Budget Committee Chairman Paul Ryan recently demonstrated the political
courage to lead in connection with our nation’s huge deficit and debt
challenges. His budget proposal recognizes that restoring fiscal sustainability
will require tough transformational changes in many areas, including spending
programs and tax policies. Chairman Ryan’s proposal includes several major
reform proposals, especially in the area of health care. For example, he
proposes to convert Medicare to a premium support model that will provide more
individual choice, limit the government’s long-term financial commitment and
focus government support more on those who truly need it. He also proposed to
employ a block grant approach to Medicaid in order to provide more flexibility
to the states and limit the governments’ financial exposure. These concepts have
varying degrees of merit; however, how they are designed and implemented involve
key questions of social equity that need to be carefully explored. And contrary
to Chairman Ryan’s proposal, additional defense and other security cuts that do
not compromise national security and comprehensive tax reform that raises more
revenue as compared to historical levels of GDP also need to be on the table in
order to help ensure bipartisan support for any comprehensive fiscal reform
proposal.

The President and Congressional leaders should be commended for reaching an
agreement that averted a partial shutdown of the federal government and resolved
funding levels for fiscal 2011. While it took way too much time and effort, this
compromise involved real concessions from both sides and represents a small yet
positive step towards restoring fiscal responsibility. But this action is far
from the most important fiscal challenge facing both the Congress and the
President. After all, Washington policymakers took about 88 percent of federal
spending, along with much-needed federal tax reforms, “off the table” during the
recent debate over the 2011 budget. In essence, they have been arguing over the
bar tab on the Titanic when we can see the huge iceberg that lies ahead. The ice
that is below the surface is comprised of tens of trillions of dollars in
unfunded Medicare, Social Security and other off-balance sheet obligations along
with other commitments and contingencies that could sink our “Ship of State”. It
is, therefore, critically important that we change course before we experience a
collision that could have catastrophic consequences. As you can see in the
series of pie charts below, mandatory programs like Social Security and Medicare
already take up the largest share of the federal budget and, absent a change in
course, will continue to do so in increasing amounts in the next several
decades.

The Federal Debt Ceiling Limit

Now that the level of federal funding for the 2011 fiscal year has been
resolved, there has been an increasing amount of attention on Congress’ upcoming
vote to increase the federal debt ceiling limit. As is evident by the chart
below detailing the debt ceiling limit per capita adjusted for inflation since
1940, the U.S. started losing its way in the early 1980s. Fiscal responsibility
was temporarily restored during the 1990s, when statutory budget controls were
in place, but things went out of control again in 2003, the year after those
budget controls expired.

In essence, raising the debt ceiling is simply recognizing the federal
government’s past fiscally irresponsible practices. But while federal law
provides for the continuation of essential government operations even if the
government has not decided on a budget or funding levels for a fiscal year, such
a provision does not exist in connection with the debt ceiling. Therefore, if
the federal government hits the debt ceiling during a time of large deficits,
which is the case today, dramatic and draconian actions will have to be taken to
ensure that additional debt is not incurred. This would likely include a
suspension of payments to government contractors, delays in tax refunds, and
massive furloughs of government employees. In addition, since Social Security is
now paying out more in benefits than it receives in taxes, the monthly payments
may not go out on time if we hit the debt ceiling limit. That would clearly get
the attention of tens of millions of Americans, including elected officials.

However, although failure to raise the debt ceiling is not a viable option
given our current fiscal state, we must take concrete steps to address the
government’s lack of fiscal responsibility. We must also do so in a manner that
avoids triggering a massive disruption and a possible loss of confidence by
investors in the ability of the federal government to manage its own finances.
Such a loss of confidence could spur a dramatic rise in interest rates that
would further increase our nation’s fiscal, economic, unemployment and other
challenges.

In order to begin to restore fiscal sanity, Congress could increase the debt
ceiling limit in exchange for one or more specific steps designed to send a
signal to the markets, and the American people, that a new day in federal
finance is dawning. To be credible, any such action must go beyond short-term
spending cuts for the 2012 fiscal year. The debt/GDP trigger and automatic
enforcement concepts I advocate above are one specific step Congress could take.

The S&P’s revised outlook on the long-term rating for U.S. sovereign debt
should be yet another wake-up call for elected officials and other policymakers
in Washington. S&P’s action serves as a market-based signal that independent
ratings agencies believe the U.S. is on an imprudent and unsustainable fiscal
path and that action is needed in order to maintain investor confidence. In my
view, this action should have been taken place some time ago; however, it is now
likely that other rating agencies will reconsider their ratings positions on
U.S. Sovereign debt.

