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’s Debt Cutting Pipe Dream

June 7th, 2011 at 12:20 am 9 Comments

Words are like bullets; once fired they cannot be recalled.  As any range master will tell you, buy viagra be careful of the ricochet.

One hundred and three House Republicans have sent a letter to House Speaker John Boehner and House Majority Leader Eric Cantor outlining the conditions under which they “might” vote to increase the federal debt ceiling.

These conditions are:

(1) cut spending immediately in order to cut the projected FY2012 deficit in half;

(2) enact statutory, illness enforceable spending caps that cut future spending down to 18 per cent of Gross Domestic Product;

(3) House and Senate passage of a Balanced Budget Amendment to the Constitution that includes a spending cap of 18 percent of GDP and “a high hurdle” for tax increases.

The letter, ram-rodded by Republican Study Committee Chairman Jim Jordan, contends that cutting the projected deficit in half in the coming fiscal year would require “only” spending cuts of $380 billion.

Signatories of the letter must make at least three assumptions.

First, the letter makes a nice press release for back home consumption, where very few voters will question the numbers.

Second, that when the right numbers emerge, the public will be sufficiently confused and stop paying attention.

Third, that when many of these signatories do vote for a debt ceiling increase, without the conditions they stipulate, all prior words on the subject will suddenly disappear from existence and voters will have forgotten what the 103 demanded.

We need to be clear here.  Congress will pass an increase in the federal debt ceiling.  It will do it with maximum confusion, unnecessary verbiage, and in such a manner that has the greatest possibility of spooking credit markets throughout the world.

Here’s a “green eyeshade” look at the letter.

The 103 signers believe that cutting next year’s deficit in half will require only $380 billion in cuts from projected spending, according to the Congressional Budget Office.  They are right only if they also endorse full expiration of most of the Bush tax cuts, expansion of the Alternative Minimum Tax (AMT), and full implementation of cuts to doctors who have Medicare patients.

Yet, in all likelihood, all 103 are on record urging full continuation of the Bush tax cuts, keeping the AMT from expanding, and making sure that the cuts to Medicare doctors don’t occur.  So those103 representatives have signed a letter that implicitly endorses what they have publicly repudiated, or they weren’t really paying attention to the little details of budgeting.  Those little details loom large.

So, what is the real number?  How much would it take to cut the FY2012 deficit in half, taking into account the very positions that the 103 have previously endorsed?

The CBO produces what it calls “an alternative baseline.”  This baseline incorporates an important matter—political reality.  Using this baseline, which assumes that politicians will continue the majority of the Bush tax cuts, will truncate the AMT’s reach, and will reject cutting doctors’ Medicare compensation, as well as other reasonable assumptions based on past behavior, the CBO gets this deficit number:  $1.12 trillion, or roughly 7.1% of anticipated GDP.  Now, half of $1.12 trillion is $556 billion, not the $386 the 103 say would achieve the goal of cutting the deficit in half.

Yes, this is getting boring.  Pure boredom with all these numbers accounts for why the public finds itself completely confused about the true federal budget situation.

But, hang with me for just a moment more. Here are the numbers for spending as a percentage of GDP.

Medicare and Medicaid = 5.0%

Social Security and related = 4.9%

Defense appropriations = 4.5%

Domestic appropriations = 4.2%

Other mandatory = 3.2%

Interest = 1.7%

That adds up to 23.5 percent of GDP.  The 103 letter signers want 18%.  So, they have a menu of where they could cut just by looking at the numbers above.

Medicare has already been poisoned politically and is unlikely to suffer much cutting over these next 18 months.  Social Security and related programs (disability insurance) have been declared out of bounds by both sides.  House Republicans leaders have expressed real concern about defense cuts while the nation is embroiled in three, undeclared conflicts.  The category “other mandatory” includes such things as veterans’ compensation and retirement, other federal retirement obligations, farm subsidies, and federal workers’ health benefits.

That leaves domestic appropriations as fair game in everybody’s view.  Do you see how easy this is?  Just eliminate all domestic appropriated accounts and you get down to about 19% of GDP.  Take a little here and a little there and you can get to 18% of GDP.

Of the 435 Members of the House, you can safely estimate that not 75 would vote for elimination of all domestic programs.

