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.

GOP Retreats From Ryan Medicare Plan

May 6th, 2011 at 5:45 pm 44 Comments

That’s all it took for House Republicans to begin to scatter like a covey of quail?

Two simple weeks of recess, viagra complete with ginned-up demonstrations against Medicare and Social Security reform, lead to a full-scale collapse on the fiscal front?

Talk about a great week—President Obama had one.

His order led to the death of Osama bin Laden.  He went to Ground Zero.  He presented two posthumous Medals of Honor. His actions drew praise from former Vice President Dick Cheney and even Rush Limbaugh.

Then at the end of the week, his adversaries on the deficit front—seemingly without external provocation—decided to say that they realized they didn’t have any chance to get Medicare reform as part of a budget package.  That’s just dandy, since Medicare is the primary driver of the unsustainable debt that Republicans pledged to attack last November.

This comes less than a month after House Republicans almost unanimously voted for deep Medicare and Medicaid spending restraint when they voted for the FY12 budget devised by House Budget Committee Chairman Paul Ryan.

House Republicans cannot even claim they didn’t know what was in the Ryan Plan.  Ryan developed the basics of his plan almost two years ago.  He introduced it to almost dead silence and virtually no co-sponsors.  It had been analyzed, criticized and praised for months and months.  So, those who voted for the Ryan Plan knew what they were voting on.  They had to know that it would create a political firestorm.

Well, it did.  And, now, just like on Saturday Night Live in the old days: “Neeeveeer mind.”

My Democratic friends say, “Yep, it’s just like when Pelosi made House Democrats vote for cap and trade in 2009, when everybody knew the Senate would never take it up.  Lots of our guys lost in 2010 on that stupid and useless vote.”

So, is this the GOP’s “cap and trade moment”?  It cannot be called anything other than self-immolation.

No one has been able to explain the seemingly off-the –cuff remarks by House Majority Leader Eric Cantor two nights ago, when he allegedly said, “well we know we won’t get real Medicare reform.”  No one has been able to explain why Ryan himself appeared to agree with Cantor when he said, “We’ll have to settle for singles and doubles, no home runs” in the fiscal battle.

And, the coup de grace, House Ways and Means Chairman Dave Camp put the legislative face on it when he said, “I am not interested in laying down more markers.  I am interested in solutions.”  And with that, Chairman Camp, whose committee has jurisdiction over Medicare in the House, made official what the Republican message mess had revealed—Medicare is “off the budget table.”

What if the House leadership had said, “Yep, we know we have a lot of work to do to convince voters that we have to do real Medicare and Medicaid change if we are to save the nation from bankruptcy, but that’s what we were sent here to do…”?  Eventually, through negotiation, President Obama would have agreed to some changes in Medicare and Medicaid.  That would have given cover to House Republicans in 2012.

As it is now, this unilateral disarmament exposes them on two fronts—they won’t be able to run away from the vote for the Ryan budget (see Sen. Chuck Schumer’s comments in the New York Times story by Jackie Calmes) and they won’t get deficits down significantly.

Am I wrong, or do I remember so many House Republicans saying, “we are not going to be corrupted by Washington, D.C.  We are going to do the right thing, even if it costs us re-election.”?

It doesn’t take much of a seer to forecast an ironic outcome—the FY12 budget that will eventually emerge will have freezes on domestic and defense discretionary spending, some kind of budget enforcement process, and no or very few tax changes.  In other words, just about the same deficit and debt numbers that President Obama had in his FY12 budget submission two months ago.

We will see a repeat of the Continuing Resolution follies, this time on the FY12 budget, some sort of deal to extend the debt ceiling, and not much else.

So, the much-jeered appraisal by Standard and Poor’s last month—when it said that it expected nothing significant on the debt stabilization front until 2013—will become a reality.  And the revolution of November, 2010, turns out to be something less than the rebels promised.

Lord knows what will happen when this crew comes back from the next recess.


Debt Talks Stall Before They Even Start

May 4th, 2011 at 3:26 pm 10 Comments

The death of Osama bin Laden dominates media, as it should.

Yet, in the shadow of that dramatic story lies the continuing federal fiscal tar pit.

Events this week already call into question assumptions held since the beginning of the year:

  • Will the Gang of Six in the Senate produce a comprehensive, unified debt reduction plan?
  • Will the Senate Budget Committee be able to produce a budget resolution for FY 2012?
  • If both the committee and the Gang of Six fail, where does that leave the debt ceiling increase?
  • Will the voices of those outside and inside Congress calling for rejecting the debt ceiling increase lose strength and votes as Members learn more about the risks of rejection?

