Stories by Steve Bell

Steve Bell is former Staff Director of the Senate Budget Committee, a former managing director at Salomon Brothers, and now Senior Director on Economic Policy at the Bipartisan Policy Center in Washington, D.C.

Will Jim DeMint Filibuster Us into Default?

July 19th, 2011 at 2:49 pm 19 Comments

Wind your way past the debate on a  Balanced Budget Amendment to the Constitution, paid protesters carrying “Protect our Social Security and Medicare” placards, and sound bites from almost all talking heads.

When you do, you will discover that some serious folks in Congress refuse to give up hopes of a significant budget deal.  Prominent among the debt shock troops is Sen. Tom Coburn (Dr. Coburn to most), who yesterday released his plan to reduce projected federal debt by $9 trillion during the next decade.

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Deal Will Come, but May Disappoint

July 13th, 2011 at 2:22 pm 41 Comments

Confusion usually reigns in Washington, D.C., negotiations just before a solution emerges.

Thus, small signs can signal big things to come.

As Federal Reserve Chairman Ben Bernanke concluded his testimony Wednesday morning before the House Financial Services Committee, Committee Chairman Spencer Bacchus made an interesting and perhaps important comment.  In short, Chairman Bacchus said that members of his committee and many members of his party understood the difference between raising tax rates and closing tax loopholes.

Chairman Bacchus hardly qualifies as a RINO nor is he considered a renegade Republican.  His remarks, therefore, may well hint that the many senior members of the House Republican caucus are beginning both to tire of the ideological rigidity of some of their “Tea Party” members and to believe that it is time to stop playing games with the debt limit negotiations. In recognition of the coming reality of a debt ceiling increase failure,  Rep. Steve King of Iowa introduced a bill today in the House that would require payment of the sovereign debt, military pay and pensions above all other payments that might be owed by the federal government.  Thus, King acknowledges that failure to raise the debt ceiling would lead to utter chaos within the government and would have catastrophic impact on United States military activities oveseas. Soon, we will see similar bills to protect Social Security, education, Medicare, and so on and so on.  CYA is in full throat.

Clever  legislation announced yesterday by Senate Minority Leader Mitch McConnell  would essentially empower a President to raise the federal debt limit himself, subject to a two-thirds vote to the contrary by Congress.  One begins to sense the uneasiness of Congressional Republican leadership and even among many GOP backbenchers as the real results of debt default becomes clearer to them. McConnell’s gambit, as one would expect from a consummate Congressional leader, does the most important thing that the GOP needs right now–to change the trend of the debate.

As we have said often before, when the face of the Republican Party on debt negotiations is Rep. Michele Bachmann, Rep. Eric Cantor, Sen. Pat Toomey or Sen. Jim DeMint, the party loses ground in the public relations battle.  “Hell no, we won’t go” over time becomes a losing message.  McConnell has said, “Yes, raise the debt limit, let’s dispose of all this Congressional-Presidential hostage-taking, and bring some stability to paying the nation’s bills.”  McConnell’s suggestion avoids direct confrontation over spending versus taxes–it begins to change the subject.

We smell a deal in the works.  It will be small, it will be disappointing to those of us who fear the fiscal future of the nation, but it will get the debt ceiling increased.  The fact that it will be relative trivial will be,  in the short run, of little moment.  Market participants, who expect nothing useful from Congress in most fiscal matters, can breathe a sigh of relief that their financial engineering will be safe for another 6, 12, or 18 months.  The debt default question evaporates until 2013.  American debt as the “best house in a terrible neighborhood” will continue to be a safe haven while turmoil throughout the rest of the world continues.

Then in the midst of the most anemic economic recovery in America’s post-World War II history, Congress can revert to political manuevering and the American people can safely revert to concern over whether or not they or their neighbors will have jobs later this year.

The true dis-connect between both parties in Congress and the fundamental concerns of  Americans in the work force will increase.  Anger will continue to mount, demagogues will flourish, our national debt will increase, and loss of faith in America’s governance will expand.  This cannot end well.