So, the debt increase is going to pass, spending as a percentage of GDP will be far above 18%, a balanced budget amendment to the Constitution remains very problematic, and the FY2012 deficit will be well above $1 trillion.

What about all those fine words in the letter to Speaker Boehner?  Sometime next fall, perhaps as early as late summer, many Republicans now in the House will find themselves confronted by 30 second ads outlining what kinds of cuts, and how many layoffs of workers, their 18% of GDP will yield in their districts.

Watch out for the ricochet.

GOP Brushes Off Default Warnings

June 4th, 2011 at 11:12 pm 61 Comments

The debt disease is catching and now threatens the very fabric of America.

While the media concentrates on the fiscal follies in Washington, check D.C., ailment the world of baseball is developing its own version of over-indebtedness.  Yes, even baseball—once truly America’s national pastime.

The Los Angeles Times, using leaked documents from a confidential briefing to baseball owners last month, revealed that nine of the thirty major league teams are now in violation of the leagues’ debt service rules.

For those of a certain turn of mind, here are the nine offenders:  Los Angeles Dodgers (no surprise there), the Mets (also not a surprise), the Orioles, Cubs, Tigers, Marlins, Phillies, Rangers and, of course, the Washington Nationals.  It isn’t enough that the Nationals and Orioles occupy the bottom rung of their respective divisions—now they have to add injury to insult by breaching the league debt ceiling!

What a metaphor.

Greece, Italy, and Portugal (occupants of the bottom rung of Euroland economies) pull down their northern neighbors with huge indebtedness and their past use of phony numbers.

California, Illinois and various other profligate states needed federal help last year to pay their state employees and, thus, pay their indebtedness to holders of their debt.

And now baseball.  Yes, the NFL and the NBA have their own labor-related problems, and the Atlanta Thrashers of the NHL will move to Winnipeg largely for financial reasons.  But, baseball!

All of this is prelude to an explanation of this last week’s discussions on the federal sovereign debt ceiling deadline of August 2.  As expected, nothing has changed.  House Republicans still want large entitlement savings (but not anything too great in Social Security or Medicare) and Democrats still insist on larger tax takes (but only from certain portions of the populace).

President Obama and House Republicans met and afterwards exchanged nasty words.

Vice President Biden’s talks “may” produce a debt down payment of $1 trillion over the next 10 years.  Now, this sized down payment ($1 trillion on what will be a $23 trillion debt) is smaller than the down payment now demanded by the Federal Housing Administration when it helps home purchasers gets mortgages.

Discussions on some form of enforcement mechanism occupy many policymakers.  Such mechanisms basically say, “Well, we cannot find a way to get our national debt under control right now, but we promise we will force ourselves to do it in the future.”

That’s about what Greece promised to the European Central Bank last year.  Is it unfair to note that it hasn’t happened yet and that Greek “restructuring” of its debt seems inevitable to some very smart analysts here and abroad?

Secretary Geithner visited the House Republicans yesterday afternoon.  He told them three things:  he isn’t lying about August 2 being the drop dead date on sovereign debt issuance;  he wants an agreement as soon as possible, just like House Speaker John Boehner;  and, he isn’t about to reveal the exact consequences to government services if the House fails to raise the debt ceiling.

House Republicans reportedly doubt the August 2 deadline, don’t want an agreement until it’s late (so that they can, as House Majority Leader Cantor has said, “get maximum leverage”) and don’t really believe that government services will be severely disrupted if the debt ceiling isn’t raised.

Anyway, the argument goes, other countries are in worse shape, so folks will still buy our debt.  And if 800,000 Americans lose their government jobs, and the military pay due in mid-August doesn’t get sent out, and if most of the federal office buildings throughout the land are shuttered, well, better that short term pain now, than even more painful consequences in the future.

Baseball tried that once—that strike began baseball’s decline as the national sport.

Football now seems ready to try something similar.

Hockey did it, too, and is just now recovering.

If the insanity continues to spread, perhaps the professional soccer and lacrosse leagues can do it, too.

After all, isn’t it just a little pain now to avoid real pain in the future?

