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Raising the Debt Limit
I’m not an economist, but the more I try to learn about economics by reading the work of those who are, the more I realize it is a field with wildly different interpretations of the facts and prescriptions for solving the country’s problems. When I read that a failure by the Federal government to increase the nation’s debt limit by August 2 will be disastrous to our economy, I’m not sure whether to believe it. Are these the same people who were oblivious to the housing bubble back in 2004-2007? If so, they don’t have a lot of credibility with me.
Still, common sense tells me that a failure to reach a deal on this – presumably some combination of cuts and revenue increases – will be a bad thing. There won’t be enough money to pay all of the country’s bills and so payments of the money that is available will have to be prioritized. What gets paid first: interest to bond holders or combat pay to a GI in Afghanistan? Where do folks relying on social security fit? It’s all unknown at this point.
What most people want, I suspect, if for the two parties to reach some type of timely compromise: some benefit cuts that the Democrats find unacceptable and some new revenue that Republicans likewise abhor. If no one is satisfied, it’s evidence of a pretty good deal. That’s how our system is designed to work and most often through our history that’s how it has worked. Matt Bai, the New York Times’ chief political analyst in a column this past Sunday, cited New Jersey governor Chris Christie and New York governor Andrew Cuomo, as the two most popular and most successful politicians in America today. Though they come from different political parties and have radically different philosophies of government, both worked with members of the other party to make the tough choices necessary to keep their respective governments working. According to Bai, Governor Cuomo summed it up pretty well when he said voters weren’t as interested in “more government or less” as they were with “effective government or ineffective.”
Because I fully agree with Governor Cuomo’s assessment, I was greatly encouraged last weekend with initial reports that President Obama and Speaker Boehner were close to an historic agreement that would have cut $4 trillion and made major reforms to our tax code and the way our government operates. I suspect I would have disagreed with many of the cuts, but any disappointment was washed away by the hope that the two parties would unite to craft a solution, one that everyone disliked but the best that could be obtained under the circumstances.
But then Speaker Boehner backed away from such a deal and today, Republican Senate leader Mitch McConnell unveiled this backup plan that was both bizarre and barely comprehensible. As I understand it, he says that it’s unacceptable to have the US government default but that his party will not raise the debt ceiling to do that. Instead, McConnell’s proposal cede’s that authority (granted by the Constitution exclusively to Congress) back to the President so that he could raise the debt ceiling, leaving Congressional Republicans to (1) claim they fought against raising the debt ceiling and (2) attack the President for doing what they know is necessary but for which they lack the political courage to do themselves. Here’s McConnell. Please watch it (excusing the ad at the beginning) and see if you understand what he’s talking about:
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Dick, you seem to accept without question the Republican position that raising the debt ceiling requires spending cuts. Congress has already legislated the tax policy and spending items that require the debt ceiling to be raised. Raising the ceiling has always been a non-political issue in the past, as it was recognized as a necessary outcome of previous Congressional decisions. The Republicans are truly holding the nation hostage on this one. And do not be confused, failure to raise the ceiling will in fact be an economic disaster for the US and global economies and the financial markets. It is the last thing we need in the current economic climate.
I completely disagree with the Republican position but that’s their position and they hold one house of Congress so they have to be dealt with. My point here was that bipartisan agreement would be beneficial for the country.
A couple of decades ago, I vividly recall many in Congress decrying our “unconscionable” debt and how we were “mortgaging the future of our children and grandchildren.” Next thing you knew, the Federal government was sitting on a surplus (which, of course, was subsequently squandered by those who cut taxes while paying for two wars but that’s another story).
The debt has to be dealt with, but that’s a long-term problem. The short-term problem is to invigorate the economy. If wages and employment go up, so will revenue. But as George HW Bush once said, claiming that cutting taxes will increase government revenue is “voodoo economics.”
Those who sign the pledge for no net tax increase are ignoring the enormous cost liability that came with the decision to invade Iraq in 2003.
Some people point to waste in the Big Dig – $15B. However, that amount paid for about 6 weeks of the invasion of Iraq, and more than 8 years have gone by since that error. At least the Big Dig money was spent in this economy.
I would be interested in a tax increase if I didn’t think it would be used as an excuse to fund more Federal spending. We can not spend for ever or we will end up like Weimar Germany, with hyper-inflation. That would be ugly.
One thing I find interesting is that now the Republicans appear to be the Keynesians and the Democrats more of the anti-Keynesians. Would Lord Keynes raise taxes at a time like this?
I would say that I am not optimistic that “economists” have figured this out. I do fear that the “quants” down on Wall Street are one step ahead of the economists.
