A few thoughts on the debt ceiling

by on May 16, 2011 at 12:26 pm in Current Affairs, Political Science | Permalink

This topic is so laden with “us vs. them” thinking that I am loathe to approach it.  Still, here are a few thoughts:

1. There is plenty in the federal budget which can be cut and should be cut, starting with farm subsidies but extending considerably further.

2. In blackmailing President Obama (and arguably the Senate too), the House Republicans are cowards.  They want him to take the heat for the spending cuts.

3. In considering the blackmail to be blackmail, the Obama administration has its share of cowards.  “You are forcing us to propose something we believe in” is not that serious a negative charge, even if the motives of the forcers are ignoble.  That said, the Obama administration is probably not going to propose something it believes in, which makes them ignoble too.

4. “Blackmail” is also known as “checks and balances” and it does not, normatively speaking, require an electoral mandate.  That said, arguably the House Republicans do have an electoral mandate for the idea of “doing something about the crummy budget,” but do not have a mandate for particular cuts which might be prompted.  Which of these is the “fact of the matter” is a moot point.

5. In my view the consequences of “funny debt ceiling outcomes” could be very, very bad.  Various crude causal theories, or underspecified bargaining theory axioms, will be used to apportion this blame to one side or the other.  The naive causal perspective would seem to apportion most of the blame for the chance of catastrophe to the Republicans.

6. By refusing to raise income tax rates on the non-wealthy, or to propose some comparably unpopular reforms, the Obama administration is somewhat undoing the normative relevance of the naive causal perspective here.  The Obama administration is also stonewalling on (required) further fiscal reforms to Medicare, to better use the issue against the Republicans.

7. Do we take market prices seriously?  Since Treasury rates are still low, low, low, arguably we can infer that the market does not think the Republican stance is so catastrophic.  Paul Krugman does not take a consistent position on the relevance of low rates.  They are allowed to indicate that the U.S. government should spend more, but not allowed to indicate that we should diminish the blame to be leveled at Republicans.  One cannot have it both ways.

Addendum: Megan McArdle comments.

1 foosion May 16, 2011 at 12:40 pm

6 – there are (at least) two ways to cut Medicare, you can shift the burden to seniors (possibly increasing total costs in the process – see CBO analysis of Ryan plan) or you can cut healthcare costs. Obama has multiple proposals to cut healthcare costs by making it more efficient. Your post conflates the two methods.

7 – perhaps the bond market thinks the government will do what it always has done – raise the debt ceiling in time. Cutting spending will likely slow growth, which is usually good for bonds, so the bond market should be fine in any event. If equity markets dive, that will be the Republican’s fault.

2 Jim May 16, 2011 at 12:44 pm

“the House Republicans are cowards.”

Also, racist. Don’t forget racist.

There is precisely nothing cowardly about refusing to raise the debt ceiling without real spending cuts. Indeed, to coin a phrase, this is the first time in my adult lifetime that I’ve been proud of the US Congress.

3 Andrew Edwards May 16, 2011 at 12:46 pm

They are threatening to totally nuke the economy unless they get what they want (massive cuts without tax increases).

“Proud” is an interesting choice of words.

4 The Anti-Gnostic May 16, 2011 at 1:21 pm

“Totally nuke the economy” is an interesting choice of words as well, since it implies a huge government presence in what is nominally a free market. An economy of net tax consumers is not sustainable.

Really the country appears no better off than the schlep in the credit card doom loop, forever raising his credit limits and extending repayment. At some point default will be the better option.

5 Andrew Edwards May 16, 2011 at 2:16 pm

No, default will always be a worse option, and would be apocalyptic for the world economy. So sayeth literally everyone familiar with financial markets.

I would argue that providing a simple basically-risk-free financial asset is one of the things that the government does which enables a functioning financial market. (Like enforcing property rights and contracting) But even setting that aside, default is completely crazy.

6 The Anti-Gnostic May 16, 2011 at 2:53 pm

There’s no such thing as a “basically-risk-free financial asset,” particularly one that can just be printed up by the government. In fact, it’s a vector for non-systemic risk to become systemic risk.

7 Floccina May 16, 2011 at 3:54 pm

I would argue that providing a simple basically-risk-free financial asset is one of the things that the government does which enables a functioning financial market.

1. No asset is risk free even t-bills are subject to inflation risk.
2. It could be a bad thing that low risk Government cash and bonds out compete other low assets in a downturn. So while low risk Gov bonds and cash may facilitate markets there may be a downside and it hard to say for sure that the upside is bigger that the downside.

Never the less I would vote to raise the limit.

8 Andrew May 17, 2011 at 6:33 am

They don’t actually know. Although they are probably right. But they are speaking out of fear and ignorance. The point is that the Republicans didn’t by themselves get us to this point. The system that all have wrought got us to the point where default or threat of default is imminent. So, to an extent, people demagoguing the Republicans are just shooting the messenger.

9 Tom May 16, 2011 at 1:49 pm

I would say they’d be nuking the economy by NOTmaking massive cuts.

10 Andrew' May 16, 2011 at 3:47 pm

Only because the government is dependent on rolling over debt. They are Lehman Brothers, they just don’t know it yet.

11 Andrew May 17, 2011 at 6:35 am

“Raising the limit” may be what must be done in the idiotic logistics of how these clowns created the way debt is handled, but kicking the can down the road just does to us what my old friend said of 4-wheel drive trucks, they just get you stuck deeper in the woods.

12 Andrew Edwards May 16, 2011 at 12:44 pm

Excellent and balanced comments, I think. Tyler nicely done overall.

13 Kevin May 16, 2011 at 12:48 pm

How bad would a technical default be? I’m leaning toward the view of Stanley Druckenmiller in this weekend’s WSJ http://online.wsj.com/article/SB10001424052748703864204576317612323790964.html

Any default should be interepreted as merely a delay; nothing seems to change about the fundamental ability of government to pay off the debt (it may even be interpreted as a positive signal that the pols are willing to go to the mat on the budget). Further, the instant the markets do start to panic, there will be an extremely strong motivation for both sides to sign a deal. This makes me think that the downside is not all that bad. I’m not sure what the best case scenario is, though, as I doubt the Republicans will get meaningful change on entitlements.

14 Hyena May 16, 2011 at 1:19 pm

It wouldbe very bad. It means that Treasury would not pay the coupon on its bonds, resulting in immediate losses which could reach hundreds of billions of dollars, forcing firms to unwind positions and incur further losses.

15 Cyrus May 16, 2011 at 2:14 pm

So technical default is the backdoor approach to repealing TARP?

16 Simon K May 16, 2011 at 3:16 pm

No, because the banks paid out the gains from TARP to their equity-holders and employees. Any losses from a technical default, they’ll pass on to their account holders where possible.

17 sardonic_sob May 16, 2011 at 4:33 pm

The GAO has stated that Treasury has discretion to order payments. If they maintain discretionary spending in lieu of meeting debt obligations, it is because the President wants them to, period, full stop.

18 Andrew May 17, 2011 at 6:38 am

The problem with paying the debt through The Fed is that all those dollars must be paid back with interest. This problem is bigger than almost anyone is recognizing.

19 farmer May 16, 2011 at 12:49 pm

why on earth get rid of farm subsidies? it is a lynch-pin, along with the standing army, of a “ready for anything” approach on a national level.

20 j r May 16, 2011 at 1:22 pm

Exactly what does a glut of cheap corn and soy beans get us “ready for”?

21 The Anti-Gnostic May 16, 2011 at 1:33 pm

Socialized medical care for all the fat Americans.

22 Colin May 16, 2011 at 2:03 pm

Red Dawn.

23 DaveyNC May 16, 2011 at 8:08 pm

Farm subsidies, specifically ethanol subsidies, hold the key to getting votes in the Iowa caucasususus. That’s why they are there.