Moving Past Partisan Politics

The American people need to understand that doing nothing to address our
deteriorating financial condition and huge structural deficits is simply not an
option. Failure to act will serve to threaten America’s future position in the
world and our standard of living at home. Therefore, both major political
parties must come to the table and put aside their sacred cows and unrealistic
expectations. As John F. Kennedy said, “The great enemy of the truth is very
often not the lie — deliberate, contrived and dishonest — but the myth —
persistent, persuasive, and unrealistic.”

Given President Kennedy’s admonition, liberals need to acknowledge that we
need to renegotiate the current social insurance contract. For example, contrary
to assertions by some, Social Security is now adding to the federal deficit and
is underfunded by about $8 trillion. As you can see below, it will face
escalating annual deficits beginning in 2015.

There is no debate that last year’s health care reform legislation will
result in higher federal health care costs as a percentage of the economy. (See
the chart below). In addition, according to Medicare’s independent Chief
Actuary, based on reasonable and sustainable assumptions, last year’s health
care reform legislation will end up exacerbating our deficit and debt challenges
rather than helping to lessen them. He estimated that the cost of the health
care law to the Medicare program could be over $12 trillion in current dollars
more than advertised.

Conservatives need to acknowledge that we can’t just grow our way out of our
fiscal hole. They need to admit that all tax cuts are not equal and there is
plenty of room to cut defense and other security spending without compromising
our national security. And while conservatives are correct to say that our
nation’s fiscal challenge is primarily a spending problem, they must recognize
that some additional revenues will be needed to restore fiscal sanity. The math
just doesn’t work otherwise.

All parties must acknowledge that we can’t inflate our way out of our problem
and that we must take steps to improve our nation’s competitive posture. This
means that some properly targeted and effectively implemented critical
infrastructure and other investments may be both needed and appropriate even if
they exacerbate our short-term fiscal challenge.

Washington policymakers need to understand that the same four factors that
caused the recent financial crisis exist for the federal government’s own
finances. And what are those factors?

First, a disconnect between those who benefit from prevailing policies and
practices and those who will pay the price and bear the burden if and when the
bubble bursts. Second, a lack of adequate transparency and accountability in
connection with the true financial risks that we face. Third, too much debt, not
enough focus on cash flow, and an over-reliance on narrow and myopic credit
ratings. Finally, a failure of responsible parties to act until a crisis was at
the doorstep.

There is growing agreement that the greatest threat to our nation’s future is
our own fiscal irresponsibility. In fact, as I noted in 2007 and Joint Chiefs
Chairman Admiral Mullin stated last year, our fiscal irresponsibility and
resulting debt is a national security issue. After all, if you don’t keep your
economy strong for both today and tomorrow, America’s standing in the world and
standard of living at home will both suffer over time – and waiting for a crisis
before we act could also undermine our domestic tranquility.

So where should Washington go from here?

First, Congress and the President should reach a compromise agreement on an
appropriate level of spending cuts in 2012 while also providing for some
additional properly designed and effectively implemented critical infrastructure
investments. Second, they should agree to re-impose tough statutory budget
controls that will force much tougher choices on both the spending and tax side
of the ledger beginning no later than 2013. Third, they should authorize and
fund a national citizen education and engagement effort to help prepare the
American people for the needed actions and to facilitate elected officials
taking them without losing their jobs. Fourth, they should create a credible and
independent process that will provide for a baseline review of major federal
organizational structures, operational practices, policies and programs in order
to make a range a transformational recommendations that will make the federal
government more future focused, results oriented, successful and sustainable.

Spending levels certainly need to be cut. After all, the base levels of
federal discretionary spending increased by over 30 percent between 2007 and
2010 during a time of low inflation. At the same time, all parties must be
realistic regarding how much should be cut and how quickly it can be achieved.
In my view, we should be targeting greater cuts than have been recently
considered, but over a longer period of time: for example, real spending cuts of
$125-$150 billion over several years. If we did so, the related savings would be
significant and would compound over time.

As the National Fiscal Responsibility and Reform Commission, CAI, The No
Labels political movement (of which I am a co-founder), and others have noted,
everything must be on the table – and all political leaders need to be at the
table – in order to put our nation on a more prudent and sustainable fiscal
path. This includes a range of social insurance program reforms, defense and
other spending cuts, and comprehensive tax reform that generates additional
revenues, including both individual and corporate tax reform. We must keep in
mind that the private sector is the engine of innovation, growth, and jobs. In
addition, many businesses are taxed at the individual, rather than the
corporate, level.