Most analysts confidently predicted that the Gang of Six would succeed in producing a bipartisan plan; that the Budget Committee would produce a budget for FY 12 based in large part on that Gang of Six plan; that failure was not an option; and that as members learned more about the dangers of playing politics with the debt ceiling increase, they would become more responsible in their statements and more flexible in their stances.

Events seem to reveal a slow deterioration in the debate.

Tuesday, Chairman Kent Conrad revealed to his Democratic colleagues in the Senate his own plan for an FY12 budget.  While the Chairman insisted that the Gang of Six could still produce its own initiative, he wanted to have a separate plan if the Gang of Six failed.  Conrad’s plan varies dramatically from the budget passed by the House earlier this year, but nevertheless Senate Majority Leader Harry Reid advised the caucus not to endorse the Conrad budget because a great deal of negotiations lie ahead.

With a Gang of Six proposal, and without the active endorsement of the Majority Leader, it is hard to envision Chairman Conrad getting an FY12 budget passed through his committee anytime soon.

At the same time, The Weekly Standard‘s editor, Bill Kristol, relates a conversation he had with former Treasury Secretary James Baker.  Kristol writes that Baker urged Congress not to pass a debt ceiling increase without a specific, multi-year deficit reduction plan in place.

Separately, a former Treasury official, Emil Henry, has written in The Wall Street Journal claiming that a debt ceiling increase really isn’t necessary and that markets will react benignly if the government merely pays the interest and principal on debt as it matures, even if it means that other government operations would close down as a result.

Meanwhile, tomorrow discussions on the debt ceiling and fiscal policy will begin at Blair House, under the leadership of Vice-President Joe Biden.  No one knows how much impact the Biden initiative will have, but the meeting will begin with several members absent–not an auspicious start.

Far from clarifying the fiscal debate, the two-week Easter Recess seems to have had almost no impact.  Republicans returned to the House, saying that pro-Medicare and pro-Social Security protesters at town hall meetings were simply union members organized for the purpose of disruption.

Gas at $4 a gallon, unemployment, still dropping housing prices and increasing foreclosures, and painful unemployment remained the focus of the folks back home.

In essence, then, the decision has been made.

May 16 will come and go, Treasury Secretary Tim Geithner will resort to various tricks to keep the nation’s finances in order until sometime in August, and Congress will continue to bicker.  America won’t default on its debt through some series of tactics.

Meanwhile, world markets will wonder at the combination of silliness and recklessness that characterizes Washington, D.C.,’s debate on a fundamental aspect of governance.

As a political matter, one constant remains:  the House of Representatives has to pass a debt ceiling increase.  President Obama doesn’t have to pass the bill.  Failure will be laid not at the President’s door, but at the door of the ideologues in both parties who dominate the behavior of Congress.

It’s sad that of the few tasks the Constitution reserves to the Legislative Branch, Congress finds itself unable to do one of the most basic ones: establishing a rational level of spending and taxing.


Markets Won’t Indulge GOP Debt Threats

April 29th, 2011 at 12:14 am 13 Comments

The GOP’s debt ceiling threat has been tried before and last time the markets were quick to shoot it down.

Way back in antediluvian times—about l995—a very successful investor and Soros Fund Management partner named Stanley Druckenmiller opined in the fall that perhaps it would be a good strategy for the Republicans in Congress to threaten to allow the United States to default on its debt in the absence of a true budget and entitlement reform package.

This opinion brought forth the wrath of Roger Altman, try once a very senior official at the United States Treasury in an op-ed piece in the New York Times.  In turn, remedy Druckenmiller and another successful Wall Street figure, Kenneth Langone, fired back: “market(s) will not be unhinged by a clear movement toward a balanced budget agreement, even if it is threatened by an interest payment delay.”

Well, now.  Three serious market participants.  A serious dispute over strategy and market reaction.  The very thing that billions are won and lost upon.

So, what happened?

On Jan. 25, l996, reporter John R. Wilke was writing, “Wall Street analyst, Stanley Druckenmiller, in change of position, says Republicans’ threat of default is ‘failed strategy….default threat would only rattle investors.’”

Wow.  What possibly could have changed someone’s mind this dramatically?

Reality did.

In between the original exchange between Druckenmiller, Langhone, and Altman, a couple of things occurred.

First, on Dec. 16 of 1995, the Dow Jones Industrial Average plunged 101.52 points, down 1.9 percent.  The benchmark 30-year US government bond dropped 1 17/32 points, its yield hitting 6.2 percent.

Second, on Jan. 10, 1996, according to the Washington Post: “Investors frantically dumped stocks and bonds today in reaction to threats of a long stalemate in Washington over efforts to eliminate the federal budget deficit.”

During that day, the Dow Jones industrial average dropped 97.19 points “twice triggering the New York Stock Exchange’s limits on computer-guided trading.”