24 Andrew May 17, 2011 at 6:40 am

Plausible, but I suspect subsidies for mechanized monoculture farming is exactly the opposite of agriculture robustness.

25 Andrew May 17, 2011 at 6:45 am

We must assume that the current incentives have given us what we’ve gotten: industrial mega-farms with pretty unsustainable practices in a hypothetical war-time scenario where global division of labor breaks down. I don’t think this is what you’d design from scratch if your objective was a sustainable and (more importantly) robust food supply. Mostly, I think we produce food because of our fertile land and not so much because of government coddling the industry.

26 K May 16, 2011 at 12:51 pm

7. Since Treasury rates are still low, low, low, arguably we can infer that the market does not think the Republican threats are credible.  So Krugman is right to argue that the White House should just ignore them.

27 Walter McGrain May 16, 2011 at 12:51 pm

As always, a heroic compromise will be reached where taxes are cut and spending is raised. Everybody wins.

28 Rich Berger May 16, 2011 at 12:55 pm

Of course the Republicans will take the heat for spending cuts, not Obama. He will simply compare them to hostage takers, like he did last December. If you are going to be blamed no matter what, you might as well make it worth your while.

4. If you identify specific cuts, you mobilize the constituencies who will be losing and the news will be filled with sob stories. Governor Christie has shown the correct way to proceed – cut across the board. Get the taxpayers behind you and let the (real) “special interests” whine and bitch.

The showdown is coming between two philosophies – the idea that there should be no limit on the cost of government – benefits now, check later, and the idea that there should be a limit on what is spent and the government decides how to spend its budget.

29 Brian J May 16, 2011 at 11:44 pm

They are acting like hostage takers. Thus, they shouldn’t be surprised when they are compared to them.

30 Thomas May 16, 2011 at 1:00 pm

2 seems off to me. Republicans want to take credit for spending cuts, because they believe 1. Republicans want to share credit with Obama. But does Obama agree with 1?

In any case, all of these discussions make an important but inaccurate assumption, which is that Democrats favor a “clean” increase in the debt ceiling. Does anyone believe that the Democrats in the House intend to vote for a debt ceiling increase? They don’t. The Senate is a different situation, but not much. The Senate hasn’t acted to raise the debt ceiling either, despite having a Democratic majority, and it isn’t the threat of filibuster slowing them down. A significant number of Democratic Senators will not vote for a clean increase.

I think that, as an electoral matter, the right thing for Republicans to do is to simply abstain on the vote, and let Democrats supply all the votes in favor. I’m sure Tyler would see that as a courageous move all around. And a huge political win for Democrats, who no longer would need to take the blame for any cuts.

31 chris May 16, 2011 at 1:01 pm

“2. In blackmailing President Obama (and arguably the Senate too), the House Republicans are cowards. They want him to take the heat for the spending cuts.”

How so? They are the ones demanding cuts and have actually passed a budget with the cuts….they are taking credit for the cuts. Agree or disagree with the Ryan Plan….it is certainly not the path of least resistance politically. How is that wanting Obama to take the heat ?

32 bjartur May 16, 2011 at 5:31 pm

Chris and Thomas nail the flaw in #2. Tyler should address this.
Also, the “blackmail”/”cowards” hyperbole is inaccurate and counterproductive, Tyler almost admits as much in #3 and #4.
Tyler describes refusing to vote for an increase in the use of force to extract people’s money against their will as “blackmail”; this is flippantly Orwellian.

33 Brian J May 16, 2011 at 11:49 pm

It’s very easy to do everything you want and then take credit for doing everything you want. If the Democrats controlled the House and passed a bill doing just what they wanted, either only raising taxes or mostly raising taxes, you wouldn’t be praising them if they claimed they would do nothing else.

34 John Thacker May 19, 2011 at 3:59 pm

“If the Democrats controlled the House and passed a bill doing just what they wanted, either only raising taxes or mostly raising taxes, you wouldn’t be praising them if they claimed they would do nothing else.”

It would be perfectly fair to criticize them on policy grounds then, just as it’s perfectly fair to criticize the House Republicans on policy grounds. But criticizing the House Republicans as cowards is ludicrous, and the reverse of the truth.

But the Democrats control the Senate and their Committee Chair hasn’t even proposed a budget, much less passed one.

If anyone is sitting back and criticizing without providing their own solution, it’s the Senate Democrats, not the House Republicans. The Republicans have bitten the bullet and proposed a (no doubt flawed) budget. The Senate Democrats are afraid to raise taxes, afraid to cut spending, and afraid to pass a budget with enormous deficits for the foreseeable future. They are the cowards.

If they proposed a budget, I might call them wrong (like the People’s Budget of some of the House Democrats), but I wouldn’t call them cowards.

35 Brian J May 16, 2011 at 1:05 pm

“5. In my view the consequences of “funny debt ceiling outcomes” could be very, very bad. Various crude causal theories, or underspecified bargaining theory axioms, will be used to apportion this blame to one side or the other. The naive causal perspective would seem to apportion most of the blame for the chance of catastrophe to the Republicans.”

When’s the last time a debt ceiling increase was tied to specific spending cuts or something similar? A vote against it in the past was usually a vote to embarrass the other party, but nothing more. This “naive casual perspective” you speak of gives most of the blame to the Republicans because they are doing something unreasonable.

“6. By refusing to raise income tax rates on the non-wealthy, or to propose some comparably unpopular reforms, the Obama administration is somewhat undoing the normative relevance of the naive causal perspective here. The Obama administration is also stonewalling on (required) further fiscal reforms to Medicare, to better use the issue against the Republicans.”

What’s the point of proposing to raise taxes on any group besides the rich if the Republicans won’t agree to raise any taxes at all?

Then again, part of me suspects the Obama administration is just waiting until all of them expire, at which point some sort of tax reform talks will take place. After all, why take the political heat when, if we do nothing, the tax cuts will expire on their own?

36 Jason May 16, 2011 at 1:15 pm

I’m not sure if the market signals and the blame in #7 mean the same thing. Looking at it from the point of view where interest rates signal debt risk, they seem to indicate the market is all but certain someone is going to cave in on the debt ceiling. Matt Yglesias put the negotiation thus: Obama, the Democrats and the Republicans all want to raise the debt ceiling, so the obvious compromise solution is to raise the debt ceiling — and the markets (assuming they are pricing this risk) are fairly sure of that right now. Adding roadblocks doing what everyone wants to do can be the object of blame regardless if we believe they will eventually cave in.

Imagine two people are in a life raft with a hole. One guy has the patch, one the glue. Can the guy with the glue extract concessions?

37 msgkings May 16, 2011 at 3:28 pm

Depends on how crazy/stupid/obstinate the glue guy is.

38 Jason May 16, 2011 at 9:08 pm

Most definitely.

39 John May 16, 2011 at 1:18 pm

I don’t see this quite in the same terms. It’s a political maneuvre where the Republicans are attempting to make a bargaining chip out of thin air, and hope for a ‘compromise’ which will look good for them (because they ‘fought for their principles’), with a downside risk that’s not that bad (receiving minimal concessions and passing the ceiling increase). From the Democrats’ perspective, the risk is that the Republicans will net positive P.R. from their gambit, so they need to do everything possible to make this look bad for them P.R.-wise. The thing that would probably look best for the Republicans is a compromise, so they really just need to keep the troops in line and pass the ceiling increase with minimal concessions.

I’m just glad markets aren’t worried, or I would be somewhat annoyed with the Republicans for choosing an ultimatum game with potentially catastrophic downside risk.

40 msgkings May 16, 2011 at 3:33 pm

What’s funny about all this is how little 95% of the electorate is paying attention to all the maneuvering we are discussing.

41 B.B. May 16, 2011 at 1:19 pm

Didn’t Senator Obama know the presidency was a hard job when he chose to seek it? Did he not understand its responsbilities? Alas. Hope and Change is not a policy.