GOP Losing Touch With
Economic Reality

July 12th, 2011 at 12:11 am 126 Comments

President Obama’s news conference this morning confirmed the age-old truth: a President has the bully pulpit.

More people saw, or will see in some format, the President’s remarks today than will see all of the comments by all Republicans combined over the weekend.

As a public relations/political matter, the GOP is getting its clock cleaned.

Three major specifics struck us as the President spoke:

First, he made explicit the fact that no revenues being discussed among the negotiators would take effect until 2013 at the earliest.

Second, he intends to request formally an extension of the present 2 per cent FICA holiday for employees.

Third, the approximate ratio of spending restraint to new revenues in the “grand plan” he and Speaker John Boehner discussed would have been 4 to 1.

Beyond the new policies revealed, the tone of the President’s opening statement continued the White House effort to show Obama as the patient, calm parent dealing with a beleaguered John Boehner, who cannot control his own unruly brood.

Parent Obama acknowledged that the deal he wants to conclude with Boehner would cause pain to his fellow Democrats.  That is the price of dealing with the looming fiscal crisis, he said.  By implying that he is willing to deal with his own children, Obama implies that no one can control the GOP children.

We wrote in this space some time ago that a deal would emerge.  It would be trivial.  It would be less than required to even start stabilizing the debt trends of the nation.  It would occur only after maximum expenditure of time, political capital, and citizens’ patience.  More than ever, events of the past two weeks confirm that forecast.

Much has been made of the miserable jobs report last Friday.  Professional economic forecasters have been so wrong, so often, on their predictions that past two years that we recommend group therapy to help them adjust to reality.  Very few analysts who have read how nations emerge from financial meltdowns have ever believed that the recovery would be anything other than , painful, jobless,  frustrating, and slow.  I don’t believe that the jobs data had as much impact on the debt negotiations as others contend.  It does give the President a chance to connect a “deal” with “job creation.”  In the short run, of course, the two things exist in parallel universes.  Getting the debt limit passed will, in and of itself, create no new jobs anytime soon.  But, the ability of the President to show that the “irresponsibility” of the Republican House will not only threaten the nation’s world standing, but will cost jobs, gives him double-barreled communications ammunition.

Here are the hard facts:  we will get a debt extension, maybe as short as six months, maybe as long as 18 months;  the savings from the debt ceiling deal will be small compared to the vast debt accumulation for the United States the next 10 years;  Republicans have embarked on perhaps the only political course that could impair their ability to win the Senate, expand their House majority, and win the Presidency in 2012.

As an aside, the uncertainties in the global economy (slowing China, moribund Japan, inscrutable Europe, fragile South America) virtually assure a continuing flight to relative safety by world investors.  With no growth in the United States to crowd out, I believe that “the best house in a terrible neighborhood” theme that has kept interest rates very low in America will continue.

Until it won’t.  That will happen and we will have little warning.

The GOP should hope for a debt deal as soon as possible, so it can change the subject to national defense, international economics, anything other than the present subject.  The longer the nonsense continues, the more Republicans risk looking out of touch with economic reality.

Politicians Will Kick the Can Down the Road

July 6th, 2011 at 3:41 pm 5 Comments

A senior Republican Senator calls for a short term debt deal of six months or so.

The House Republican Speaker doesn’t want that. Senate Majority Leader Reid opposes it.

The President rejects a short-term deal.

What is the path of least resistance?

Yes, a short-term debt deal to “buy time for real action.”

Most Members know the reality of the consequences of failure to raise the debt ceiling.  Various commentators, ranging from Ezra Klein of the Washington “Post” to Clive Crook of the “Financial Times” have weighed in.  Failure is a bad idea, if not an insane idea.

Most Members apparently agree that they don’t want to be tarred politically as one who brought chaos into markets and the American economy.