For perspective, the DJIA was about 5,100 at the time.  An equivalent drop today when the Dow is at 12,763.31 would be about 250-300 points in one day.

So, the United States Congress has tried the old, “we won’t raise the debt ceiling without a big fiscal plan” threat before.  Its bluff was called, a couple of government shutdowns ensued, markets were rattled, and in November of 1996, President Clinton was re-elected.

Keep this history in mind when analysts and politicians assert that America’s equity, bond and currency markets will take a stalemate over the debt ceiling this year with aplomb.  Markets don’t react with aplomb.  They react with fear or greed.

My colleague, Jay Powell, was Undersecretary of Treasury for Finance under the Bush I Administration.  He has excellent Wall Street experience.  Read his analysis of the present situation, and the options open to the Treasury Department if Congress fiddles with the debt ceiling vote later this year.

One might also read entirely the letter from Matthew E. Zames, Chairman of the Treasury Borrowing Advisory Committee, to Treasury Secretary Tim Geithner on April 25.  Jay’s piece links to the Zames letter, which doesn’t beat around the bush a bit.

Optimists, usually a rare bird in the Washington, D.C., jungle, believe that at least the outlines and process reforms needed to really move toward debt stabilization can emerge from the coming comedy of Congressional wrangling over the debt ceiling increase vote.  Pessimists retort, “In a fight between debt in the future and Medicare and Social Security ‘cuts,’ debt has no chance to win.”

In the past, the pessimists have been right.  Odds are that they will be right this time.

But no one should think the world markets will react with calm to yet another American failure to get its unsustainable debt burden under control.

Remember we tried that “failed strategy” once before.


Washington Flirts with
a Debt Disaster

April 22nd, 2011 at 4:50 pm 15 Comments

Lunacy abounds in every field, thumb though it seems to appear most prominently in Hollywood and Washington, D.C., where the media takes notice.

Monday’s warning from Wall Street on the debt, coincided with a full moon, which triggered on the same day: a statement of theology, a statement of theory, and the truth about the impending federal debt ceiling.

First, we had a statement of theology:  Prominent anti-tax activists went on the attack.  Any tax increase, even closing tax loopholes, dooms the Republic, they proclaimed.  The problem isn’t that we have too few taxes, but that we have too many federal programs.  So, this belief system posits, any notion that taxes should increase by any means is inherently heresy.

Second, this was followed by a statement of theory:  Politico ran a guest editorial on the debt ceiling by Jagadeesh Gokhale, a senior fellow at Cato Institute and a former senior economic adviser to the Federal Reserve of Cleveland.  Gokhale asserted that “a temporarily frozen debt limit could instead signal U. S. lawmakers’ resolve to get our fiscal house in order” and termed a technical default “a temporary suspension of fiscal operations to promote a more prudent fiscal course.”

Third, we received the truth from the marketplace:  JP Morgan’s fixed income analytical group, who provide research and analysis to large market participants, produced almost simultaneously its analysis of what a technical (one or two day) default would do to markets globally.  One cannot do the entire work justice in a short blog; but, the JP Morgan group concluded, among other things:

that any delay in making a coupon or principal payment by Treasury would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy.

Well, what a fine mess Secretary Geithner has gotten us into this time!

The theologians believe that under no circumstances should taxes be raised, even if necessary to get the congressional votes to raise the debt ceiling.  If you do so, you will go directly to political Hell and not collect $200.

The theoretician speculates that a short-term technical default by Treasury might actually be good for the economy long-term and that any harm in the short run would be offset by such a demonstration of fiscal seriousness.

The truth, told by folks who lose their jobs when they are wrong, is that even a technical default would have serious long-term consequences to both the Treasury and the U.S. economy.

As we’ve said before—most notably in response to the notion that having “30 good Republicans in the Senate” is better than having a Republican-controlled Senate—theologians don’t mix well with governance.

Theorizing retains a critical role in the effort to discover truth, but serves much less well in the practical world of trying to handle the finances of the world’s largest economy.

The truth speaks of the real world as it perceives matters now.

For Treasury, credit markets are the real world;  indeed, credit markets may be the only universe that the world’s largest debtor nation needs to pay attention to.

As debate continues among those who call for quick action on the debt ceiling and those who believe we can in theory shock government painlessly into saving $120 billion or that low taxes are so sacred that any attempt to raise revenue will bring on damnation, it’s good to keep something in mind.

However much we might dislike it, for the Treasury, the truth resides in market reaction.

The rest remains a matter for college sophomores in late night discussions over controlled substances, and for gatherings of the faithful.