The President’s own budget, as scored by CBO, never, ever has the budget deficit dropping below 4.1% of GDP, which is larger than the deficit in any full fiscal year of the Bush Administration. The deficit in FY 2021 would be $1.2 trillion, even with “full employment.” And those estimates include his tax hikes on “the rich” and taking away tax breaks from those greedy oil companies and higher corporate taxes, and include the wonder efficiencies of ObamaCare.

President Obama has no plan to reduce the deficit to sustainable levels in the short, medium, or long terms. I am not saying that his plan is flawed; I am saying he has no plan. This from a lawyer who campaigned on how reckless and terrible the Bush deficits were. Revealed choice tells me that he does not care are the deficit as long he can spend what he pleases. The Republicans are right to tell the President, “you have an obligation to lead, and leading means submitting a responsible budget plan.” As the Marines say, “do something: lead, follow, or get out of the way.”

Reagan had a “starve the beast” policy, in which tax cuts caused budget deficits which force spending cuts. Didn’t exactly work out, but that was the idea. Obama has a “feed the beast” policy, in which he spends as much as he can to create a permanently larger government, supported by large interest groups. Because it will seem impossible to cut all that spending, avoiding default will force large tax hikes by his successors in the presidency. That is not a bug, it is a feature. I salute the Tea Party and the new Republicans for refusing to play such a cynical game.

I will support some broad-based tax hikes (I suggest a $4/gal gasoline tax) if the revenues would reduce the deficit. But if all they do is pay for a larger government, I see no point.

Default may be rational from a public choice perspective. If the government must exit the credit market, that will create a true balanced budget requirement, unlike some silly constitutional amendment.

42 K May 16, 2011 at 1:30 pm

Of course, 4.1% deficit will do just fine, since it will reduce debt to GDP by 0.9% annually assuming 5% equilibrium NGDP growth.  Just saying.

43 Zach May 16, 2011 at 9:01 pm

“in any full fiscal year of the Bush Administration.”

That’s an excellent turn of phrase, absolving Bush of responsibility for FY2009, which was government by his budget and saw the largest single-year deficit since WWII. Of course some of it comes from (mostly tax cuts) the stimulus, but it’s not like President McCain would’ve had a smaller stimulus or one that wasn’t even more front loaded with tax cuts.

44 Thomas May 16, 2011 at 11:17 pm

Wasn’t the deficit actually larger the following year, if you treat TARP consistently both years?

45 Brian J May 16, 2011 at 11:51 pm

The difference between structural and cyclical deficits seems to be lost on you.

46 Hyena May 16, 2011 at 1:25 pm

Obama’s refusal to propose unpopular reforms is probably wise. Obama is a true national figure where a large, diverse electorate will respond. Senators and Representatives, by contrast, are relatively local figures regardless of what role they play in policy or in the media. It is much less risky for them to make unpopular proposals than it is for Obama because they are usually answerable to a more politically homogeneous group”

47 Right Wing-nut May 16, 2011 at 1:50 pm


It’s the other way around. A national figure has the ability to reach all for the good of all. The KS polytician can be all for cuts, but you know how the entire country depends on agriculture, so it needs special treatment. The NYC poly understands that the economy can survive without such subsidies, but the financial sector–now THAT requires special treatment. The man from Detroit knows that that’s just silly, it manufacturing, especially automobiles which are truly leveraged in our economy.


48 Octahedron May 16, 2011 at 1:32 pm

Nice reasoned thoughts probably the best I’ve read so far. It’s really irritating that the president is continuing to dance around the issue of entitlements considering how much they’re supposed to continue to increasing throughout the century. Instead of proposing something substantial he’s just putting all the blame on the Republicans(and lying about them wanting to destroy it).

49 Brian J May 16, 2011 at 11:52 pm

The Affordable Care Act took the biggest time bomb, the Medicare program, head on. It’s not clear what will work and what won’t work, and further reforms are certainly necessary if what I’ve read is any indication, but it was a great first step. The Republicans opposed it every step of the way.

50 Tom May 17, 2011 at 11:43 am

As they should. All ACA did was to shorten the fuse to the bomb.

51 Brian J May 17, 2011 at 3:43 pm


52 kb May 16, 2011 at 1:37 pm

i’m a farmer (rancher, logger) and i can totally tell you: get rid of all subsidies

53 Philo May 16, 2011 at 1:43 pm

The dictionary suggests that you should drop the ‘e’ from ‘loathe’.

54 E. Barandiaran May 16, 2011 at 1:44 pm

# 7 is the only relevant point. Markets are still taking the conflict as a fight between DB’s fraudulent clowns. Let us hope that this fight doesn’t extend to the bleachers (although we can see a lot of off-duty scholars in the bleachers writing inflammatory columns and shouting provocative slogans).

55 Ed May 16, 2011 at 1:54 pm

At the time of the election, I think I commented that the Democrats’ retention of the Senate (an accident of only a third of the Senate being up for election in a given year) would turn out to have a disproportionate effect, because it would make it harder to cut a deal. Essentially the White House doesn’t have the option of selling the Congressional Democrats down the river by doing a deal with the Congressional Republicans. We did have a similar situation in the 1980s (presidential party in control of the Senate but not the House), but of course no threat of default, and the Senate Republicans were positioned politically between the House Democrats and the White House, so more willing to sign off on a deal. In this situation , past statements indicate that the White House is more likely to agree to repeal entitlements than the Senate Democrats.

If you ignore the political arguments, and simply treat the vote not to raise the debt ceiling as a vote for default, this may be a good idea. If the US really is close to default, its probably better to do so now and get it out of the way, then to extend and pretend and default a decade later. There is a point where a system becomes tangled enough to make reform impossible, and once that happens keeping it alive for a little longer simply means you are forcing another generation to learn how to work within a failed system. Also, defaults have sometimes benefited the defaulting country, because they had really gotten to the point where it was the only feasible way to clean up the debt.

And keep in mind pensions are debt, if you stop paying pensions to be able to pay bondholders, you should why you are keeping promises towards one group and not the other. Why not the reverse?

56 chris May 16, 2011 at 2:22 pm

Essentially the White House doesn’t have the option of selling the Congressional Democrats down the river by doing a deal with the Congressional Republicans.

No, but the congressional Democrats do have the option of making a deal with the congressional Republicans whether Obama likes it or not. After talking up the importance of the debt limit he can’t very well turn around and veto a bipartisan bill that his own party agreed to — and even if he did, with enough of both parties in Congress on board, he could be overridden.

Obama is worried because Presidents are often irrationally blamed for events far out of their control, but he’s not a real power player in this scenario. If Boehner, Pelosi, Reid, and McConnell came to terms and could deliver enough of their respective caucuses, Obama wouldn’t need to be in the room. And if you accept that Obama can’t afford to veto a bipartisan bill, then Pelosi is unnecessary and McConnell only needs to pledge not to filibuster.

“You are forcing us to propose something we believe in” is not that serious a negative charge, even if the motives of the forcers are ignoble.

The Obama Administration doesn’t believe in large immediate spending cuts (especially during a recession — whether or not you personally agree with Keynesianism, it’s clear that *they* believe in it). Therefore, demanding that the Administration propose large immediate spending cuts (and the Reps are very clear that they won’t consider deficit reduction via tax increase, or even via closing tax loopholes) is demanding that the Administration propose something they *don’t* believe in.

They don’t want the President to propose a budget HE believes in, they want him to propose a budget THEY can believe in — something they can’t even do themselves! (The Ryan plan fails the latest Republican demands for concessions in exchange for a debt ceiling increase, even granted all the economic miracles assumed into it.)

57 Thomas May 16, 2011 at 3:54 pm

You think that the Obama administration favors expansionary fiscal policy via spending during a recession, but would be willing to consider contractionary fiscal policy via tax increases. Why pretend that stimulating growth has anything to do with their goals at all? I’d rather think them dishonest than stupid.