As a way to deflect criticism, some Congressmen have devised a public relations tool to protect incumbents, especially from Tea Party-based primary challenges.  It’s called “Cut, Cap, and Balance” (CCB).  It’s a pledge that allows signatories to say to their constituents, “Look, I support cutting spending, capping it at a certain percentage of Gross Domestic Product, and passage of a Balanced Budget Amendment to the Constitution.”  While apparently an earnest pledge, the document carries no legislative weight and is more a statement of general ideology than any hint that concrete policymaking will follow.

Finally, behind all the calls for meetings at the White House, resistance to revenue increases, or real reform of Medicare and other entitlements, remains this truth:  the majority of members of both chambers and both parties know that failure to increase the debt ceiling carries toxic political realities.  In private, this majority wants two things to happen: the debt ceiling to increase, but not with their “aye” vote.

Political cognitive dissonance almost always yields temporizing.  Or, in English, confused politicians usually choose the “easy” way out.  In this case, a six-month increase in the debt ceiling, off-set by “cuts” of about $1.1-1.2 trillion, and an enforcement mechanism with teeth, seems the easy way out.

Except.

A six-month extension of the debt ceiling might expire, let’s say, next February.  In late January, the Congressional Budget Office will release its annual report.  It will likely forecast trillion dollar deficits for at least a decade more.  In February, the President is supposed to issue his Fiscal Year 2013 budget recommendations.  A likely intense battle over another Continuing Resolution for Appropriations for FY12 will be in full throttle, or, if we are lucky, has just concluded.

Add to this, the need to extend the debt ceiling once again, and the inevitable vote on the expiring Bush tax cuts later in the year, and it doesn’t take too much foresight to see a truly constipated and dysfunctional Congress.   It is unclear how financial markets and companies will react to further evidence of silliness, but the risks increase daily.

Meanwhile, the President continues to “lead from behind.”  His call for a White House meeting tomorrow follows in this pattern.  His rhetoric bold, his actions remain clouded.  As he did during the health care debate in 2009-10, in immigration policy, in the CR11 conflict, the President simply proposes nothing concrete.  While this is frustrating to policymakers and analysts, let alone Republican members of the House and Senate, it carries the least political risk to the President.

After all, only three outcomes seem likely.  A deal will be made that includes tax increases and some entitlement reform.  A deal will be made that makes trivial changes in appropriated accounts and gains a six-month reprieve on a debt ceiling vote.  A deal will  be made after a   serious market hiccup and no fiscal reform of note.

In each case the President can emerge looking like “the adult.”  He blesses any bi-partisan deal made (thus spreading any political damage to all parties involved);  or he expresses deep disappointment and concern (thus painting his adversaries as irresponsible).

No, it isn’t leadership of any kind.  But, it may prove to be very smart short-term politics.  That is, it may be enough to keep him in office after November, 2012.

Americans laugh at Greece and the other PIIGS in Europe.  Yet, America’s federal establishment fears taking anything like the fiscal reform going on in Greece and other European nations.

Having the world’s reserve currency carries, as one French politician said years ago, “exorbitant privilege.”  And, that seems to include the privilege of fundamental fiscal irresponsibility.

Obama Puts Congress on Notice

June 30th, 2011 at 10:45 am 44 Comments

In his statement and news conference yesterday, President Obama decided to take off the gloves in his fight with Congress over the debt ceiling increase.

His performance should stand as a reminder to Congress that, ultimately, only the President has the bully pulpit.

As we at the Bipartisan Policy Center have written before, when then-Speaker Newt Gingrich and his advisors decided to “close down the government” in the 1995-96 confrontation with President Clinton over appropriations and debt ceiling, most Republicans thought that Clinton would get the blame.  He didn’t.  The House, and more specifically the Speaker, got the blame.  This incident remains one of the main things most alert Americans remember about Newt.

We have heard the same contention by some Republicans over the last few months as the debt debate reached the front pages: ”Obama will get the blame if something bad happens because we didn’t increase the debt ceiling.”  History instructs us otherwise.