Washington Moves Slowly After Debt Warning

April 19th, 2011 at 2:46 pm 13 Comments

Standard and Poor’s unexpected announcement yesterday that it had put United States sovereign debt on watch with “negative” implications shocked Washington. But while Congress may heed the warning and raise the debt limit, sales it’s unclear if S&P’s announcement will push both parties to a longer-term debt stabilization plan.

The White House called the S&P announcement “a political” document;  Secretary of Treasury Tim Geithner said it provided more impetus for a long term debt agreement;  and Japanese officialdom said this morning that the United States bond market was still a good place to invest under current circumstances.  More importantly, neither China nor Europe had anything to say on the S&P announcement.

As in the story, “The Dog that Didn’t Bark,” China’s silence comports with its earlier announcement this year that it was paring back on its American sovereign debt holdings.  Along with the decision by the largest bond fund in the world, PIMCO, to sell all its American debt, it’s clear market participants view the upcoming three to five years as critical to the relative security of United States issuance.

S&P has a reputation of being the most cautious of the American-based rating agencies, so its analyses draw a little more attention than other sources.  All rating agencies have suffered as the financial crisis revealed a business model that some believe called into question the validity of their ratings.  However, the rating agencies moved quickly to identify the European debt crisis and downgraded quickly the sovereign debt of several countries.  Subsequent facts have validated rating agency behavior in the case of Euroland.

What did S&P really say?  It said that it was putting American long-term debt on watch with negative possibilities.  It based that action on a judgment — a forecast if you will — of how budget negotiations will turn out in Washington.  Since the budget process will be inherently political, it’s fair to say that S&P was making a judgment about how political behavior in Washington will evolve.  Thus, the White House was obliged to say that it was confident in the ability of Congress and the President to reach a significant long-term debt agreement that will reduce projected indebtedness over the next 20 years.  In essence, the White House’s political forecast differs from S&Ps.

As we wrote yesterday, Members of Congress aren’t hearing too much about debt and deficits on this two-week recess.  Most talk will be about $4 a gallon gasoline, lack of jobs, flooding and tornadoes, and home foreclosures.  The President, to his credit, has begun a speaking tour in which he will use the bully pulpit to pound home the message that America must act now on a long-term debt reduction plan.  When the recess ends, we expect that the Senate’s “Gang of Six” will have completed their plan for deficit restraint.  Senate Budget Committee Chairman Kent Conrad is a serious fiscal thinker who has announced that he will not run for re-election.  He certainly wants to do all he can to leave behind a legacy of real accomplishment in budget policy.

So, all the elements for a possibly productive budget settlement seem in place.  Meetings under the aegis of Vice President Joe Biden will start the first week in May, with representatives from the House, Senate, and Administration.  Senior staff from Congress and the White House have substantial prior experience in dealing with large budget negotiations.  Deficit hawks can take some solace from these steps forward.

But (isn’t there always a “but” in Washington?)—Members of Congress will also hear during this recess period from all the groups that oppose any changes to Medicare, Medicaid, Social Security and other entitlements in the federal budget.  We can expect demonstrators, waving of placards, all the usual picture posing that such events bring.  Also there’s good reason to fear that many “middle of the road” Senators and Congressmen will be taken aback by the fury of opposition and may come back to town with less than a happy face.

Nothing can happen without the President.  How he approaches his natural political allies who oppose any change to entitlements, and who want higher taxes across the board, will be the key point in negotiations.  Will the President continue to move more to the center of the political spectrum despite liberal grumbling?  So far, he remains slightly aloof, having no detailed plan of his own to tackle entitlements, but urging others to do so.

Yes, the debt ceiling will increase by Congressional vote sometime this summer.  And, yes, the United States will pay its debts promptly and in full.  But failure by Congress and the Administration to achieve a real, verifiable debt stabilization agreement will mean that another 18 months to 2 years will pass without progress on the most critical economic dilemma facing the country.

As we have said many times before, the bond vigilantes may be snoozing right now as investors continue a flight to perceived safety of principal in difficult international times.  But, when Ben Bernanke stops being buyer of last resort for Treasuries, and Congress and the Administration dither, maybe the bond boys will awaken.


Wall Street’s Wake-Up Call

April 18th, 2011 at 3:00 pm 49 Comments

This morning Standard and Poor’s put its long-term rating on United States sovereign debt on negative outlook.  The equity market, as I write, is off by more than 200 points on the Dow and 50 points on the tech-heavy NASDAQ.  Strangely, markets seem to be reacting as it they didn’t expect this or couldn’t divine it by simple research.

Three things seem to have reached a synergistic point:

First, markets are spooked by the continuing European debt crisis.  Almost all bond holders, including those European banks heavily exposed to Greek, Irish, Portuguese, and Icelandic debt, now realize the near-certainty that some kind of “punishment” in the form of re-structuring all that debt seems inevitable.

