Smoke and Mirrors

August 3, 2011

The debt ceiling was finally raised this week.

The US will not default.

But how come I do not feel any better?

I kept listening to both sides…

Looking for that golden nugget

Will someone finally look at the whole picture

And come up with a meaningful plan?

Republicans want to cut cost

Are they really cutting cost?

All they are doing is cutting the amount of future increases

Not real cost

The democrats want to cut cost (future increases)

And raise taxes

Let’s make everyone pay their fair share

The bottom line there will be $1T dollars in cost reduction
in the

Next 10 years

Congress will form a special committee to recommend

$1.5T dollars of additional cost reductions

To be implemented over the next 10 years

All the while

The US deficit  is
projected to grow an

Additional $8 Trillion dollars

From $14.3 trillion dollars to $22.3 trillion dollars

Is this really cutting cost?

What steps are being taken to help…

Grow the economy….

Create jobs….

Restore confidence……

In America’s future?

We are currently borrowing 43 cents of every dollar we spend

At the current pace…

How long will this be

Sustainable?

The US cannot borrow its’ way out of this dilemna

We must devise a plan for the future

One that will rebuild our economy

Help put people to work

Promote stability

And insure prosperity for America’s future

Our forefathers had their disagreements…

But their goal was always for

The common good of the nation

They undertook projects

That they knew would not benefit them

But would provide for the future

What steps are we taking to insure a better future?

For our children and our grandchildren?

Have we allowed our political leaders to become

Complaisant

Reported by Sam Stein for The Huffington Post

WASHINGTON — Sunday night’s much anticipated debt ceiling meeting between the president and congressional leadership managed to produce an outcome, just not the desirable one. Attendees did not find agreement on a package of cuts, revenues, or entitlement reforms. Instead, they settled on the decision to meet again and, perhaps after Monday’s meeting, again after that.

As the government approaches the August 2 date at which it will run out of cash, the need to hold meetings is the only thing both sides can agree on.

Sunday night proved no different, as lawmakers met in the Cabinet Room with no apparent budging from either end. According to multiple attendees, the discussion began with President Obama pressing, once more, for lawmakers to consider a “grand” bargain to end the debt ceiling debate, something that would combine $1 trillion in revenue raisers with $3 trillion in cuts, including reforms to Medicare and Medicaid and smaller tinkers to Social Security.

“The basic thrust of the meeting was the president making the case for why to do a big deal and putting it to everyone around the table: if not now, when? And if not the big deal, then what is the alternative, particularly given that it is the Republicans who have said we need to use this opportunity to do something serious about the deficit,” said a Democratic official briefed on the meeting. “The president is a bit frustrated too … He is out there. He is ready and willing to take political heat. He is already taking some heat.”

Less than 24 hours earlier, House Speaker John Boehner (R-Ohio) had formally rejected the very offer that Obama was pressing for, insinuating that it was too heavy a political lift and that negotiators would be better served building on the $2.4 trillion deal that Vice President Joseph Biden had been crafting in a series of bipartisan meetings with congressional leaders. Obama’s pitch did little to chip away at that opposition. The speaker, according to several sources briefed on Sunday’s meeting, did not say much during it, deferring instead to House Majority Leader Eric Cantor (R-Va.). But a Boehner aide made it clear after the fact that his boss hadn’t exactly been won over.

“The speaker told the group that he believes a package based on the work of the Biden group is the most viable option at this time for moving forward,” said the aide. “The speaker restated the fundamental principles that must be met for any increase in the debt limit: spending cuts and reforms that are greater than the amount of the increase, restraints on future spending, and no tax hikes.”

And so it went for roughly 75 minutes, as the eight congressional attendees, along with the president and vice president, spoke at varying lengths about not just the economic logic of their respective plans but the political arithmetic behind them.

Cantor and Senator Jon Kyl (R-Ariz.), the Senate minority whip, both insisted that a grand bargain did not have the votes needed to pass. “We should start talking about the Biden-type framework instead,” they added, according to a GOP source briefed on the meeting.