Regards — Cliff
Comparisons to Weimar Germany are inapt. We have no inflation. We could use some. It would be a sign that middle class wages, stagnant for more than a decade, were increasing. That would lead to increased consumption, creating increased demand which would ease unemployment and increase the flow of revenue into the treasury which would then reduce the debt. Right now, the only entity capable of spending is the Federal government and to curtail its spending at this point would further depress the economy. One reason middle class wages have been stagnant is that tax policy has facilitated the greatest transference of wealth in American history from the middle class to the wealthiest. If the so-called new revenues are the result of bringing some fairness to the tax code – I paid more in taxes last year than did Exxon – then all the better.
Would that in a proudly “capitalist” country, the citizenry had a clue on economics and finance. At a minimum, their own. No Virginia, you and your family are not likely ever to face the “death tax”. No Miguel, the marginal rate is just that, all of your income is not taxed at 15% or 28% or whatever your current or prospective bracket. Marginal! And sadly, Liam, social/economic mobility in this country has reversed and you are unlikely, indeed, to enjoy the wealth and tax containment opportunities of that hedge fund manager.
And no, Barack, the Federal budget IS NOT the same as a household budget.
Listening to Democracy Now now (I don’t have the tuner and have been too busy reading this blog to get up and change the channel), Ben is talking about the danger of inflation emerging. But that is just Ben.
Regards — Cliff
If the G W Bush tax cuts of 2002 are so essential, why hasn’t that policy led to a stronger economy today? Haven’t we had enough of a road test on this one? A mature, responsible president in 2001 would have said to the country, “We have been attacked by religious extremists, and we will respond forcefully using every option, from covert military action to good old-fashioned police work to find those who committed the heinous crimes and punish them. This will cost lives and money, and everyone has to help. Some people will sacrifice life and limb in this effort. Others must sacrifice a piece of their wealth. The founders of our nation pledged their ‘lives, fortunes, and sacred honor’ for the cause of independence. We should do no less to protect our nation.” No, instead most Americans got a tax cut and were told to go shopping, and the red blood and red ink flowed.
Paul is right and the way I would hope I would have played the hand at the time. On the other hand, if the job of Terrorists is to shake the foundations of a Government and a People, then the admonition to get back out there and shop might have made some sense at the time. Hunkering down looked like a bad idea. Look at the static that President Bust got for staying away from Washington for a few hours.
But, would we be in this position we are in today if he had not cut taxes? Would the housing bubble have not burst. Would the “quants” on Wall Street not have found new ways to get themselves (and their masters) in trouble? I think I need three more econ courses.
Regards — Cliff
Back in the third week of June, the Congressional Budget Office issued a budget forecast that essentially said the budget would be balanced within five years if Congress just sat on its hands! It was primarily the result of letting the Bush tax cuts expire with a small boost from letting some Medicare reimbursement reductions that Congress passed 15 years ago but have been delaying ever since. To paraphrase a recent investment manager presentation, “Look at the charts, people!” The deficit has two primary drivers: the Bush tax cuts and health care costs. Everything else, with the exception of the defense budget (GWB – let’s cut taxes and invade two countrys!), is small change. And don’t get me started on Alan Greenspan’s responsibility for the housing bubble or Ronald Reagan’s responsibility for building an economy based on expanding debt, but public and private.
The latest Quinnipiac Poll shows the public turning on the Republicans in this tug of war over setting a new debt ceiling. Also shows strong support for collecting more tax money from the wealthy. The poll respondents also hold G W Bush responsible for the Great Recession. Maybe the public gets it after all. Here’s a news report with figures from the Palm Beach Post in Florida. http://www.palmbeachpost.com/news/state/quinnipiac-poll-americans-favor-obama-dems-over-gop-1609697.html
A President and Senate who haven’t submitted a budget in two years is the reasonable ones? You’re joking, right? Say what you will about the House GOP’ers and even the Tea Party zealots, but at least they’re willing to put their money where their mouths are. They know damn well they’re going to get hammered for even hinting at touching the Social Security and Medicare sacred cows yet do it anyway. Where is the leadership in not proposing a budget for two years, then insisting on tax raises you know don’t stand a chance in hell of passing the House? THAT is politicking and class warfare at its best, not “reasonbale leadership”
I am amazed at the disingenuous logic of the no new taxes mantra of the Republicans. Is it not a tax on the middle class when college fees increase? Is it not a tax increase when a teacher, firefighter, soldier, govt. employee loses hours, benefits, salary due to a cut in funding. And it will certainly be a ‘tax’ when interest rates increase on small business loans if we default. These are taxes with real impacts on the spending, income and investment capacity of the average US citizen. When Republicans scream no new taxes they have only the interest of the most wealthy of Americans in mind, themselves included. There is no way out of this, the is no way to a balanced budget without shared pain.