Second, the markets seem to realize that political uncertainty in North Africa and upcoming elections in China could mean dramatic changes in important global financial and economic sectors.

Third, neither President Obama’s deficit plan speech nor Congress’ response seem to have settled market nervousness about projected soaring American debt.

But I wonder why markets have not expected this?  None of the three fact patterns offer new information.  All have been subject to hundreds of analyses and hundreds of thousands of words and numbers the past two years.

Two things seem likely to happen in response to the S&P announcement.  First, most Americans won’t notice — especially with $4 a gallon gasoline and a 9 percent unemployment rate.  Second, politicians will issue strong warnings, but will engage in weak action.

The timing of the S&P announcement may have caught markets by surprise, since many analysts thought that the firm would have released any such statement after the 2012 elections.  It may well be that S&P hopes that announcing at this time might prod politicians in Washington, D.C., at a time when the President, the House Republican majority, and a bi-partisan group in the Senate have begun to commit to real negotiations on deficit and debt reduction.

I still believe that the odds are less than 50-50 that Congress and the President will come up with a convincing plan this year.  And, 2012 seems the least likely year for such an initiative.

However, if the S&P announcement is taken as a warning — like the dead canary in the mine shaft — those odds may improve.  Rhetorically, at least, the two sides are far apart on every aspect of long-term debt reduction.  In substance, however, I believe that common ground can be found on most points.  The single most important person in the fight ahead is still House Speaker John Boehner.  No one has a tougher job in Washington, D.C. than the Speaker, who’s trying to forge his caucus’ desire for smaller and less expensive government into something beyond mere sloganeering.

The two-week Easter and Passover recess comes almost providentially.  Members can hear from constituents back home, rhetoric from the budget combatants gets time to calm, and the Senate Gang of Six gets renewed impetus with their colleagues.

For those who have been saying that markets will simply ignore all the Congressional and Presidential nonsense and bargaining statements, the S&P announcement comes as a reminder of what I have written about before.  Out in the marketplace exist bond traders.  They are watching.  They will watch all the silliness surrounding the debt ceiling fight a couple of months from now and either find themselves re-assured or find themselves heading for the exits.

Some commentators have responded that: “Markets know that the debt ceiling will be raised.  They won’t be spooked.”

I’ve worked with 31-year-old bond traders.  When I was at Salomon Brothers in the l980s and 90s, Salomon was the biggest bond house in the world.  When you have more than 500 bond traders on one floor, connected to their colleagues in London and Tokyo instantaneously, exhilaration and panic both move at warp speed.

If Congress passes two or three short-term increases in the debt ceiling, following the pattern of behavior that characterized the Continuing Resolution negotiations, then those young bond traders may start moving quietly toward the exits…and none of them will want to be the last one out.


State Debt: Washington’s Next Budget Headache?

April 16th, 2011 at 12:28 am 6 Comments

Congress may have finally approved the FY11 budget this week, click but the next battles have already begun. The deficit debate awaits a proposed centrist compromise from the Gang of Six, look both parties are firing salvos over the debt ceiling vote and the forgotten issue of state and local debt could soon become Washington’s next worry. As Capitol Hill takes a breather from the budget battles, generic here’s an overview of the unresolved debates and still-mounting spending skirmishes.

Fiscal Year 2011 Funded at Last: The Senate joined the House late this week in passing the seventh and apparently final version of the FY11 appropriations bills, in the form of a Continuing Resolution.  House Minority Whip Steny Hoyer was able to provide sufficient Democratic votes for Speaker John Boehner to compensate for the loss of 59 members of the Republican caucus.  At least now agency and program managers in the federal government have guidance on how to run their departments and what their budgets will be.  Some experts estimate that between the emergency funding in the bill and the costs of the five delays caused by five CRs, the final bill actually added to the FY11 deficit.  One can be reasonably sure that this result was far from what the bulk of the GOP caucus intended when this entire adventure began.  In some sense, it reminds one of World War I—bloody, interminable, hand-to-hand combat day after day without any tactical nor strategic gain for either side.

Gang of Six Needs to Move: Frustrations mount among Senators as both the House and President Obama have joined the budget fray full scale.  The “Gang of Six” has yet to release a comprehensive FY12 budget plan nor a longer term outline similar to that House Budget Committee Chairman Paul Ryan and Obama have produced.  Appointment of Sens. Dan Inouye and Max Baucus by Majority Leader Harry Reid to represent the Senate in the budget talks proposed by the President must be viewed as a deliberate slight of Senate Budget Committee Chairman Kent Conrad and other Democratic members of the Gang of Six.  Most observers believe that Reid’s appointment of Inouye, Chairman of Appropriations, and Baucus, Chairman of Finance, makes a comprehensive and detailed legislative outcome less likely.  What the Gang of Six does now remains uncertain, although hints have emerged recently that the group will reveal a full-scale plan when the two-week Easter Recess ends.