Take a practical step back.  When husband and wife discuss things over morning coffee, they most likely don’t think about debt ceilings, bond markets, or other esoterica.  They talk about kids, schools, work, chores around the house, money, maybe sports or even Oprah-type things.  If they read or hear that the Congress has failed to pass a debt extension (a strange concept in and of itself since this husband and wife pay their bills faithfully,) that financial markets are in turmoil, and that maybe a whole bunch of folks will lose their jobs, their response will most likely be, “Holy cow, what are those idiots doing up there!”

Why would this be the majority response?  Well, because Congress must pass the debt extension.  It is its duty.  The President doesn’t pass the debt ceiling increase.  On television, over the radio, in the newspapers, and throughout the blogosphere, it will be Congress, not the President, who has failed to pass the debt extension.

Clearly Obama realizes this.  He knows the ill-fated 1995-96 history. He knows that all he really has to do is declare Congress irresponsible, and say that it’s holding hostage the American economy and hurling the country into another Great Recession or worse.

Clearly, most Republican leaders in Congress know this fact of life.  They have tried to say that the President is to blame for this impasse, that they want no default on American sovereign debt, but that the President is making this happen because he insists that revenues (taxes) be part of the fiscal solution attached to the debt bill.  Wisely, but so far unsuccessfully, they have tried to change the subject from what they have to do (pass the debt extension) to what the President wants (raise taxes).

As poll after poll reveals this past several months, Congress continues its slide toward single digit popularity in the eyes of the public.  The “change the subject” manuever hasn’t worked.

What the President said yesterday was, “Hey, Republicans, listen up.  I am going to continue to compare you to my kids who don’t get their homework done on time, and continue to tell you that as adults you must get your work done before you go on your extended summer vacation.  Here’s just a taste of what is to come.”

Of course, the President has been playing the famous “lead from behind” game.  Of course, Republicans are frustrated because the President and other Democrats have demonized them on Medicare and Social Security, and very unfairly done so.  Yes, the President has failed to lead sufficiently and has shown little boldness.

But, the President has also retained the ability to make his voice heard throughout the country, on his terms and with a pliable media elite as an echo chamber.

Republicans cannot expect mercy.  They have painted themselves into a corner.  The President isn’t going to get paint all over his shoes by trying to  extract them from that corner.

Here’s How To Get To A Debt Ceiling

June 27th, 2011 at 2:31 pm 7 Comments

The theatrics of the past two weeks aside, the wink and the nod seem to be already communicated as the President, the Speaker of the House, and the Senate Majority and Minority leaders begin the next phase of the drama.

Both sides have now solidified their bases in Congress.  “No new taxes” now balances “The end of Medicare as we know it.”  Neither will happen to any significant degree and the press releases for back home can be written well in advance.

The question arises, then, if the negotiations ignore 70 percent of the problem, what kind of deal could pass muster with a majority in both the House and Senate?

Here’s the dirty little secret—it isn’t that hard to meet the targets set out by either side.

Let’s start with the basics.

To get a debt ceiling increase that will take Congress and the Administration beyond the November, 2012, elections, requires approximately $2.4 trillion.  Speaker Boehner has declared that he wants that much in spending restraint, dollar for dollar.

Selected leaks from the now-defunct Biden meetings crowed about getting as much as $2 trillion.

Can either target be met without confronting the underlying structural changes in entitlements that would truly change the debt trajectory?

Yes.

Here’s a “back of the napkin” plan to reach the Speaker’s goals and not harm entitlements.

A—accept approximately $1.1 trillion in defense savings over the 10-year period by simply counting the money that will be saved as we draw down troops from Iraq and Afghanistan.

B—freeze non-defense, domestic appropriated accounts for five years, saving $400-$500 billion.

C—make minor changes in small entitlements like agricultural subsidies, change the Cost-of-Living index used to calculate increases in various federal programs, and allow many of the openings in the federal work force the next decade to go unfilled, saving another $100-$200 billion.

D—accept a freeze on new defense spending, outside the troop drawdown savings, for enough time to get $300 billion.

E—close a couple of tax loopholes—like the ethanol subsidy, some of the “tax extenders” for special purposes, and remove the mortgage interest deduction entirely for second homes—and save another $600 billion over the decade.