58 chris May 17, 2011 at 9:34 am

You think that the Obama administration favors expansionary fiscal policy via spending during a recession, but would be willing to consider contractionary fiscal policy via tax increases.

Well, there’s a big difference in multiplier (especially for loophole-closing), but still, there is some point to this. The administration would probably ask for some tax increases to be phased in rather than imposed immediately. After all, they did support temporary extension of the Bush tax cuts. But since the “standard” way of talking about deficits now is over 10 years, there’s plenty of room to phase in tax cuts and have them address the medium-term deficit without stepping too hard on the prospects for recovery in the next few years.

But it’s rather academic when the Republicans are unwilling to consider any tax increase, immediate or delayed, regardless of incidence.

Why pretend that stimulating growth has anything to do with their goals at all?

Because almost everybody who knows anything about political science says the state of the economy in a year is the strongest factor affecting Obama’s reelection chances? Even if you assume everything he does is in bad faith, he still wants to be reelected so he can keep doing it.

59 MikeDC May 16, 2011 at 2:10 pm

Before we take market prices seriously, we have to understand the market. Well, who are the major buyers in the Treasury market? Is the Fed really going to sit there and let a major default occur? Will it not simply tell its constituent banks to buy up the newly issued T-Bills, and we’ll buy them from you and give you cash. Oh, and we’ll pay you interest on that cash even if you just let it sit here.This will be pretty easy for the Fed to do, since it’s already what the Fed is doing.

I don’t see a big jump in interest rates without the Fed implementing a major policy shift. As it stands, my understanding is they control enough of the treasury market to ensure even if Bill Gross, China, Japan or your local boy scout troop decides not to buy new treasuries, there will still be a substantial market for them.

60 The Anti-Gnostic May 16, 2011 at 2:35 pm

Yes, it’s nice when you can lower your borrowing costs by printing money and buying your debt with it.

61 Gabe May 16, 2011 at 3:28 pm

That is a conspiracy theory. We have free markets in this country. the bond market is not manipulated by the government! This is free market cpitalism at its best.

62 Barkley Rosser May 16, 2011 at 2:15 pm

Well, what if there is no deal and the president orders the Secretary of the Treasury to just keep on paying bills as they come due? After all, without a deal, the Secretary has no guidance in what to pay and what not to pay (presumably we are not going to see a complete cessation of all payments). When it goes to court, he can argue that in fact the Congress is itself in a contradiction, having authorized a budget that violates the debt limit without providing any instructions as to what to do when the limit is hit and the budget they have passed cannot be paid for.

So, some would say, “eeeeek! We are not enforcing the law!” But, heck, adultery is against the law in about half the states, and that is a law that is almost never enforced anywhere. On top of which, no other country has such a legal debt limit. Blowing by it and ignoring may effectuate what is really most needed here, to eliminate this anachronistic absurdity first put in place back in 1917.

63 E. Barandiaran May 16, 2011 at 5:33 pm

Be careful what you wish for.
You may end with
1. Sgt. Barack as a leader of a death panel to reduce health care consumption (he may even consider Sarah P. as the panel’s co-chairwoman). I was told that now anyone over 75 looks to him like OBL.
2. Secretary Tim Geithner back in the IMF not to pay taxes, or in a NYC’s police station to chat with IMF’s Executive Director about how to implement SOFITEL’s austerity with or without debt restructuring. Hope you like fiscal adjustment with a French flair.
3. Constitutional Law Scholar Joe Biden (the one that was last in his class) forcing you to read Alan Feld, “The Shrunken Power of the Purse” (Boston Law Review, 2009). To practice you can repeat Article I, Section 8 at least 100 times.

64 Serial Buttocks Fondler May 16, 2011 at 9:58 pm

Hey Barkely, shut the fuck up!

65 dirk May 16, 2011 at 2:28 pm

7. Can treasury rates be considered market rates right now while the Fed is purchasing most of the treasuries?

66 Gabe May 16, 2011 at 7:20 pm

You are probably a birther. The Fed does not monetize debt!

67 David E May 16, 2011 at 2:43 pm

The administration has made clear that its policy is
1) Say we need to control spending
2) Actually propose and when possible institute massive spending increases
3) Demigogue the Republicans when they propose controlling spending (autistic children, mediscare, etc)
4) Only agree to control spending when forced to by Republicans

Under these circumstances isn’t it reasonable that Republicans use what leverage they have to get the administration to agree to spending limits?

68 Tom O May 16, 2011 at 2:46 pm

As a liberal in the financial services industry, I am often in the minority and bring a different perspective to matters that are usually argued only from a conservative framework. Let’s try a thought experiment:

Let’s pretend that a hypothetical liberal majority in the House decided to oppose raising the debt limit on a Republican President and Senate unless they both agreed to:

1. Pass single pay health care (Medicare for all).
2. Remove the income cap on Social Security contributions.
3. Raise marginal tax rates to what they were in 1998.
4. Reinstate an indexed inheritance estate taxes ranging up to 50% on estates over $5,000,000.

Leaving aside the relative merits of these issues, I am curious if those of you supporting the attempts of the Right to impose their agenda on America would feel the same if the shoe was on the other foot.

I am with Krugman on this one. If Obama allows a narrow majority of the House to hold the economy hostage to their particular agenda on this issue, he will irreparably damage his Presidency, and allow a pernicious precedent to be established.

69 The Anti-Gnostic May 16, 2011 at 3:00 pm

Again, if “the economy” is utterly dependent on the US continually obligating its net tax payors to ever-increasing levels of debt, then the US is no better off than the schlep who’s underwater on his mortgage and transferring balances among credit cards. He just needs to go bankrupt and start over while he still has some productive years left.

70 Tom O May 16, 2011 at 3:38 pm

I don’t really disagree with you there, and in fact the hypothetical I proposed (excepting the Medicare part, maybe) would very likely do more to reduce the structural deficit than any savings from the Ryan plan. It’s certainly a much better alternative than the default-bankruptcy-depression route you seem to be proposing.

My point is that trying to negotiate huge changes in the tax and social welfare system over the span of a few weeks by threatening financial Armageddon is deeply irresponsible no matter which party does it.

If this does work for the right, it will also work for the left. Is that how you want the Country to operate.?

71 The Anti-Gnostic May 16, 2011 at 4:19 pm

I think sovereign default is one of the government’s hobgoblins that everybody is supposed to be terrified about. Historically, it’s not that uncommon and, like the guy walking away from his underwater mortgage, it’s actually a shot in the arm. We’re all supposed to be horrified that the government can’t borrow money (essentially siphoning off capital from the rest of us) but I’m really not seeing the downside at this point. If the debt limit has to be raised just to pay bills, we’re sunk already.

72 MikeDC May 16, 2011 at 4:28 pm

As a practical matter, the progressive/socialist sort of solution can’t work because economies don’t work the way socialists think they do. We’ll get worsening health care which is still too expensive, worsening labor conditions, and a more stagnant economy.

As a purely political matter, the you get to the heart of the matter when you say that “trying to negotiate huge changes in the tax and social welfare system over the span of a few weeks by threatening financial Armageddon is deeply irresponsible no matter which party does it.”

A negotiation, by definition, requires two sides. Whether one agrees or disagrees with the Ryan plan, it does seem to represent an earnest attempt put forth a solution. Consider it a starting offer in negotiations. The problem, as I see it, is that the “other side” in the negotiations has neither presented a plan nor really even come to the table.

The President is traditionally the agenda-setter for his party, and he basically wouldn’t touch the recommendations of the commission he appointed with a ten-foot pole. The Progressive Caucas recently put forth a plan that, as best I can tell, was not not adopted by the President, and despite a variety of tax increases, did little to close the structural deficit.