Biden, for his part, reminded the Republican attendees that the package they were now touting was one they had previously abandoned (both Cantor and Kyl walked away from the negotiating table when the talks turned to revenues). Besides that, he argued, it wasn’t really a package at all, but rather a list of goals with blanks requiring filling.

“The one really important point Biden made is that it is a bit of a fallacy to talk about the Biden framework as something that could just be taken off the shelf, because nothing was agreed to in those conversations and the vice president made it very clear that we weren’t going to [reach a deal] without revenues,” said the Democratic official briefed on the meeting.

If lawmakers wanted to go even smaller — say, take the $1 trillion in cuts that Biden and Republicans had pinpointed – they would have to convince the president first. Obama, according to a GOP aide, told attendees on Sunday that he would not sign a debt deal that didn’t go through 2013. He and Biden also made it clear that even the smaller packages would have to have a revenue component to earn their support.

For all the intractability, there were relatively few moments of tension on Sunday evening. According to those briefed on the exchanges, lawmakers took turns talking about their preferred approaches. There were some jabs thrown. Senate Majority Leader Harry Reid (D-Nev.), according to a Hill aide, accused the Republican Party of falling far short of their rhetorical bluster when the topic came to deficit reduction. He pointed to the fiscal commission, the Gang of Six negotiations, the Biden deal and Boehner’s refusal to craft a grand compromise with Obama as instances in which Republicans simply left the table when it came time to make tough choices. “Every time we try to do something big on this, you walk away,” the aide paraphrased him as saying.

By and large, however, the conversation was, as one Democratic official acknowledged, “cordial.” And that may be where the problem lies. With ten days to go before the president wants a bill presented — so that it can go through the legislative process in time to pass by August 2 — the sides are still dealing in broad strokes. Additionally, there isn’t a clear sense of what type of package could garner the necessary support. The president will be hosting a news conference on Monday before he meets with congressional negotiators once more. He left the meeting on Sunday telling them to have their schedules cleared or flexible for the full week.

“The president ended the meeting by saying we will come back here tomorrow and that we should be prepared to be here every day,” recalled the Democratic official briefed on the meeting. “He said, I want people to come back here tomorrow with an answer to the question: If not this, what is your plan and how are you going to get 218 votes [in the House] for it?”

By  Bruce Bartlett, Published: July 7

 

In recent months, the federal debt ceiling — last increased in February 2010 and now standing at $14.3 trillion — has become a matter of national debate and political hysteria. The ceiling must be raised by Aug. 2, Treasury says, or the government will run out of cash. Congressional Republicans counter that they won’t raise the debt limit unless Democrats agree to large budget cuts with no tax increases. President Obama insists that closing tax loopholes must be part of the package. Whom and what to believe in the great debt-limit debate? Here are some misconceptions that get to the heart of the battle.

1. The debt limit is an effective way to control spending and deficits.

Not at all. In 2003, Brian Roseboro, assistant secretary of the Treasury for financial markets, explained it best: “The plain truth is that the debt limit does not affect the deficits or surpluses. The critical revenue and spending decisions are made during the congressional budget process.”

The debt ceiling is a cap on the amount of securities the Treasury can issue, something it does to raise money to pay for government expenses. These expenses, and the deficit they’ve wrought, are a result of past actions by Congress to create entitlement programs, make appropriations and cut taxes. In that sense, raising the debt limit is about paying for past expenses, not controlling future ones. For Congress to refuse to let Treasury raise the cash to pay the bills that Congress itself has run up simply makes no sense.

Some supporters of the debt limit respond that there is virtue in forcing Congress to debate the national debt from time to time. This may have been true in the past, but the Budget Act of 1974 created a process that requires Congress to vote on aggregate levels of spending, revenue and deficits every year, thus making the debt limit redundant.