F—finally, add to these savings the amount of federal interest payments that such savings would produce, another $300-$400 billion.

Lo and behold, you’ve done it.   These changes from the Congressional Budget Office current policy baseline for the next decade amount to even more than $2.4 trillion.  And, better yet, the savings from “cuts” in programs outweighs the new revenues from loophole closings by about three to one.  That is another stated goal of whatever package emerges.

Republicans get to claim that they held on “no new taxes.”

Democrats get to shout that they kept “hands off our Medicare and Social Security.”

And both sides can do all this without having to reduce Medicare payments to doctors, or to expand the reach of the Alternative Minimum Tax (AMT), or to reform almost anything of significance.  Better, if the 113th or 114th Congress confronts a serious international challenge, those folks can always increase defense spending as needed.  One Congress cannot bind another—a basic law of legislation.

No one will notice, except for budget geeks and some cranky media types, that the total indebtedness of the federal government will total $23 trillion ten years from now.  This means that the $2.4 trillion in savings barely achieves 10 percent of anticipated debt.  Worse, such a deal allows Medicare, Medicaid and most other entitlements to continue to climb without restraint.

Why does this outcome seem probable?  Because we have been down this road before.

In the Reagan years, Congress promised a package of deficit cuts that would be three-to-one spending changes compared to tax changes.  When all was said and done, and we looked back a couple of years later at our handiwork, much more was said than done.  The package never achieved three-to-one spending versus taxes and deficits barely budged from projections.

Yes, the package may contain serious process reform and enforcement mechanisms that promise to save more in the future.  But such an outcome will hardly satisfy those who want real fiscal reform and real stabilization of the federal debt.

Kicking a can down the road really is fun.  You watch kids do it all the time.

IMF To Congress: Time For A Debt Deal

June 17th, 2011 at 11:33 am 15 Comments

Last evening, participants in the “Biden Budget Talks” leaked that the group seeks now $4 trillion in debt reduction during the next 10-12 years.Yet, reports proliferate that Medicare, Medicaid, perhaps Tricare, and Social Security are off-limits.

The arithmetic doesn’t work if the rumors are true.

More likely outcomes will be along these lines:

  • Small changes to non-medical, non-Social Security, entitlements (pensions, farm subsidies, etc.);
  • Assumption of a freeze of some length on domestic appropriated accounts (12-14 per cent of federal expenditures);
  • “Process” changes that will create the promise of automatic spending cuts in the future in Medicare, Medicaid, defense spending and tax expenditures.

We will be very pleasantly surprised if the Biden talks produce fundamental re-structuring of the nation’s fiscal mess. Not only is time running out for a comprehensive legislative package that reforms Medicare and Medicaid (the greatest drivers of future fiscal collapse), but it is not in the self interest of Democrats in general to produce meaningful Medicare reform when so many of them in the House and Senate want to use it as an attack tool against their Republican opponents in the 2012 election cycle.

Our reaction is similar to that of Senate Budget Committee Chairman Kent Conrad earlier this week when he expressed his fear that the Biden talks would produce nothing of substantial fiscal consequence.

Conrad has been around the budget block many times and he can sniff out a bad deal when he gets near one. As for the “pledge” that spending cuts will be three times bigger than any revenue changes, history presents a lesson. Way back in antediluvian times (the mid-’80s), Congress promised then President Ronald Reagan that it would produce three dollars of spending savings for each dollar of tax increases. The actual package was more like one for one when all the gimmicks and spin were squeezed out of the package and people who knew Reagan best said that he knew after the fact that the numbers were phoney.

The recent admission of reality by the American Association of Retired Persons (AARP) that Social Security and Medicare really are on the reform block is good news. AARP wants to have a seat at the table in the post-2012 election world when Congress may get serious about such entitlement reform. Its traditional opposition to any changes in entitlements has been a huge stumbling block to progress on the fiscal front; indeed, one can make a pretty strong case that the spending indulgence for seniors that will flood the nation in coming years occurs because of the counter-productive actions of AARP.