Meanwhile, another ratings agency, Moody’s, warned that if it didn’t see real, concrete movement toward a large and believable debt reduction plan out of Washington, D.C., within the next six weeks, then it may really (truly) put America’s debt on watch with negative implications.

It’s all enough to make a man take a couple of days off and go watch the Nationals.  If they can meet payroll.

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GOP’s Debt Fight Strategy Backfires

June 2nd, 2011 at 11:29 pm 36 Comments

A very strange thing happened this week—truth appeared in Washington, site D.C.

After President Obama met with House Republicans, click both sides told the media that the meeting had gone poorly, that no common ground was found, that House Budget Committee Chairman Paul Ryan had expressed anger to the President, and that progress on a deal to get the federal debt ceiling raised never materialized.

Now, in the good old days, even a meeting that involved the direst of enemies (think Israel and Syria) would result in positive boiler plate spin.  Something like this: “We had a frank and open discussion of the issues.  We found some common ground that holds promise for some further discussion in the future.  We continue to believe that we can find a solution to the most vexing of problems.”

In other words, “blah, blah, blah.” But last night, no “blah, blah, blah.” More than any other event of the past four months of talk on the debt extension, last night’s quotes revealed the true state of affairs.

Three things seem obvious.

First, House Republicans have been burnt by the Medicare attack from the White House and other Democrats.

Second, House Republicans don’t believe that the White House intends to have a comprehensive debt reduction plan of any serious magnitude before the 2012 elections.

Third, House Republicans now realize that failure to pass an increase in the debt ceiling (and any attendant consequences) will fall squarely on them.

As the GOP struggles to find some path to reverse these three “facts,” it seems to search further and further into unreality.

Initially, many in the caucus seemed to believe that the President would be blamed for any disruptions that occur if the debt ceiling isn’t increased.  That wishful thinking flies in the face of overwhelming evidence from past events.  The President always wins these kinds of confrontation, whether it is Ronald Reagan or Bill Clinton.  The House has to pass a debt ceiling increase or not.  Not the President.  Not the Senate.  And as the GOP has told, loudly, anyone within in shouting distance, it now controls the House and has the mandate to act from the people.

Some believe that following the “Toomey Plan” is the way out.  Secretary of the Treasury Tim Geithner has enough cash flow each month to pay principal and interest on outstanding debt.  After that, he will have to decide what departments to close down and what bills and salaries go unpaid.  When these folks realize the impact of such a decision on their individual districts, and the economic turmoil that will result, this fanciful idea will evaporate, also.

Finally, several Senators believe they can force President Obama into unveiling a “post debt ceiling failure” budget.  Then, they can attack that kind of budget.  The White House won’t fall for this kind of obvious gambit.

Where does that leave things?

In all likelihood, after delay and debate, the debt ceiling will increase.  The terms of “settlement” will be along these lines:  a meager “down payment” of $1 trillion or so in savings over the next decade and some form of “draconian” enforcement language that will compel savings in the future.

Of course, $1 trillion over the next ten years is little more than a rounding error compared to the size of the debt numbers projected, but it may make enough of a headline back home that Congressmen can survive such an obvious failure.

And, this occurs when the following facts prevail:  slowing economic growth, continued turbulence in European debt markets, recession in Japan, further housing value declines, 9 per cent unemployment, and a huge majority of Americans both losing confidence and saying that they believe that the nation is on the wrong track.

You don’t have to be a dour Scot to be pessimistic about any progress on getting the American fiscal house in order any time soon or any renewal of American voter faith in the federal government.

GOP Now Owns the Debt Crisis

June 1st, 2011 at 5:26 pm 50 Comments

The House of Representatives overwhelmingly defeated the motion to pass a “clean” increase in the United States’ federal debt limit last night.  No surprise, sovaldi right?

But one or two gems emerge from what analysts have called nothing more than a publicity stunt.

First and foremost, mind about 60 per cent of Democrats voted in favor of a clean (unamended) debt increase.  This means that they supported what is officially and formally President Obama’s position and the stance of Treasury Secretary Tim Geithner.  These Democrats came primarily from safe districts, but their support could ultimately put House Republicans in an uncomfortable position come August 2.