The Debt Ceiling Approaches: Media hysteria, focused so breathlessly on a “government shutdown” as the CR debate lingered, can now attach itself to the question of how Congress will pass an increase in the federal debt ceiling.  The present limit is $14.29 trillion.  Treasury Secretary Geithner estimates that ceiling will be breached no later than July, even using every trick in Treasury’s book.  Thus, President Obama called for his three-party budget negotiations and set an end of June deadline for reaching an agreement on a long-term blueprint to get the projected national debt under control.  No one with any experience in this town believes that even the best-intentioned negotiators could reach agreement and produce implementing legislation in such a short time, but the President was well-served by setting a deadline, especially one that he knows cannot be met.  Despite what conventional wisdom holds, we believe that President Obama will be on the offensive on the debt ceiling increase vote and that the public burden lies squarely on the House Republican leadership.  The President will continue to call for quick action on a “clean” debt bill (one without any amendments attached), knowing full well that it will never happen.

Treasury’s Good Luck Continues: If deficits are so bad, why are American interest rates so low?  That question arises whenever deficit hawks warn about soaring debt and the inevitability of higher interest rates.  The answer, of course, lies in present global economic and military realities.  The European debt crisis proves more expensive and more extensive than first projected.  North African instability continues, with Iran involving itself at every opportunity to cause turmoil.  Japan’s earthquake/tsunami tragedy raises economic uncertainty not only in the world’s third largest economy but throughout the developed world’s economies.  Economists warn of a persistence of the slowdown in America’s economy in the just-concluded first quarter.  And, Fed Chair Ben Bernanke remains a buyer of last resort of American debt issuance.  Under such unique circumstances, which put a premium on safety and liquidity, global investors rush to buy United States debt as a temporary refuge from this global chaos.  So Treasury’s good luck continues—as long as the world remains unstable and investors rush to risk quality and perceived safety, American interest rates will remain low.  However, this unusual situation will end; when and how remains unknowable.  But when safety becomes a lesser priority among investors, and greed/risk take over again, then America will have to pay high interest to investors to sell its debt.  That could cause “interesting” consequences.

Meanwhile, the States Plod Along: Lost in the media’s focus on the federal debt, the worsening condition of state and local finances occupies the back pages.  Interviews with professional municipal bond managers reveal less fear than headlines suggest.  Most professionals believe that some states will face serious debt problems within 3-5 years, but most dismiss predictions of thousands of defaults costing tens of billions of dollars as vastly over-stated.  No one predicts the future with great accuracy, but even if only California, Illinois, and Pennsylvania come to the federal government seeking some sort of “bail out,” bond markets will quake.  Taking a larger view, one is struck by the fact that debt is migrating up the governmental food chain.  Cities ask for state help, states ask for union and other spending concessions, ratings agencies watch warily, and, ultimately everyone looks to the federal government.  Even individuals who cannot pay the debt on their homes, have turned to state and federal programs for help.  This migration of debt will reach some sort of federal policy decision-point before the end of the decade—but the feds will have no money to help.

Finally, the Public Remains Fed Up: Poll data from a wide variety of sources shows that Americans still believe by overwhelming margins that the country is going in the wrong direction.  The President’s approval ratings remain below 50 per cent, Congress’ approval barely nudges 30 per cent, and joblessness continues to unnerve almost everyone.  As foreclosures continue relentlessly, and good jobs remain scarce, almost no politician in a competitive situation should assume an easy race in 2012.  Those pundits who confidently predict an Obama win or loss, or Republican takeover of the Senate, or Democratic gains in the House, engage in pure speculation.  In turbulent national and international conditions, where exogenous events govern public confidence levels, prediction is almost less than an art—it is mythic.

Congress Begins Its Two-Week Easter Recess: As Will Rogers is reported to have said, Congress is out of session, so the nation is temporarily safe.  Old Will would have loved to be alive and commenting these days.


Was GOP Fooled By Its Own Budget Numbers?

April 14th, 2011 at 3:07 pm 14 Comments

A substantial number of the House Republican caucus are now complaining loudly about the “bad deal” their leadership struck to pass the Continuing Resolution for FY11 last week.  That agreement kept the government open and many expect it will pass the House today only because enough Democrats cross the aisle and vote with Speaker Boehner.

The complaint centers on two realities.

First, help many of the new House Republicans pledged to voters last November that they would fight to the bitter end to get $100 billion in spending cuts in the FY11 budget.