Someday not far off, real entitlement reform will force itself onto the Congressional agenda. It won’t be this year nor next. It may well be 2013. And, given turmoil in overseas markets and economies, America may continue to be blessed by strong demand for the “safe haven” of our sovereign debt.

But the patience of credit markets is not eternal. At some point market participants will demand real changes in American debt accumulation. That demand could be in the form of very unpleasant interest rates demanded on our sovereign debt.

Market patience concerns not just serious American policymakers.  This morning, the International Monetary Fund warned both the Europeans and Washington, D.C., that “they are playing with fire” unless they take immediate steps to reduce deficits.

Jose Vinals, director of the IMF’s monetary and capital markets department, continued:  “You cannot afford to have a world economy where these important decisions are postponed because you are really playing with fire.  We have now entered very clearly into a new phase of the crisis, which is, I would say, the political phase.”

In addition, the IMF’s new economic forecast predicts slower global and American economic growth in the next 18 months than its original forecast. Slower growth, higher unemployment, increasing spending, less revenue — no wonder most Americans who live outside Washington, D.C., have so pessimistic a view of the future and so little faith in the federal government.

Our view is that if the Biden talks produce the minimal result we predict, Director Vinals’ fears will materialize more quickly and perhaps more dramatically than most Americans anticipate.


Ethanol Vote: Senate Continues To Disappoint

June 15th, 2011 at 8:18 am 12 Comments

The “World’s Greatest Deliberative Body” Tuesday afternoon voted to kill an amendment offered by Sen. Tom Coburn (R-Oklahoma) that would have eliminated the federal subsidy for ethanol.

This action bodes ill for deficit reduction, for tax reform, and for hopes of getting our sovereign debt under control anytime soon. Coburn’s amendment was simple, as was its common sense rationale. Eliminate the 45-cent federal subsidy for ethanol and get rid of the 54-cent tariff on ethanol imported primarily from Brazil.

After all, the subsidy keeps food prices high, adds very little net fuel to the nation’s needs, and, many contend, tends to corrode engines. The tariff is equally outrageous — it increases the cost of ethanol and props up a domestic industry that recent history reveals cannot compete on its own.

The vote was a little disappointing to Coburn supporters, failing on a 49-50 vote. It needed 60 votes to pass under Senate procedure, so the vote wasn’t as close as the numbers suggest.

Contributing to the defeat was the prospect of an amendment authored by Sen. John Thune (R-SD) that would have eliminated the tax break for ethanol, and would have authorized $1.5 billion for ethanol infrastructure. Thune was one of the more vocal opponents of the Coburn amendment, yielding to corn producers in his home state despite his stated desire for serious deficit reduction.

While taxpayers got the short end of the stick once again, at least the 34 Republicans who voted with Coburn stood up to the Americans for Tax Reform (ATF) and its much-discussed taxpayer protection pledge.

Most Republican candidates for federal official sign the document, which ends up allowing them very little room to really attack America’s fiscal problems. Now, with 34 Republicans defying the ATF, the spell may be broken — not one of the 34 will suffer any political damage back home by “violating the pledge.” One hopes that is the end of this particularly pernicious influence on public policy.

One has to ask the Senate this: if you cannot get up the gumption to kill one of the most ill-advised tax loopholes for the few thousand American corn growers, who are already enjoying almost record high prices, how in the world will you ever get enough courage to really take on the other $1 trillion a year in tax loopholes? And without closing loopholes in the tax code, how will you every pass serious tax reform or serious fiscal control?

House Ways and Means Committee Chairman Dave Camp’s spokesman said that the defeat showed that “one-off” attempts to close loopholes will fail. She continued, accurately, to note that the best chance to bring sense to the tax code would be in the context of overall tax reform.

Camp has pledged to bring the subject up legislatively in 2013 and has held a wide-ranging series of hearings so far this year. Yet, the victory of opponents of the ethanol tax break reveals how bloody the battles between favored businesses who enjoy tax loopholes ( much larger than the ethanol subsidy) and taxpayers will be the next several years.