In short, we’ve all known the financial Armageddon is coming, and a solution needs to be negotiated that’s amenable to both sides. Our politicians need to quit being douches for long enough to negotiate in relative good faith on an issue of actual national import. One side has put forth a coherent statement of their agenda, and are pushing it. The other side has, as best as I can tell, put forth nothing and refuses any meaningful negotiation.

73 Tom O May 16, 2011 at 6:06 pm

It’s really hard to have a serious discussion with someone who conflates “Democrat” with ‘Socialist”. As to health care cost/efficiency under different political systems, the facts would seem to disagree with you according the the WHO.

Do you really take the Republican plan as a serious negotiating position? No tax increases, more tax cuts for the wealthy and trillions of dollars of cuts to services for the poor, with the alternative being immediate financial Armageddon? Would you accept as legitimate my side taking an identical scorched earth approach in an attempt to ram our agenda down the country’s throat?

74 Don K May 16, 2011 at 6:27 pm

Well, I agree negotiation would be a good thing, but the Republicans have shown over the last two and a half years that they view compromise as equivalent to capitulation, and that the only compromise they will accept from Democrats is capitulation. In the development of the medical-insurance plan, Democrats began with a pretty modest plan, then continually gave in to Republican demands (even the silly no paying for discussion of end-of-life planning, aka death panels), and in response the Republicans continually moved the goal line. It’s kind of like selling one’s house, agreeing to a bidder’s offer, then having him come back demanding you leave behind the furniture and decorations, pay for new landscaping, and oh yeah, a pool would be really nice.

In the present situation, not increasing any tax, anytime, is non-negotiable. The principle of no reduction in defense spending is non-negotiable. What you’re left with is arguing how large the cuts should be on education, transportation, Medicaid, etc. With regard to the Ryan plan for Medicare, one side does have to capitulate on how medical care for the elderly will be paid for. If the Democrats capitulate on the voucher plan, then the only argument will be over annual indexing of the size of the voucher (i.e., how long does it take for the voucher to become completely inadequate to pay for anything more than basic “yep, you’re really sick, sucks to be you, have a nice death” health insurance). The only alternative would be for the Republicans to capitulate and agree that Medicare ought to continue to exist in more or less its present form, and agree to negotiate means to restrain the growth in medical costs. I don’t see that happening anytime soon.

75 Brian J May 17, 2011 at 12:18 am

That’s ridiculous.

As Tom said, imagine the Democratic equivalent to the Ryan plan. That wouldn’t be the People’s Budget from the House Progressive Caucus, but something that raised the highest marginal tax rate on not only income but on capital gains and dividends up to 80 percent. The posters here would be fuming, and rightfully so.

76 MikeDC May 17, 2011 at 10:17 am

Tom O – If it’s so easy, to distinguish them, please do so.

Regarding the plan, as I said, I regard having a plan as a good point of departure. The Republicans have a plan. Clearly, you don’t like it. I understand that. I don’t agree with all of it although I probably agree with more of it than I would the equivalent Democratic plan.

However, yes, a meaningful negotiation needs to have a starting point. The Ryan plan is a is a legitimate one, just as a thought out proposal from the Democrats that credibly put us on a sustainable fiscal track would be a legitimate starting point. All the talk of scorched earth and ramming agendas down throats overlooks the fact that there have been no actual negotiations and the democrats have proposed no starting point of their own. That is, failing to propose a plan and refusing to engage in negotiations appears is a sort of escalation of the issue and ramming an agenda down a throat too.

77 MikeDC May 17, 2011 at 10:31 am

Brian J-
I wouldn’t be fuming, I’d take it as a starting point. Were it an honest negotiation, there are parts of the “People’s Budget” I’d be willing to agree to if they would be willing to agree to parts of the Ryan plan. Because once the theatrics are stripped out, that’s what has to happen in order to get a deal done.

Also, why would a broadly supported Democratic plan would impose that much more in the way of taxes than the People’s Budget? The latter reflects the thinking of the leftward edge of the Democratic party, so I take that to be the absolute maximum that they believe they can go out and raise additional revenue with taxes.

To me, that underscores the basic realities of the issue. The best case from raising “taxes on the rich”, as put forth by people who actually believe it’s the right thing to do, demonstrates it’s not enough, by itself, to put us on a sustainable path. I think this is why the Democrats are hesitant to release a plan with workable numbers.

78 Veridical Driver May 16, 2011 at 11:42 pm

Defaulting on debt isn’t “Financial Armageddon”… It is “Political Armageddon”. The economy will survive just fine… what will die, is the political class, both left and right, who survive by trading money for votes. The kelptocrracy won’t be able to borrow money to win elections. It is a death sentence for the Democrats and Republicans.

79 Rich Berger May 16, 2011 at 3:50 pm

Given that a Democratic majority did only 1 (and that in the face of mounting public opposition) I would guess that their poll numbers would quickly change their (collective) minds.

80 Gabe May 16, 2011 at 7:26 pm

It would be great if either party would help shut down the government. It would be great if either party could damage the presidency. it would be great if either party could end the wars and bring the toops home. I don’t care who is “blamed”. It would be good if either party stopped stealing from the young to fund destruction today. Blame the republicans …big deal. If the left or right doesn’t like it they should lead a seccession movement.

81 Brian J May 17, 2011 at 12:10 am

No Republican would go along with that. Simple answer, simple question.

The problem, first and foremost, is tying specific policy to the debt ceiling. Unless I missed something, when Obama voted against it as a senator, it was just a vote against it. That’s political, of course, but there wasn’t any specific legislation in mind. But in a larger sense, the Republicans are the bigger cause of the problem, because anybody with even the slightest clue about the political situation in the United States knows that spending cuts won’t be the entire answer to the long-term deficit problem. Some tax increases will be necessary; Tyler himself has admitted this. By refusing to even consider this, even as part of a package that still favored their interests dramatically, like $5 of cuts for $1 of tax increase, they are making passing an agreement more difficult.

82 Ed May 16, 2011 at 2:51 pm

I’m curious if anyone has an informed response to Barkley Rosser, who raised some interesting questions at 2:15 PM.

My uniformed response is that I don’t think there actually is a budget, since Congress didn’t pass one last year or this year. I’m not sure if that matters. Constitutionally, Congress has to authorize debt just as much as it has to authorize taxes or spending. Otherwise there is nothing to stop the administration from just borrowing the money and doing whatever it wants, Congress would be pretty irrelevant. And they may need additional debt in order to roll over current debt.

83 Andrew' May 16, 2011 at 3:51 pm

If the implication is that the Congress couldn’t do anything, they could jack Bernanke up by the tightey whiteys.

84 Matthew May 16, 2011 at 2:57 pm

“… I am loathe …” sb loath:

85 Michael Foody May 16, 2011 at 3:11 pm

House republicans are not cowards, they are boldly holding the country hostage to institute an unpopular version of responsibility where the wealthiest are the most insulated from the consequences of insustainable long term spending.

86 Veridical Driver May 16, 2011 at 11:50 pm

There doesn’t need to be a conspiracy theory for the wealthy to be insulated, it is simply one of the reasons why it is good to be wealthy. That is why people desire wealth. If they had to fear for their financial well-being like the average joe, they wouldn’t be “wealthy”.

What the left doesn’t understand, is that even if it is horribly unfair that the wealthy not to suffer like the rest of us… the alternative is to destroy wealth.

87 Floccina May 16, 2011 at 3:45 pm

The rationally ignorant median voter wants more services and lower tax and thinks that he can get it. He thinks he can get it because whenever he interacts with Government, like at the post office or the DOT etc. he sees huge waste. He does not know that such are a small part of the budget. So it is that whoever cuts benefits or raises taxes will be in peril. In order to get a deal it needs to be both parties taking equal blame and if they do get a deal it will look to the median voter like Democrat and Republican Politicians against the people.

IMO it is better to wait until there is a real crisis that the median voter feels and then address the problem.