Why?  Because the House must pass or not pass the debt increase.  The House is controlled by the Republicans.  Thus any negative fallout from the debt battle will be laid at the feet of Republicans.  House Democrats have already revealed a “responsible” position with a majority voting aye.

The second gem is the revelation that a growing number of House Republicans are beginning to think very seriously about the consequences of the debt increase vote.

Two scenarios have been discussed most prominently.  One, which I will call the “Toomey Plan,” merely says this—vote against a debt ceiling increase, force the Treasury to pay the debt on time and in full, and then see where Treasury will find the tens of billions of dollars needed each month to keep total government debt below $14.3 trillion.  Sen. Pat Toomey of Pennsylvania first pushed this notion.

For members who have defense or non-defense employees in their districts (in other words, almost everyone in Congress) the Toomey Plan would lead to the cuts of hundreds of thousands of jobs, shutdown of most government agencies, and a whole host of problems.

A second scenario though may win out.  This scenario involves a relatively small “down payment” in the form of $1 trillion or so in savings over the next decade, coupled with a strong enforcement mechanism that forces further savings in the future.  So far, the “SAVE-GO” proposal pushed by the Bipartisan Policy Center (of which I am a member) has received good responses publicly and on the Hill.  A combination of compelled future savings and the down payment may be enough to get House passage.

I have heard the argument that if the debt ceiling fails, with the consequences of large job losses and disruption of essential government services, President Obama will get the blame.  Those of us who went through the 1995-96 government shutdowns know better.  We watched on television as President Clinton took the oath in January 1997, for his second term as President after he turned the shutdowns on us.

With the Obama/Geithner “clean bill” request, and a majority of House Democrats supporting it, the entire credit or blame for passage or failure of a debt increase will fall squarely on the House Republicans.

To my Republican friends still on Congressional staff who argue with me, I simply say, “Well, are you willing to risk your boss’s career on that?”


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Wall Street’s Getting Nervous About a Default

May 29th, 2011 at 12:01 am 29 Comments

“Don’t go to a butcher for back surgery.”  My Air Force veteran father used to say that.  It meant: don’t listen to folks about important matters unless they really know their business.

He had been in the Strategic Air Command during the height of the Cold War, purchase stationed at MacDill Air Force Base.  A barber had opined to him, “Well, I guess you guys would have plenty of time to get away safely if you ever did have to drop one of those atomic bombs.”

My father looked at him and said, “How would you know that?  Folks I fly with aren’t so sure.  I think I’d rather not test that theory.”

I am reminded of that as I listen to those Republicans who claim that a small default on payment of principle and interest to creditors would not roil credit and equity markets.  Indeed, 17 Republican Senators have sent a letter to Treasury Secretary Tim Geithner saying that if a default on sovereign debt payments occurs, it is all Geithner’s fault.  The “reasoning” for this statement is the fact that the Treasury takes in much more money than is needed to pay outstanding debt on time and in full, so it’s Geithner’s responsibility to make sure that happens.

What they don’t say is that a government services disruption of an unprecedented nature would then occur—after all, if Treasury pays the debt cost, it has to cut spending somewhere else.  And in a cash-in/cash-out system, only hundreds of thousands of layoffs and the issuance of IOUs to contractors, among other chaotic choices, would satisfy that “stubborn fact of life.”

Apparently, the belief that no one in the United States would notice such layoffs, and the resulting economic disruption, is held as an article of faith by folks who ought to know better.

In a separate letter, 23 GOP Senators wrote to President Obama calling upon him to create a budget plan that would assume no increase in the government’s ability to borrow.

And, Stanley Druckenmiller reprises his 1995-96 role in a budget/debt debate by once again contending that a short term default wouldn’t disturb markets if a major deficit reduction plan emerged.

(If I were 24 years old, seven feet tall, with a superior hook shot and athletic ability, I would be the center for the Los Angeles Lakers.  That is about as relevant as Druckenmiller’s hypothetical discussion of markets’ reactions to something that isn’t going to happen.)

When politicians talk about politics, it is wise to listen.  They do it for a livelihood and if they are wrong, they lose their jobs.  Just like butchers and back surgery, however, don’t listen to politicians with little or no experience in modern financial engineering when they predict market behavior.

Listen to market participants, who will lose their jobs if they are wrong.