And, while a the “one-at-a-time” approach to closing loopholes may fail, supporters of tax reason and taxpayer relief still must be disappointed in the Coburn defeat and the overwhelming number of Democrats who voted to keep the egregious ethanol break alive.

On the other hand, many of those Democrats voted for ethanol subsidies for the same reason Thune opposed Coburn — to curry favor with farmers back home in front of the 2012 elections. Thus, the Senate continues to disappoint. It acts seldom and when compelled to act, acts badly.

Technical Default? Don’t Even Think About It

June 10th, 2011 at 3:52 pm 20 Comments

This past week, differing assessments of the effect of a “technical default” on United States sovereign debt widened the debt ceiling split among politicians on Capitol Hill.

The first view we can, for shorthand purposes, call the “Toomey Plan,” after Pennsylvania Sen. Pat Toomey, who first publicly pushed it. That view is quite straightforward: enough cash comes into the Treasury each month that America can pay its debt obligations with ease.  Yes, that means some other functions of government may suffer or even end, but that short-term pain is worth it if a real long-term debt package can emerge from the chaos.

This view, approximately, lines up with some Wall Street investors who believe that even a technical default that causes short-term disruption among global financial markets can be tolerated. Again, yes we have short-term pain, but over the long run, the United States will be in a better financial position than it is likely to be in if we fail to have a long-term, credible debt reduction plan.

Some Members of Congress invoke the name of Stanley Druckenmiller, a very successful Wall Street denizen, who proposed this analysis earlier this year and had urged it on Congress during the 1995-6 debt ceiling showdown.  House Speaker John Boehner had a list of 150 economists who urged a large, credible debt stabilization plan as a pre-condition for passage of the increase in the debt ceiling and he took that list with him to the White House when he met with President Obama earlier this month.

The other view we can term the “Establishment Plan.”  Supporters of this analysis contend that even a short-term technical default would cause sufficient chaos in global financial markets such that the United States would suffer a grievous economic and financial wound.  Either a true default—in which the United States fails to pay on time and in full its outstanding sovereign debt obligations—or a form of the Toomey Plan leading to large-scale government agency shutdowns would cause serious harm. In this group are rating agencies like Standard and Poor’s, J.P. Morgan, Fitch, and Moody’s.

Not surprisingly, proponents of the Establishment Plan are members of “The Establishment.”  Think of the Department of Treasury, Wall Street advisors to the Treasury, CEOs and presidents of global and regional financial institutions, a large number of economists from academia and think tanks, as well as former members of the Washington, D.C., opinion elite and most mainstream media, including The Economist, Washington Post, New York Times, and similar voices.

Prominent among “The Establishment” stands Treasury Secretary Tim Geithner.  Geithner, of course, speaks with substantial authority for a number of reasons.  It is his department that manages the public debt.  It is his department that has to go continuously to global credit markets to sell and roll over our debt.  And, it is his department that publishes the daily income statement of the United States. Geithner knows America’s debt position and funding needs better than any other single senior official in the country.   Geithner also knows markets and market-makers very well, since he used to be the president of the New York Federal Reserve, which daily reviews activity in Wall Street.

James Carville, political strategist, said, “If I come back in another life, I want to come back as a God d***** bond trader.”  That was his way of highlighting the power that credit markets have over large sovereign debtors who follow sloppy fiscal policies (think of Greece as a modern example). And, it reflected the fear of the Clinton Administration and then-Treasury Secretary Bob Rubin when it came to suggestions to challenge the wisdom and power of markets.

So, who’s right?

Since it is a matter of first impression—after all, modern America has never defaulted to any significant degree on its debt—both sides have begun to argue and assert scenarios.  No one can “prove” either view right.

But a look at modern financial engineering gives us real clues to the likely answer.