Second, purchase as the “real” numbers begin to emerge, unhealthy many of these members now realize that the $38 billion in “cuts” could mean perhaps as little as $15 billion in true deficit reduction in FY11.

We touched on both these issues before.

To repeat—no way existed short of closing down most domestic government agencies to get $100 billion in real deficit reduction from the FY11 budget.

And, just because you “cut” appropriations bills by $100 billion doesn’t mean you have cut the deficit by $100 billion.

Things get a bit wonky here, but if one doesn’t know the budget process and the federal budget, both wonky things, one makes bad assumptions.  The conservative complaints now reveal how little too many incoming GOP members knew about either.

If you cut money from the president’s proposed budget for FY11, you have to make sure that you are cutting from already-authorized (enacted) programs, not from the president’s wish list of new spending.  Obviously, if you are rejecting additional money to already existing programs, or are refusing to fund new initiatives, you really aren’t cutting the Congressional Budget Office’s deficit baseline.  After all, you are cutting things that don’t yet exist.

If you refuse to spend monies that were appropriated, but now lie unused (as in the case of census expenditures) and will never be used for the purpose intended, you are cutting spending in some sense, but you surely cannot claim to be cutting deficits.  That money was never going to be spent any way.  You cannot restrain spending by restraining non-spending.

Finally, when you get down to the real meat of cutting presently-enacted programs in which money is being spent and will continue to be spent, you have the nasty little fact of something called “spend-out rates.”

This is where most folks go to sleep.  But, it’s also the most important part of understanding the appropriations and budget processes.  As senior budget staff in the Senate, we used to say that the most important thing we could teach new senators was the difference between budget authority and outlays.  Sometimes we succeeded.

If you want to cut $100 billion from spending in non-security, discretionary accounts—really cut monies that will be spent otherwise—you would probably have to cut about $250-$300 billion in budget authority.  Since the total budget authority for all those accounts amounts to less than $500 billion in FY11, and since the Fiscal Year is about half-over, that means to truly save $100 billion in outlays, about a third of the government agencies would be shuttered.

Most money that is destined to be spent in any fiscal year goes to salaries, expenses, medical benefit support, and entitlements.  Large construction projects, or defense projects like new ships or planes, spend out their budget authority over four, five, as much as seven years.  So eliminating all funding for a new ship channel might cut $500 million in budget authority, but would cut deficits only a small fraction of that in the first fiscal year.

The way to cut spending with any assurance is to change underlying authorizations.  You have to change the way we implement Medicare, Medicaid, Social Security, farm subsidies and other mandatories and entitlements.

And even if you fundamentally, radically reform entitlements, real deficit and debt savings won’t occur to any great degree within the next couple of fiscal years.

Let me guess: so, now you are bored out of your mind.  You wonder why you had to listen to all this gobbledy-gook.  You just want to cut spending and now some budget geek is telling you that when you cut spending you don’t cut spending?

That’s how many of the new House Republicans must feel about now.  They should have listened carefully when they discussed with their colleagues how to cut $100 billion or even $38 billion.  But too many of them didn’t and now they feel misled and embarrassed.

They weren’t misled.  Too many of them might have happened to sleep through that boring budget lecture that the House Republican leadership provided a couple of months ago at the “budget camp.”

Now comes the debt ceiling increase vote.  It will even more complicated.  And the scar tissue from the CR fight will be fresh.


Topics:  , ,

The Budget Deal’s Biggest Winner

April 11th, 2011 at 5:30 pm 20 Comments

Conventional wisdom saw House Speaker John Boehner as all tan and no substance.  As usual, conventional wisdom got it wrong.  In Friday’s budget deal, Boehner amassed enough credibility with his own caucus that he can now confront the larger fiscal challenges ahead.

Boehner accomplished two things that many in this town thought beyond him.  First, he negotiated brilliantly on the FY11 Continuing Resolution, ending up with more savings than almost anyone expected and revealing both the Senate leadership and White House as almost passive participants.

Second, he proved to those “Tea Party” House Republicans that he can be trusted to keep their interests in mind as he negotiates.

The Speaker will need all his accumulated political capital as both the FY12 budget and the upcoming vote to increase the federal debt limit loom.  Both will present challenges well beyond anything that the CR demanded.

This Wednesday, if administration sources are to be believed, President Obama will unveil his comprehensive fiscal plan.  If he does so, it will be an abrupt turn of strategy for this president.  On health care reform and other major issues during the 111th Congress, Obama was content to vaguely call for action, but was careful not to issue any detailed plan himself.  He followed the same strategy (“it’s Congress’ problem, not mine”) on the Continuing Resolution.  His budget for FY 12 contained nothing of note, beyond allowing federal deficits to continue at $1 trillion or more for another decade.