Realistically, it will take us a number of years to get back into fiscal
shape. And while it would be great if we could do a “grand bargain” and enact a
broad range of transformational reforms in one step, that just isn’t realistic
in today’s world. Therefore, what is a reasonable order of battle to win the war
for our fiscal future?

First and foremost we need to enact budget process reforms, re-impose the
type of budget controls and engage in the fact-based citizen education and
engagement effort referred to previously. The next order of battle items should
be corporate tax reform and Social Security reform. Why corporate tax reform?
Because it can help to improve our competitiveness, enhance economic growth and
generate jobs.

And why Social Security reform? Because we have a chance to make this
important social insurance program solvent, sustainable and secure for both
current and future generations. We can also exceed the expectations of all
generations and demonstrate to both the markets and the American people that
Washington can act before a crisis forces it too.

The above efforts should be followed by broader tax reform and
Medicare/Medicaid reforms. We will then need to rationalize our health care
promises and focus more on reducing health care costs in another round of health
care legislation. We must also begin a multi-year effort to re-baseline the
federal government’s organizations, operations, programs and policies to make
them more future focused, results oriented, affordable and sustainable.

In summary, the truth is that the government has grown too big, promised too
much and waited too long to restructure. Our fiscal clock is ticking and time is
not working in our favor. The Moment of Truth is rapidly approaching. As it
does, let us hope that our elected officials must keep the words of Theodore
Roosevelt in mind: “In any moment of decision the best thing you can do is the
right thing, the next best thing is the wrong thing, and the worst thing you can
do is nothing.” And “We the People” must do our part by insisting on action and
by making the price of doing nothing greater than the price of doing something
We must insist that our legislators offer specific solutions to defuse our
ticking debt bomb in a manner that is economically sensible, socially equitable,
culturally acceptable, and politically feasible We need to recognize that
improving our fiscal health, just like our physical health, will require some
short-term pain for greater long-term gain. The same is true for state and local
governments.

We’ll soon know whether Washington policymakers are up to the challenge and
whether they will start focusing more of doing their job than keeping their job.
They need to focus first on their country rather than their party. And yes, the
President and Congressional leaders from both political parties need to be at
the table and everything must be on the table in order to achieve sustainable
success. Let’s hope they make the right choice this time!

All of us who are involved with the Comeback America Initiative (CAI) will do
our part. All that we ask is that you do yours. The future of our country,
communities and families depends on it.

For more information about the Comeback America Initiative and No Labels,
check out www.tcaii.org and www.nolabels.org.

Deficitation

I thought I would only write 1 newsletter this week.

 

You know….

 

Keep it light…

 

Talk about the summer fun

 

 

As much as I am trying to enjoy this summer

 

I am finding that I once again have to speak up

 

 

 

I wrote several newsletters in the past

 

Discussing the deficit and government spending

 

 

It just amazes me that Washington

 

Is going out of their way

 

Not to bring a serious resolve to the issue

 

 

Short term……Long term

 

 

What steps must be taken?

 

 

Putting party politics aside

 

 

That will send a message to the financial world

 

That we are done drinking the kool aid

 

 

The US will take responsible steps

 

To control our cost

 

And bring our economy in line

 

 

We can no longer continue to borrow $.43 cent of every
dollar

 

To support our economy

 

 

The chart below shows the growth of government

Over the past 40 years

 

 

TotReceipt     Tot Expense  Surplus/Deficit

 

1970      $192B          $195B              $2.8B

 

1980      $517B        $590B               -$73B

 

1990      $1.031T     $1.253T         -$221B

 

2000      $2.025T   $1.788T        +$236B

 

2010      $2.165T   $3.833T     – $1.555T

 

 

They are talking of doing a short term deal

 

 

Cutting spending by $1.2T over the next 10 years

 

 

That’s about $120B a year

 

Although they say most of it is on the back end

 

 

Smoke and Mirrors….

 

 

Every family has to deal with budget issues

 

 

We are all held to responsible spending

 

 

Even when we borrow money

 

 

Banks look at acceptable levels of

 

Debt to Income

 

 

 

We are a great nation…

 

Difficult decisions have been made in the past

 

To bring us to where we are today

 

 

Let Washington send a strong message

 

 

That we are back…

 

 

And ready to do business responsibly.