Privately ask a Wall Street investor running money for others what would happen if the Toomey Plan prevailed.  Remember, in that plan, all United States sovereign debtors would be paid in full and on time.  Little money would be left to fund many other government functions, with the resulting overnight shuttering of entire departments and immediate layoffs of hundreds of thousands of government employees.

The consensus response is “chaos.”

Now if an active credit market maker tells you that chaos would occur if some scenario became a reality, the wise should listen.  This bond trader isn’t theoretical.  He or she is telling you what they would do in the event of a Toomey Plan—run for the doors.

The real question for Members of Congress, then, isn’t whether they “believe” Toomey or the Establishment view is right.  The real question is simply, “Which way do you want to bet your entire career and the economy of the country on?”  Even most of the new Members are beginning to enjoy the privileges of power, privileges that will disappear if their actions tank the economy and financial markets.

So, the prudent person should look askance at the Druckenmiller/Toomey suggestion.  If a majority of market participants and folks who have been out selling our debt to markets for decades say that the Toomey approach would severely injure America’s economy, that’s the way I am going to bet.

The long-run argument—the Toomey Plan that has at least a dozen supporters in the Senate–sounds so noble, so almost moral, so “gutsy,” that some may go that way. Testosterone will do that sometimes.

Such would-be warriors  would be well served to remember John Maynard Keynes:  “In the long run, we are all dead.”

Or if they want a more recent example, here’s Warren Buffet on the dangers of a form of modern financial engineering called derivatives:  “Derivatives are financial weapons of mass destruction.”

Just for the record, even a technical default on payment of American sovereign debt would shatter parts of the derivatives markets, endanger global financial markets, and have other “non-trivial” consequences.  Or, at least, that’s what folks who make a living in that market say.

The Toomey Plan sounds a little bit like a military advisor telling his superiors, “Well, you know we could always try a small tactical nuclear weapon to see if the doom-sayers are right.”

GOP Rallies Support For Budget Reform

June 8th, 2011 at 4:08 pm 16 Comments

Republicans in Congress have begun to force talks on budget process reform, starting with instituting a two-year (biennial) budget, instead of the present annual budget system.

The idea first emerged a couple of decades ago when then Senate Budget Committee Chairman Pete Domenici and present House Rules Committee Chairman David Drier co-chaired a Congressional task force on budget reform.  The two pushed almost every Congress for the two-year idea, but faced consistent opposition from Appropriations Committee members in both chambers.

As the years have passed, however, more and more analysts and policymakers have urged re-consideration of the plan.

Proponents of the idea argue two major points:

1) The present annual system allows almost no room for oversight by either the Appropriations or Authorizing committees;

2) Congress finds it impossible to ever do its annual appropriations on time under the present system, leading to catchall bills that leave almost no time for serious consideration by members who aren’t on the Appropriations Committees.

Of course, appropriations staff and some members still oppose the idea.  Their arguments pale in the face of the failures of the committees to follow regular order almost ever during the past decade.

But, for the sake of fairness, here are the two arguments appropriation opponents of biennial budgeting make.

1) Two-year budgets would not give the Congress the ability to react with immediacy to changing circumstances;

2) Such a change would lead to more multi-thousand page Continuing Resolutions hitting the floors of the two chambers.

The proponents have an historical advantage on the arguments.

Since the passage of the 1974 Budget Act, the power of the authorizing committees has dwindled.  While Budget Resolutions and Appropriations Acts can get to the Senate floor either by statute or by necessity, literally dozens of critical re-authorizations in areas like military spending, housing, transportation, and education never get floor action during an entire Congress.

Therefore, the critical oversight aspect of the authorizing committees correspondingly has wilted.  Policy-making has migrated to appropriations bills, Senate rules notwithstanding; and appropriations bills have morphed into huge, multi-policy monsters that almost never get any reading in full by anyone.

Dreier has 38 co-sponsors and a similar measure has 31 sponsors in the Senate.

The two-year budget reform is long overdue. It surely isn’t a cure-all for the dysfunction that now baffles the Legislative Branch.  But one hopes that when Congress concocts this year’s debt ceiling increase package, biennial budgeting will be part of it.