Or watch the rising costs of Credit Default Swaps (CDS) in the marketplace.  Without getting too technical, when those costs rise, it means that markets are losing faith in a form of financial product—in many cases, national sovereign debt.  The CDS market forecast the late and unlamented financial meltdown of three years ago before almost any other market mechanism.

According to the Depository Trust and Clearing Corporation, which gathers information about global CDS, global traders and investors have increased their purchase of this form of insurance, doubling the level of such insurance on American sovereign debt in 12 months.

So, who you gonna believe—the markets or the politicians?

Here are a couple of ways to make that decision:

*ask the next Senator you see about the Credit Default Swap situation;

*ask the next Congressman you run across at a fund-raiser about the size of the global derivatives market;

*ask the next Washington, D.C. politician you meet how many swaps and derivatives contracts he or she has personally arranged.

Then, ask a Wall Street fixed-income trader the relationship between United States sovereign debt issuance and the global markets in these arcane financial instruments.  Finally, ask this trader for the legal and market implications of failures of counterparties to be able to perform as contractually obligated because the United States defaulted “just for a little while” on its debt payments.

And, the coup de grace, just ask anyone if they think it is wise to test a theory about marketplace behavior when failure of that test could severely undermine the confidence of markets all over the world about the reliability and judgment of United States policymakers.

A theory gaining ground on Capitol Hill posits that with all the turmoil in North Africa, the Middle East, in Japan, and with wars in Iraq, Afghanistan, and Libya, American Treasury securities will continue to be the first choice with global investors who want to protect their capital.  That’s like saying that we should foul our own nest because others’ nests are even worse.

Raise the debt ceiling (as Congress assuredly will do in the most painful and chaotic way possible, causing maximum anxiety) or don’t raise the debt ceiling (and let government services collapse, causing maximum anxiety).   Are these really the only choices that policymakers can conceive?

As my colleague Jay Powell wrote in the Wall Street Journal this past week, we are beginning to have a serious discussion about America’s fiscal future.  Why mess up this long-overdue, critical, discussion on policy with all the political theatrics and threats of the past three months?

And, the final irony: in private, a majority of Congressmen in both parties  would likely admit that we have to raise the debt ceiling, we have to begin to address Medicare and Social Security solvency, and other entitlements, and that revenues have to be part of the solution.

But they are afraid to say this truth publicly.  Their polls tell them that their jobs are at stake and truth often suffers in such circumstances.


Coburn Pulls the Plug on Senate Deficit Deal

May 18th, 2011 at 11:35 pm 19 Comments

As he looked down the dugout at his inept Mets, viagra Manager Casey Stengel famously asked, pills “Can’t anybody around here play baseball?”  The American people have a right to look at Congress, sale especially the Senate, and ask, “Hey can’t anybody around here legislate?”

Sen. Tom Coburn’s decision to formally remove himself from the Gang of Six bi-partisan talks in the Senate reveals a growing crack in the attempts to reach agreement on the Fiscal Year 2012 budget, and on the extension of the federal debt ceiling,.  Coburn was part of the last remaining barrier to fiscal breakdown.

Coburn is a serious person who rarely does things to make a point or publicly postures.  His departure, based as he said on a fundamental gridlock over entitlement reforms, strengthens those who believe that no significant fiscal deal can be reached this year.  If the pessimists/realists are right, then we can almost play out in advance what the year will look like:

  • some sort of deal on minor spending cuts in discretionary (appropriated) accounts will be reached;
  • a process reform measure will help pass an increase for a short period of time in the debt ceiling;
  • for the second year in a row no Congressional Budget Resolution will exist;
  • most, if not all, of the FY12 appropriations bills will once again be wrapped into a Continuing Resolution;
  • and, the two sides will be able to fight on the FY12 levels of that CR, just as they did on the FY11 CR.

Coburn’s decision is subject of course to re-consideration if the other members of the Gang of Six move toward real entitlement reform.  But, those who said the Gang of Six initiative was doomed from the start may be right.  The open opposition of the Senate Majority Leader Harry Reid and Democratic Senatorial Campaign Committee Chairman Chuck Schumer made success for the Gang of Six problematic.  Reid opposes revealing any budget plan right now, saying that negotiations conducted under the leadership of Vice President Joe Biden should be the arena in which a plan is devised.