 

2. Opposition to raising the debt limit is a partisan issue.

Republicans are doing the squawking now because there is a Democrat in the White House. But back when there was a Republican president, Democrats did the squawking. On March 16, 2006, one Democratic senator in particular denounced George W. Bush’s request to raise the debt limit. “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” the senator thundered. “Increasing America’s debt weakens us domestically and internationally. . . . Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.”

That senator was Barack Obama, and he, along with most Democrats, voted against a higher limit that day. It passed only because almost every Republican voted for it, including many who are now among the strongest opponents of a debt-limit increase.

 

3. Financial markets won’t care much if interest payments are just a few days late — a “technical default.”

Some Republicansbelieve that bondholders know they will get their money eventually and will understand that a brief default — just a few days — might be necessary to reduce future deficits. “If a bondholder misses a payment for a day or two or three or four,” Rep. Paul Ryan (R-Wis.) told CNBC in May, “what is more important [is] that you’re putting the government in a materially better position to be able to pay their bonds later on.”

 

This is nothing but wishful thinking. The bond-rating agencies have repeatedly warned that any failure to pay interest or principal on a Treasury security exactly when due could cause the U.S. credit rating to be downgraded, which would push interest rates up as investors demand higher rates to compensate for the increased risk.

J.P. Morgan recently surveyed its clients and asked how much rates would rise if there was a delay in payments, even a very brief one. Domestic investors thought they would go up by 0.37 percentage points, but foreign buyers — who own close to half the publicly held debt — predicted an increase of more than half a percentage point. Any increase in this range would raise Treasury’s borrowing costs by tens of billions of dollars per year.

Some may think that a rise in rates would be temporary. But there was a case back in 1979 when a combination of a failure to increase the debt limit in time and a breakdown of Treasury’s machines for printing checks caused a two-week default. A 1989 academic study found that it raised interest rates by six-tenths of a percentage point for years afterward.

 

4. It’s worth risking default on the debt to prevent a tax increase, given the weak economy.

While Republicans’ concerns about higher taxes are not unreasonable, most economists believe that any fiscal contraction at this time would be dangerous. They note that a large cut in spending back in 1937 brought on a sharp recession, which undermined the recovery the country was making after the Great Depression.

Republicans respond that tax increases are especially harmful to growth. However, they made the same argument in 1982, when Ronald Reagan requested the largest peacetime tax increase in American history, and again in 1993, when Bill Clinton also asked for a large tax boost for deficit reduction. In both cases, conservative economists’ predictions of economic disaster were completely wrong, and strong economic growth followed.

 

5. Obama must accept GOP budget demands because he needs Republican support to raise the debt limit.

Republicans believe they have the president over a barrel. But their hand may be weaker than they think. A number of legal scholars point to Section 4of the 14th Amendment, which says, “The validity of the public debt of the United States . . . shall not be questioned.”

Some scholars, including Michael Abramowicz of George Washington University Law Schooland Garrett Epps of the University of Baltimore Law School, think this passage may make the debt limit unconstitutional because by definition, the limit calls into question the validity of the public debt. Thus Treasury may be able to just ignore the debt limit.

Other scholars, such as Michael McConnell of Stanford Law School, say the 14th Amendment will force Obama to prioritize debt payments and unilaterally slash spending to pay bondholders. But this would involve the violation of laws requiring government spending.

Either way, a failure to raise the debt limit would force the president to break the law. The only question is which one.

 

Bruce Bartlett, a former adviser to President Ronald Reagan and a Treasury official in the George W. Bush administration, is the author of “The New American Economy: The Failure of Reaganomics and a New Way Forward.” He will be online at 11 a.m. on Monday, July 11, to chat. Submit your questions and comments now.

Want to challenge everything you know? Visit our “Five myths” archive, including “Five myths about interest rates,” “Five myths about the Bush tax cuts,” “Five myths about defense spending,” and “Five myths about the deficit.”