88 Andrew' May 16, 2011 at 3:46 pm

So, isn’t THE debt ceiling the problem, or more accurately, the debt-dependent Treasury-Banking system?

89 mulp May 16, 2011 at 3:58 pm

The big problem I see is the liberals are terrible on tactics.

Republicans are demanding entitlement cuts and spending cuts and bashing government workers and no taxes to get to some big number of spending reductions.

Harry Reid and at least 40 other Senators are safe for four years (they are not up, they aren’t returning, or they will be reelected) so Harry can get a bill to the floor for a vote unless Republicans filibuster, and Harry can have the Senate begin endless debate.

So, Harry should write a bill that beginning Oct 1, 2011 cuts Social Security benefit payments by 10% – the benefits get calculated as usual, then cut 10%, cuts Medicare payments across the board by 10% after all the other calculations are done, cuts Medicaid payments to the States by 10%, cuts the pay of every Federal employee across the board from the Congress and staff, Executive and staff, all Federal employees, all except judges, by 10%, and cuts military pay by 10%, and cuts budgets for military contracts by 10%. My SWAG is this gets Boehner’s $2T in cuts. The bill of course increases the debt limit by the approximate $2T in cuts.

The ideal situation is the Republicans filibuster and Harry begins weeks of debate. Harry should use his whip to count votes and keep the debate going until the debate becomes the top news item for a week.

Bernie Sanders would certainly be good for 12 hours of debate per week, arguing against Harry’s bill in favor of tax hikes. Lieberman might also have the courage to do what is right instead of what is pleasant and argue for tax hikes. Kent Conrad might argue a deficit hawk position that if repealing the tax cuts he opposed were off the table, then across the board spending cuts were the only options for fiscal conservatives.

Thus Democrats would make some of the Republican majority voting blocks pay for voting Republican – elections have consequences. The Republicans in Congress would be required to stand behind their words with actions. And Democrats would have defined the issue for 2012, especially if Republicans called Harry’s bluff, and expected Obama to veto it. If the bill were passed in June, Obama wouldn’t need to sign it if Harry keeps Congress in session, allowing Obama to oppose the bill. Worst case the House passes it only Aug 2 and Obama doesn’t sign it, calling for a clean bill for the next 10 days as Treasury doesn’t pay bills for 10 days.

90 Tom O May 16, 2011 at 4:09 pm

Speaking purely from a tactical political perspective, the Republican plan to destroy Medicare is gift enough. All Reed should do is give the Senate R’s a chance to vote for it.

And before you accuse me of craven pandering, go back and look at the history and use of the “Death Panel” meme in the last election.

You right wing guys really need to remember that two can play this game, and every action creates a reaction.

91 The Anti-Gnostic May 16, 2011 at 5:02 pm

It’s kind of a hollow threat, because at the end of the day the Left still needs net tax payors willing to pony up for its social welfare schemes. About the only credible threat the Left has is to defund the military, but that’s kind of counter-productive because being outgunned by the government is the only reason most people pay taxes.

92 Benny Lava May 16, 2011 at 6:37 pm

This doesn’t make any sense. Can you explain how destroying Medicare reduces the number of net tax payers?

93 The Anti-Gnostic May 16, 2011 at 6:58 pm

I’m referring to political tactics. What can the Left threaten the Right with? Increase taxes, or we cut funding for … what? National Public Radio? The MLK Memorial project?

I suppose de-funding overseas military campaigns (for example) may be a credible threat, but given that a huge military is the main reason people are fearful enough of the government to keep paying their taxes, it strikes me as counter-productive.

94 Benny Lava May 16, 2011 at 8:57 pm

Well, if the military, social security, medicare, and medicaid were gutted there would be essentially no budget left, so that’s true in one sense. Though I have my doubts that the Right is really in favor of cutting those things.

95 Oderus Urungus May 16, 2011 at 10:24 pm

There’s also the point that the Demos are just as beholden to the Zionists as the Repubs, hence they would never threaten the overseas empire, whose primary purpose is the facilitation of Israel’s geopolitical objectives.

96 Danny Noonan May 16, 2011 at 5:10 pm

Yes, because before 2010 the idea that the Democratic party would shamelessly exploit nonsensical concerns about Medicare was unthinkable. Just ask all those old-timers who have being living on cat food since Reagan won his election.

The simple reality is that the Democratic party, in its current form, is unable to maintain a viable political coalition without buying huge chunks of that coalition with public funds (government employee unions being the textbook example, but not the only one.) The vote-buying works “great” when the Treasury is flush, but doesn’t work so well when the Treasury needs to be handled efficiently because an enormous number of Boomers are about to start retiring and we have to address that concern while, at the same time, addressing structural deficiencies in our economy. And the vote buying approach won’t work at all when those Boomers actually retire and start collecting on all those promises that have been made (promises, it should be noted, that are reliant on money that was spent long ago.). Accordingly, the only real question is when will the Democratic Party start taking a look at the future in a numerate fashion. To date, the answer to that question is never. Not becasue they don’t want to (at least not necessarily for that reason- who knows what the Party actually wants) but because as a political matter, they simply can’t. The Party depends on buying votes, threatening to cut up the Credit Card is an existential threat and will be treated as such. To focus back on the topic at hand, there just isn’t a lot of negotiating room in that scenario.

97 Tom O May 16, 2011 at 5:32 pm

I think you are looking at this question through a pretty strong ideological lens. Certainly there has been no lack of willingness on the part of either party to reward those who support them. I am surprised I even need to make that case to someone who posts on a financial website.

98 Tom O May 16, 2011 at 6:18 pm

One more thing:

“Accordingly, the only real question is when will the Democratic Party start taking a look at the future in a numerate fashion.”

Wow. I can’t tell you how much I appreciate being lectured about financial probity by someone who over the last ten years has presumably supported every single tax cut, unfunded Medicare mandate and unpaid for war. We left you a surplus, you left us a mess. Granted, it wasn’t all your fault, or ours, but it’s really, really hard for me to see just what you guys have accomplished that gives you any lofty right to be patronizing.

99 Tom May 17, 2011 at 12:01 pm

Tom O,

You said you worked in the Financial industry. Tell me you don’t mean what this post says. Then again maybe this explains our current situation.

100 Benny Lava May 16, 2011 at 6:39 pm

The same is true of the Republican party, that bought the votes of senior citizens with Medicare Part D and tax cuts. Which party is innumerate again? I suspect that you don’t know what that word means based on how you used it.

101 Danny Noonan May 16, 2011 at 7:04 pm

Which party is innumerate again?

The one that works to preserve our completely unsustainable current spending path. Of course you already know that, which makes me wonder why you bothered to ask in the first place. As far as presumptions regarding what I supported a few years back, if you have evidence in support of your claims please provide it. Otherwise, it sounds like your backside is the source for your rebuttal. That just isn’t very impressive. At least not in this context.

If anyone would like to argue that the feds can maintain current spending levels long-term, they are free to make that argument. But it’s a nonsensical argument that no one honestly believes. The only choice, given such, is to address our spending problems. One party is lousy on that issue, and the other is completely incapable, given their current predicament, of addressing it in any substantive way. If that claim is in error, please provide evidence of the error. Or, you could do the intellectually honest thing and admit that the the Democratic Party is helpless to address spending issues given its current configuration. Based on your rebuttal to my previous comment- which focused on evidence free assumptions about me personally- I’m guessing this will end up being another case where your rebuttal is substantially… Republicans-bad; Me-good.

Good luck with that.

102 Benny Lava May 16, 2011 at 8:54 pm

So you mean the Republican party, with the deficit increasing Ryan plan?

I would also question what you mean regarding “what I supported a few years back”, as I never made any insinuations about what you did or did not support, only that your insinuation that the Democratic party is the only one engaging in vote buying. As I noted, the Republicans do this as well.

Still, I suppose you are right, my rebuttal is only slightly better than your “Democrats are dummies”. Alas, maybe I”ll have more time for this tomorrow.