On the House side, House Budget Committee Chairman Paul Ryan has drawn criticism for his budget plan for FY12, which passed the House earlier this year.  Some in his own caucus now say that he tried to do too much and that the Medicare reform provisions in his budget may defeat many Republicans who voted for it.

Such critics are wrong.  Ryan has had a plan similar to that which he used as his budget resolution for more than two years.  No one can claim they didn’t know what was in it.  No one can say that Ryan “hid the ball.”  Almost above all other Members of the House, Ryan has been completely transparent about his views on the budget.

If House Republicans are smart, they will do exactly as Speaker John Boehner has done—stick with the Ryan Plan, go back to individual districts, sell it, and not back down.  The “terrible” vote has been taken.  If Republicans who voted for Ryan try to back off now, they not only will be unsuccessful in doing so, but they will be regarded as weak by many of their conservative supporters back home.

The polls on Medicare reform are mixed.  In some districts and states, Medicare reform will never get a majority.  But in many other districts and states, Medicare reform can garner a majority, if the proponents of reform don’t back down. President Obama himself has called for entitlement reform, including Medicare.  In short, he agrees with Ryan and the Republicans that Medicare as it now exists is unsustainable.  A deal on Medicare with the President seems achievable.  What Republicans need to do is take a deep breath, talk continuously to their constituents, and do what leaders are supposed to do—educate and legislate.


Washington Stalls on Debt Limit Deal

May 15th, 2011 at 12:00 am 50 Comments

The movie, “Groundhog Day,” rushes to mind as we watch the tragicomedy of the recent debates on the national debt and the country’s fiscal future. In “Groundhog Day,” Bill Murray found himself reliving the same day over and over. In our political debates, the participants are using the same talking points over and over, talking points that are also decades ago.

Here are just four examples of our repetitive “Groundhog Day” debates:

#1. Renown investor Stanley Druckenmiller, in an interview in the Wall Street Journal, defended the notion that Congress should refuse to pass an increase in the debt ceiling.  Druckenmiller asserted that markets would react more harshly to a debt ceiling increase without significant cuts in federal spending than they would to a default.  He predicted that any short term disruption in markets would eventually calm down if a real deficit reduction plan emerged from Congress.

This is the same argument Druckenmiller made in the winter of 1995-96, when he called upon the Republican House to reject an increase in the debt ceiling.  He later recanted as it became obvious that markets were somewhat less forgiving of stupidity than he had believed.

Such claims normally would be ignored, except that some Republican Senators and Congressmen who have no idea of what derivatives are or how they connect to global markets, are encouraged to say similarly silly things.


#2.The release of the report on the Social Security and Medicare trust funds.  The Trustees’ report confirmed two facts obvious to most analysts:  the date for bankruptcy for Social Security had advanced by one year and the main Medicare trust fund will be completely out of money by 2024, five years earlier than projected just last year. This report repeats most of the trustee reports of the past two decades.

Every few years, someone writes about the dangers, the same old voices deny that any dangers exist, and nothing happens.


#3. At the end of this past week, Treasury Secretary Tim Geithner warned that a failure to pass an increase in the debt ceiling promptly could lead to a “double-dip” recession. Few media outlets paid much attention to Geithner’s remarks, in large part because he has been issuing the same warning for months now.

Worse for those making  such warnings, Treasury Secretaries for the past 25 years have made similar arguments.  It seems that some in Congress simply believe that Treasury Secretaries have been crying “wolf” and now it’s time to test if they are right or not.


#4. Both political parties are charging each other with threatening to destroy Medicare and Social Security.  This is an old debate. Democrats have attacked Republicans since 1965 with hostility toward Medicare.

Once in a while, Republicans respond by charging Democrats with similar instincts–e.g., the cuts in Medicare Advantage that are part of the PPACA (“Patient Protection and Affordable Care Act”, known to most as “Obamacare”). Republicans claim that these cuts proves that it is the Democrats who want to cut Medicare.

On Social Security, repetition has reached the point where one can simply take a videotape from debates on the subject from decades ago, substitute different speakers, and hear precisely the same charges and counter-charges. Nothing new has emerged from the Social Security debate since the 1970s.