Color us skeptical.  At this moment, it’s not hard to hear the political arm of the White House (and campaign in Chicago) urging the President to be cautious and vague.  After all, the House Budget Committee Chairman has revealed a FY12 budget that touches all the sensitive areas of the budget: Medicare, Medicaid, other entitlements.  Political strategists within the Democratic Party must hope that they can just pull out the 30-second commercials and blogposts that hurt the GOP in the 2008 once again in November 2012.

At least two members of the administration give fiscal hawks some comfort: Jack Lew at the Office of Management and Budget and Gene Sperling, the President’s economic advisor.  Both were critical players in the 1997 budget deal between President Clinton and Republicans in Congress.  If allowed to follow their instincts, Lew and Sperling may be able to persuade Obama to ignore the purely political voices in his party.

Before the president reveals his ideas on Wednesday, Rep. Chris Van Hollen, senior Democrat on the House Budget Committee, will produce his own budget Tuesday.  Details remain pretty sparse on the Van Hollen plan, but rest assured that it will differ fundamentally from the Ryan plan outlined last week.

It may well be a triumph of hope over experience to believe that something positive may come of all the machinations of the week ahead.  But, given the dismal fiscal landscape ahead, we can be forgiven for briefly seeing the oasis instead of the vast desert surrounding it.


Congress Gets Ready for the Next Budget Battle

April 10th, 2011 at 11:50 am 37 Comments

The 24-hour-a-day, seven-days-a-week coverage of the fiscally trivial work of the past 3 months is over.  The Continuing Resolution for Appropriations for FY11, passed at 11:55 p.m. Friday, five minutes before a government shutdown would have occurred.  Passage of the CR represents an important symbol for a small section of the American electorate at best and evidence of Congress’ lack of seriousness at worst.  But as far as the American federal debt goes, and as far as day-to-day economics proceeds, nothing happened.

The projected deficit for this fiscal year will be about $1.6 trillion.  After the CR battle that dominated headlines and cyberspace ad naseum, the projected deficit will be $1.567 trillion.  Given the inherent inaccuracies of such projections, even this late in the fiscal year, that is a difference that makes no difference.

In my last blogpost, I considered how a hypothetical 31-year old bond trader in Tokyo might respond to the budget follies in Washington.  They would be sufficiently alarmed by the chaos and inexplicable behavior of our political leadership and would have good reason to worry about how this same Congress would handle the looming debt ceiling increase drama.

Despite the deal, bond markets will be confused and rightly so.  Why did politicians create such noise over almost nothing?  Was it all symbolic?  With such an enormous debt burden bearing down on the country, why did they waste so much time?

The conclusion of the FY11 budget battle leaves bond traders just as apprehensive about how Congress will act on the debt ceiling increase as before.  They have in the back of their minds questions: “Are these folks serious?  Do they know what lies ahead?”

No one won in the FY11 confrontation.  Each of the three major actors suffered injury:

  • the Republican House reinforced an image of ideological rigidity that caused its approval rating to plunge from approximately 53% to the mid-30s in just 90 days
  • the Senate played a relatively minor role, both sides sticking to talking points reinforcing the behavior of their partisans.
  • President Obama, having failed to try to educate the public or lead public opinion in his State of the Union, once again seemed aloof and somehow disconnected to the problems confronting the nation.

But each of these three elements think they’ve won something important:

  • House Republican conservatives believe they have shown their strength and leadership, mistaking stubbornness for wisdom
  • Senators played around with balanced budget amendments and saving National Public Radio while America’s debt increased by about half a trillion dollars during the course of the debate
  • President Obama avoided any real commitment to the outcome, leaving him political room in the presidential race to condemn or endorse more comprehensive fiscal plans later.

It has been fashionable from the first days of Congress more than 200 years ago to criticize the institution and its denizens.  It may well be that most members of Congress believe that this most recent spectacle will soon flee from public memory and that any damage to members will soon dissipate. After all, folks always complain about politicians, but most of them get re-elected on a regular basis.  The same thing, many members may think, will happen this time.

Congress focuses so intently on the audience back home, and prays so fervently that memories remain short, that it fails to notice another audience–our 31-year-old bond trader in Tokyo.  He buys and sells billions of dollars a day in U.S. sovereign debt.  If and when the global bond market begins to lose confidence in American fiscal seriousness, our bond trader wants to be the first to sell, not the last.

Our 31-year-old bond trader is neither mythical nor imaginary.  He really exists. Even in the middle of the tragedies his own country suffers, he concentrates on his task: to make money.   And, he watches closely how this incomprehensible American government will handle the necessity of raising the public debt ceiling, now $14.29 trillion, later this year.

So far, he is far from impressed or re-assured.