103 Brian J May 17, 2011 at 12:27 am

This is a hilarious inept post.

There’s nothing nonsensical about it. The Republicans have been accused of wanting to slash Medicare for years because, sure enough, that’s what they proposed doing. Regardless of your feelings on the matter, they are proposing to dramatically alter the program in a way most people find unacceptable and have no answer to important questions like what happens when the voucher runs out.

“The simple reality is that the Democratic party, in its current form, is unable to maintain a viable political coalition without buying huge chunks of that coalition with public funds (government employee unions being the textbook example, but not the only one.)”

HAHAHAHAHAHA! The same can easily be said about the Republicans, which is a way of saying that it’s an entirely meaningless statement.

104 Andrew' May 16, 2011 at 4:59 pm

This isn’t about tactics. When the people figure out what has happened, either the tax cuts they thought was spending reductions, or the debt increases they thought was spending increases, were a bait and switch pulled by both parties using debt to waste the people’s money, they are going to smite BOTH parties. None shall survive.

105 Tom O May 16, 2011 at 11:15 pm


Nothing personal. When I hear someone attacking only Democrats with standard Republican talking points, I tend to assume they have voted Republican and/or support the majority of that agenda. Good for you if I am in fact wrong.

As to evidence, the Clinton tax increases were the last serious attempts to deal realistically with budgetary realities, opposed if I remember by the vast majority of Republicans. Certainly the decisions made in the last 10 years by both parties give little cause for optimism.

As to financial reality, that has two sides. To think we can get there with benefit cuts alone, especially in this economic environment, shows a fealty to ideology but (at least in my opinion) little grasp of reality.

106 Barkley Rosser May 16, 2011 at 5:17 pm

Andrew, You are right. The debt ceiling is the problem. It should simply be ignored. End of problem. Let Geithner pay all the bills that are due, and let that be that.

107 Andrew May 17, 2011 at 4:52 am

I don’t think so. The debt ceiling is a characteristically stupid way the government chose to wink at a real problem.

108 Bill May 16, 2011 at 5:57 pm

If you game this out further, everyone seems to be ignoring one thing: the Bush tax cuts expire without action of the president.

Default condition is a tax increase.

109 Veridical Driver May 17, 2011 at 12:14 am

The Bush tax cuts are not the reason the U.S. government is bankrupt. There is no possible way the government could ever tax enough to sustain its current spending levels.

Getting rid of the Bush tax cuts is like a person who makes $100,000 a year, and who is spending $150,000 a year, trying to balance their budget by not buying a $100 bottle of wine once a week. Sure, buying a $100 bottle of wine once a week is irresponsible, but it isn’t going to make any difference.

110 Brian J May 17, 2011 at 12:43 am

Well, there’s really nothing that the current congress can do to specifically restrain the spending of future congresses. They can try to explore ways reduce spending by certain methods, which was part of the thinking behind the Affordable Care Act, but they can’t specifically control the actions of legislators in the future any more than they can control the actions of any other person in the future. What they can do is try to control things in the immediate and near future. Rescinding some or all of the Bush tax cuts is certainly one way to help bring the deficit under control for the medium term and it’s something that congress can do.

111 Andrew May 17, 2011 at 6:53 am

“Default condition is a tax increase.”

It is and will be viewed as a tax increase. Noone whose ox is getting gored is going to say, “oh well, that’s the default condition.”

The current deficit is a red herring, that is something Grover Norquist is exactly right about (no Bill, I only saw him one time on Tech Ticker, you probably knew who he was before I did), and by holding the current red herring hostage to address the actual problems of the future would be something to admire, if one is to believe that is what Republicans are doing.

112 Andrew May 17, 2011 at 6:57 am

It’s actually quite masterful how Krugman makes a red herring by calling it a red herring. I don’t think his core audience will get it.

113 Brian J May 17, 2011 at 3:45 pm

Who are you responding to?

114 Bill May 17, 2011 at 8:34 am

Vertical Driver,

You seem to be driving without facts.

From wikipedia:

“Effect of policies on federal budget deficit and national debt

Recent additions to U.S. public debt [from Bush tax cuts]
Fiscal year (begins
10/01 of prev. year)
% of GDP

$144.5 billion

$409.5 billion

$589.0 billion

$605.0 billion

$523.0 billion

$536.5 billion

$459.5 billion

$962.0 billion
(proj.) 6.8%

The total surplus in FY 2001 was $128 billion. A combination of tax cuts and spending initiatives has added almost $1.7 trillion—through budget deficits—to the national debt since then (October 1, 2001 through September 30, 2007). It should be noted that yearly debt accumulation often exceeds the yearly budget deficit, because, for example, paying the interest on the debt is not planned in the budget to be paid off or because Social Security receipts run a surplus (see Fiscal policy of the United States). The total budget deficit for FY 2007 was $162 billion.[33]”

In addition, we increased military spending to fight some wars and created a medicare drug benefit ON TOP of this tax cut.

115 Brian May 16, 2011 at 7:24 pm

Just get rid of the debt ceiling already. The CBO on the debt ceiling: By itself, setting a limit on the debt is an ineffective means of controlling deficits because the decisions that necessitate borrowing are made through other legislative actions. By the time an increase in the debt ceiling comes up for approval, it is too late to avoid paying the government’s pending bills without incurring serious negative consequences.

116 Gabe May 16, 2011 at 8:34 pm

just default on the debt…only way to get a balanced budget

117 Marked2Market May 16, 2011 at 8:34 pm

Anyone know whether or missing the payment counts as a default for CDS?

118 Zach May 16, 2011 at 8:54 pm

“The Obama administration is also stonewalling on (required) further fiscal reforms to Medicare, to better use the issue against the Republicans.”

Um, “Beginning in 2019, the target will be set at the nominal gross domestic product per capita +1.0 percent. If future Medicare spending is expected to exceed the targets, the IPAB will propose recommendations to Congress and the president to reduce the growth rate.”

It’s fine to think the IPAB recommendations will be overruled in the future or that it’ll be nixed entirely, but what else do you expect Obama to do here? I wish I had the time and knew where to look to compile every Congressional vote in the past decade on a bill that would address cost growth in Medicare and Medicaid. By and large, Democrats want to continue to provide comprehensive health insurance for seniors and the poor in perpetuity and raise money to pay for it. On top of that, we’re willing to talk about controlling growth rates by limiting the range of services covered — in fact, we passed a law doing just that.

Second, if wages begin to rise again, so will effective tax rates on the non-wealthy, right? Isn’t this sort of thing why revenue is projected to go up to 27% GDP or so fairly soon if we let the Bush cuts lapse?

Lastly, what does Krugman say there that you’ve got a problem with? He doesn’t say that default is particularly likely. The worst-case scenario to me is what happened with the TARP vote in the House. The House (both sides of the aisle) voted it down, folks called up and complained that they weren’t getting their money’s worth when the Dow dropped 777 points, and the vote flipped the next day. It might take another hit like that in the financial markets to get folks to reconsider (after which Obama will go on TV and recite quotes from Boehner, Cantor, and McConnell on how the debt ceiling obviously needs to be raised as well as how they all voted along with Paul Ryan to raise it in 2002).

119 Bill May 16, 2011 at 10:32 pm

You have well described the Kabuki dance that we will see in the future.


120 Thomas May 16, 2011 at 11:22 pm

If you think that attacking Republicans by reminding them that they voted for an increase in the debt ceiling in prior years is likely to help, you don’t have a good understanding of politics. They will all–each of them–respond by quoting Obama’s speech from 2006. And they will be less likely to move.

121 Zach May 17, 2011 at 8:57 am

And it won’t really matter because things that Boehner, Cantor, and McConnell say don’t get put on TV or in newspapers. Obama calling them out for things they said all of a month or two ago in a press conference or whatever would be the headline and that’s what matters.