Every debate has become rote, almost Kabuki-like, where charge and counter-charge are well-rehearsed, well-known, and fully disregarded.  No one is really thinking any more, merely reacting.

Ask yourself these questions:

-Do current markets have the same size, complexity, and global inter-relatedness as they did in 1995?

-Are the demographics driving Social Security and Medicare the same as in 1995?

-Are the fiscal realities of American government policy the same as in 1980, 1990, or even 2000?

-Is the American dollar still the best store of value in the world, as it once was?

The answer to all four questions is, “No, Of course not. Things are different now.”

I have often written of my hypothetical 31-year-old bond market trader in Tokyo, watching this entire fiscal and debt debate.  He doesn’t know, nor care, about how things were 25 years ago.  He wasn’t even in grade school then.  He cares about now.  How obviously ignorant of modern market structure are American politicians?  Even if these folks manage to ensure that no payment of principle or interest is missed, what kind of damage will they do to their own economy with their machinations?

In short, is this 31-year-old bond trader really confident that America knows what it is doing? Right now, he isn’t. Our hypothetical bond trader may soon decide he needs to change how he values US sovereign debt.

Boehner Takes Heat for Hardline Debt Stance

May 12th, 2011 at 11:58 pm 65 Comments

House Speaker John Boehner is this week’s D.C. whipping boy.  Whether it is A.B. Stoddard writing in The Hill or Ruth Marcus of the Washington Post or venomous Matt Miller pushing the Center for American Progress line, drugstore Boehner gets it from all sides.

Last week’s botched messaging on Medicare and the debt ceiling forced Boehner to go to New York and “clarify” the House Republican position on both.  His speech did two important things: it set a target for savings of $2 trillion and it put Medicare back on the table.

The perceived wisdom in Washington is that both actions amount to political suicide for Republicans.

Medicare “cuts” will bring down Republicans in 2012; it’s too toxic to touch, political analysts contend.

And $2 trillion is both too much and too little; it’s too much to cut out of spending only during four to five years unless you attack federal health care costs and it’s too little to satisfy the deficit hawks in the House who want a balanced budget.  Thus, it is opined, that number is a political error.

The Speaker has the hardest job in town; his caucus wants him to lead a revolution, but not a revolution that will cause any casualties.  Then the activists impose conditions on the outcome of the revolution that virtually guarantee maximum casualties.

Boehner’s effort to restore some kind of cohesion to the House GOP position is ironic.  After all, it wasn’t the Speaker who said that real Medicare reform wasn’t realistic, it was Eric Cantor, House Majority Leader.  Boehner didn’t say that he wouldn’t report a Medicare reform bill out of the Ways and Means Committee, it was that panel’s Chairman, Dave Camp.  Boehner is trying to salvage something from others’ loose lips.

Somehow Boehner’s position reminds me of Col. Joshua Chamberlain during the Battle of Gettysburg.  Chamberlain and his 20th Maine Regiment found themselves facing overwhelming Confederate forces, out-manned and out-gunned.

Out of ammunition and facing annihilation, Chamberlain shouted, “To the bayonets.”  His regiment charged down the slope, stunned the Confederates and launched a Union advance.

Boehner may not be Joshua Chamberlain, and the congressional tone may not have deteriorated yet into something like a civil war, but his position in the debt ceiling battle seems similar.

Boehner has put Medicare back on the negotiating table, where it belongs.  And most polls show that voters opposed to Medicare changes outnumber those in favor, although by relatively small margins.

Boehner and Ryan have already chosen their battle lines.  Now their only chance for victory is an all-out messaging campaign, district by district, showing how soon Medicare will go bankrupt.  The House GOP is “all in.”  Only a fierce, disciplined counter-attack can keep political casualties down to bearable levels.

And, above all, Boehner needs to hope that when he shouts, “To the bayonets,” his troops will respond like those of Col. Chamberlain 148 years ago.


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Boehner’s Debt Deal Price Tag: $2 Trillion

May 10th, 2011 at 1:01 pm 67 Comments

Last night, buy House Speaker John Boehner made headlines when he announced that Republicans in the House will demand at least $2 trillion in spending cuts before they vote to increase the federal debt ceiling later this year. Many in the media played up this as real news.