122 Jwillow May 16, 2011 at 10:41 pm

“arguably we can infer that the market does not think the Republican stance is so catastrophic.”

Um, the U.S. has not defaulted on deft yet, and the markets think it will not. Thus, markets feel that Obama or the GOP will cave. Krugman thinks it will be Obama, but hopes it will be the GOP.

No wonder Andy Sullivan links to you. Your logic sucks rocks.

123 Elvin May 16, 2011 at 11:21 pm

I can think of all sorts of problems occur with any debt issued beyond the ceiling limit as Barry Rosser suggests. Since Geithner would not have authority from Congress for issuing the debt, he would probably possibly be liable for fraud (claiming that debt had backing of the Treasury) and would immediately be impeached by the House. Yes, the Executive Branch has ignored the Legislative Branch at times, but generally they are when the issues are hazy and the rights aren’t clearly defined. This would be a first class in-your-face violation of Congressional authority. I think he’d lose 9-0 in the Supreme Court.

Who would buy such debt? At the least, they demand a premium because it faces all sorts of legal risks. Could the Treasury repudiate it if it was declared illegal?

More plausible is that Geithner figures out a way to borrow money from a bank or creates an exotic security–revenue participation notes. The investment bankers would love it! Another way to get rich.

Viva financial innovation!

124 Barkley Rosser May 17, 2011 at 2:14 pm


There are a whole bunch of EU countries in violation of their supposed debt limits, 60% of GDP, and have been for years with essentially zero consequences, except for ones like Greece that get too far out there.

The new debt could be backed by the Treasury. Unless the Congress actually instructs the Treasury Secretary on which bills he should pay and which he should not, if we hit the debt limit, then he faces a contradictory mandate: obey the last budget instructions on both taxing and paying bills, which would require issuing new debt, or obey the instruction not to issue new debt. But, making decisions on which bills to pay or not pay without Congressional instruction looks like at least as bad a violation of the Constitution and laws as ignoring the debt ceiling.

This is nowhere near the legal slam dunk you think it is, and given that no other country has such a ridiculous nominal limit, the sooner it is blown away, de facto or preferably de jure, the better. (Plus, the debt limit itself may be unconstitutional based on the 14th Amendment, all the more reason this is a messy situation legally.)

125 Andrew May 17, 2011 at 5:06 am

Danny, B.B., MikeDC +1 for insights (among others).

So, by holding the tax hikes (not the debt ceiling) hostage, we will FINALLY see what starve the beast actually looks like.

126 Rich Berger May 17, 2011 at 8:34 am

I know that this thread is petering out, but I wonder what a real “compromise” would look like. Reagan made a deal with the Democrats to raise taxes in exchange for spending cuts and got snookered. How about a one rise in taxes for all taxpayears (up to those Clinton era rates that mulp so loves) in exchange for a one year set of actual cuts of equal or greater size? Taxes would revert to the current rates in the next year unless a new round of cuts were agreed to. Do you think the Dems would agree to this? I would agree to this deal knowing that I would be paying more in taxes, but only if there were enforceable, verifiable cuts and an expiration date on the tax increases.

127 chris May 17, 2011 at 9:42 am

I would agree to this deal knowing that I would be paying more in taxes, but only if there were enforceable, verifiable cuts and an expiration date on the tax increases.

…so in other words, you would only agree if you got everything you wanted permanently and could take back everything you gave the Democrats that they wanted after a few years. Some compromise!

128 Rich Berger May 17, 2011 at 10:17 am

I guess reading comprehension is not your forte, so let me say again – I am suggesting a one year deal only after which tax rates and spending revert to pre-deal levels. I would not agree to a permanent tax increase because it is too easy for spending to be boosted and taxes not lowered.

129 SteveX (formerly Steve) May 17, 2011 at 11:15 am

Rich: Great idea. I like that plan, as long as, as you suggest it does have a fail-safe way of expiring en masse right before the 2012 elections. It gives us an opportunity to feel the pain and verify the results to see if we’re willing to live with them over the long term. The ’12 elections would be the mandate for its extension, modification, or death by expiration. My guess would be, hopefully, reasonable and pragmatic modification.

We’ll make a centrist out of you yet. 😉

130 MikeDC May 17, 2011 at 11:19 am

While I agree that spending increases harder to cement, a lot of them are procedural and changing the procedures put in place by Congress would be an effective tool to end them.

My sort of compromise offer would be to offer tax increases in exchange for an end to the most obvious drivers of “automatic” spending increases:
1. Lower social security indexing.
2. An end to baseline budgeting.

The big sticking point I see is health care, because the current system is such an incoherent mesh of price controls government subsidies, regulations and multi-generational decision points that it’s very hard for me to see how either side, so far divorced and cemented into unrealistic positions, can come to a sensible agreement on things.

131 SteveX (formerly Steve) May 17, 2011 at 11:38 am

Would it be possible to limit the cuts to the entitlements (health care, defense, etc) to “symbolically doable” for the first year, with the stipulation they must be addressed in greater depth and detail before the legislation can be extended? In other words, get something bipartisan on the books that addresses the basic philosophy quickly, but allows enough debate time and escape routes to do the big ticket entitlements fairly and properly.

132 MikeDC May 17, 2011 at 1:15 pm

No. Congress can’t credibly commit to future legislation. They can’t promise to pass a better law next year.

My suggestion is a bit different. Changing the formula for social security is current legislation that affects spending in the future. Thus, it wouldn’t have much immediate cost now, but it would be credible in that it would take a future act of Congress to actually change

Simply put, getting Congress to do something is hard. Better to have that inertia on the side of reducing spending than against it (where it’s been for the past 40 years or so). As Gordon Tullock would tell you, we don’t have much cycling, so getting a law actually set in place is a significant hurdle toward establishing a permanent outcome.

133 Brian J May 17, 2011 at 3:47 pm

They might, depending on what the cuts are. But I doubt the Republicans would, which is the reason why so many, including myself, blame them for any lack of progress.

134 Loren F. File May 17, 2011 at 11:13 am

“Do we take market prices seriously? Since Treasury rates are still low, low, low, arguably we can infer that the market does not think the Republican stance is so catastrophic..”

Please Tyler. This republican pose is for the rubes. Nobody with a full wit takes the GOP threat seriously. Think a second. All the democrats will vote to raise the ceiling. It takes fewer than 30 republicans to get it done. It is hardly worth counting.

What kind of odds would you require for a wager?


135 SteveX (formerly Steve) May 17, 2011 at 11:28 am

Loren: I agree.

What concerns me more though, is the “public’s” belief that there would be few consequences if it weren’t raised.

Also, Megan McArdle wrote: “…foreign aid, which the public stubbornly continues to believe constitutes 25% of the federal budget.”

I can understand a lot of misguided public opinion comes from the limited news sources people choose to believe, but that doesn’t explain all the numbers. Where do they get these impressions?

136 Ed May 17, 2011 at 12:49 pm

The foreign aid “misimpression” comes from the fact that the public considers as foreign aid ANY US government spending that is primarily designed to affect things outside the US. The news articles and columnists that say in effect, “silly public, foreign aid is really just a small part of the budget” count only the USAID budget as foreign aid. The public understands the issue better.

137 SteveX (formerly Steve) May 17, 2011 at 1:57 pm

“foreign aid ANY US government spending that is primarily designed to affect things outside the US.”

That’s a pretty broad description. Wouldn’t that include all defense spending?

138 Gabe May 18, 2011 at 9:42 am

it would include the portion of “defense” spending that is actually offensive war spending…and yes that is a big chunk of waste.

139 Beefcake the Mighty May 18, 2011 at 12:55 pm

You’re right, but do you think the public really views it that way? Unfortunately I don’t think they do.

140 MERLIN May 18, 2011 at 3:50 pm

“Blackmail is a form of extortion, in which a threat is made to disclose a crime or social disgrace.”

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