Earlier in the day, Sen. Jon Kyl, a member of the GOP Senate leadership, called for $6 trillion in spending cuts.

And, the Tea Party, not to be outdone, criticized both the Speaker and House Budget Committee Chairman Paul Ryan, whose budget plan would cut more than $5 trillion during the next decade.

It’s hard to really compare these three pronouncements.

Does the Speaker’s $2 trillion mean total savings of that amount over the next 10 years?  If so, it is instructive to remember that President Obama’s budget submission in February, the object of wide Republican criticism, would reduce spending by approximately $1.5 trillion during the next decade.

Does the Speaker’s $2 trillion mean $2 trillion during the next two years, matching the approximate length of time that an increase in the present debt ceiling by $2 trillion would allow the government to borrow?  If so, that is indeed an extraordinary amount of savings, representing almost 30 per cent of all projected spending during that time frame, since federal spending approximates a projected $7.5 trillion in FY12 and FY13 combined.

Numbers do mean something, as the GOP House learned when it failed to come anywhere near its much-ballyhooed $100 billion in spending cuts for FY11.  That number turned out to be less than $15 billion and about $350 million in FY11 itself.

Thus, the Tea Party misgivings about promised future spending cuts seem justified.  Two trillion in cuts in the next 2 years won’t happen. Even most Republicans won’t vote for restraint that deep, while the Democratically-controlled Senate would never even consider it. Two trillion in spending cuts over the next decade is a piece of cake—it represents little more than the President proposed.

Now, when Sen. Kyl mentions $6 trillion, things begin to get real.  Depending on how one measures baselines, and all sorts of boring things like that, adoption of the Ryan budget would get near that amount.  The plan that our Bipartisan Policy Center’s Task Force on Debt Reduction developed during the last 18 months would surpass that amount over 10 years, but that includes revenue increases and radical reform of the tax code.

Boehner’s speech was necessary on two fronts.

First, he had to clear up the confusion of last week, caused by the seeming Republican leadership’s rejection of serious Medicare cuts contained in the Ryan budget.  Boehner did that:  real entitlement reform, including Medicare, will be part of the price his caucus will demand before it votes to increase the debt ceiling.

Second, he allowed his caucus some wriggle room.  The number to reach, he said, is $2 trillion in spending cuts.  But, he left the time frame over which those cuts would be measured open to interpretation.

This afternoon, the second of the Blair House budget meetings under the aegis of Vice President Biden will occur.  Sen. Kyl is part of that group, as is House Majority Leader Eric Cantor.  Will Kyl bring his $6 trillion to the table?  Will Cantor adopt the $2 trillion mantra and if so, over what time frame?  Will real entitlement reform, including Medicare and Medicaid, rise from the dead during these discussions?

Two facts stand out starkly, hovering over all these pronouncements.

First, you cannot stabilize the United States debt at any reasonable proportion of Gross Domestic Product without fundamental changes in Medicare and Medicaid.

Second, many House Republicans realized during the last recess that a whole bunch of their friends and neighbors back home don’t want such fundamental reforms.

Meanwhile, Senate Budget Committee Chairman Kent Conrad, a deficit hawk in the minority in his own caucus, has to decide what to do about an FY12 budget plan.  Does he begin to devise that plan in his committee soon?  If so, what can he reasonably expect to produce, given Senate Majority Leader Harry Reid’s veto of the release of any Democratic version of a budget until negotiations reach a decision point?

The Senate Gang of Six plan hasn’t emerged yet and the delay in that plan begins to make it seem irrelevant.  If the Gang of Six could produce a middle-of-the-road fiscal plan that cut deficits by $6 trillion or more during the next decade, perhaps its ideas could still influence what remains a chaotic and contradictory discussion.

Certainly, bond market participants who heard Speaker Boehner last night cannot come away with great expectations.  The numbers mentioned are relatively tiny compared to national debt projections.  And, the Speaker’s insistence that it would be more irresponsible to pass a debt ceiling increase without real spending cuts than to simply refuse to raise the debt ceiling must have made many in the audience wonder if that was a judgment set in concrete or one designed to quiet the GOP House caucus.


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.