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.

Budget Fight May Freak Out Markets

April 8th, 2011 at 5:00 pm 10 Comments

Whether the federal government “closes down” for this weekend remains unknown at this time.

But for the sake of discussion, ampoule let’s assume that Congress fails to agree on a Continuing Resolution for Appropriations for FY 11.  Non-essential personnel in the government will then take the weekend off, waiting to see if they can return Monday or wait a few more days.  The Washington Monument will close during the weekend, but for the most part a week-end shutdown presents no major economic or policy complications.

That’s the general feeling of many in Congress and in the rest of the country.  Shut it down, nobody will notice, and we will have made our point.

Let’s imagine another scenario:

Some people will notice that the American Congress didn’t pass the bill.  They won’t understand what point was made nor why.

Let’s call these people bond traders who work for major financial institutions globally.

Imagine you’re a 31-year-old bond trader in Tokyo, responsible for a small portfolio of $7-10 billion.  Your understanding of the American political system comes only from the books you read and the American traders with whom you do business.  Your American friends tell you, “Don’t worry, they will pass this bill and things will turn out all right.”

But, what happens to the value of your portfolio as Congress dithers?  Will traders at other firms get nervous and begin to sell their positions?  If they do, should you try to beat them out the door by selling first?  If you are caught as the last one out, losing 5-10 per cent of the value of your holdings, you will lose your job.

So, you begin to sell, reducing your risk.  Other traders in the Far East note what they sense is the beginning of a selling trend.  They begin to protect themselves by selling their American bond holdings.  By the time London markets open, computer models at financial firms are flashing a “sell” sign.  Bond traders in London hedge their bets, selling or buying insurance against loss.

By the time New York markets open, and most Americans are awakening, sophisticated computer models all over the globe are signaling “sell.”

Overnight, the 10-year United States note dives in value, with yield going from 3.4% to 4.4%, an almost historic move in 24 hours for the world’s largest debtor nation.

Central banks throughout the world begin to buy as many bonds as they can.  They try to “intervene” in order to stabilize both the fixed income and currency markets.  Lending dries up globally as risk of non-payment rises to unprecedented heights.

Now, that’s just a scenario.  It’s similar to a scenario that in a very minor form played out in the 1990s and ended in the bankruptcy of Long Term Capital Management, a hedge fund.  That bankruptcy threatened a major disruption in markets resulted in a major intervention.

Will bond traders react that way to a short-term American government shutdown this weekend?  Probably not.  The numbers involved are trivial and the world remains a dangerous and unstable place.  So, most investors still seek the “safe haven” of the American Treasury market.

Don’t forget though that this FY11 budget battle is a rehearsal for other really important debates that will happen later this year.

Our 31-year-old Tokyo bond trader will remember the unfathomable behavior of America’s Congress in the FY11 Continuing Resolution matter.  He will become a little leery about risks to his portfolio.

And, when the federal debt ceiling is reached in May or June, and our bond trader sees what he thinks is the beginning of another round of irresponsibility on the part of Congress, he will be wired to sell at the first hint of indecision on the debt ceiling increase.  He will believe that he has seen this movie before.  And, he doesn’t want any part of it.

Markets are driven by psychology as much as any other factor—fear and greed.

When fear overcomes greed, market participants run for the exits, the Devil take the hindmost.

If such a scenario plays out in real life, the result could make the Great Recession of the last three years look minor in comparison.  Perhaps Congress will forget what happened when the House killed TARP the first time through—markets plunged disastrously within minutes.  Markets recovered when the House said, “Oops, never mind” and passed TARP.

So, is a shutdown of the government this weekend really a matter of great concern?

Only to the bond market that trades trillions of dollars of debt each week, and in whose tender embrace the American economy more and more entrusts itself.  Those markets are getting nervous.  They may soon get very nervous.

As James Carville once famously said, “When I die and come back to earth, I hope I come back as a damned bond trader.”


Ryan’s Biggest Gamble

April 6th, 2011 at 11:59 pm 35 Comments

The conventional wisdom in Washington, D.C. Tuesday was clear: House Budget Committee Chairman Paul Ryan’s FY 2012 budget plan is political suicide for anyone who endorses it.  But is that really the case?

In the 1980s, Republicans in the Senate devised a budget plan under the Senate Budget Committee chairmanship of Sen. Pete Domenici.  I was staff director of the committee at that time.  In a dramatic late night vote, then-Sen. Pete Wilson of California was wheeled onto the Senate floor in a gurney (he’d had an emergency appendectomy earlier in the day) and cast the vote that passed a budget plan that had a minor change in Cost of Living Adjustments (COLAs) in Social Security.

Eventually, President Reagan and House Speaker Tip O’Neill conspired to undo the deal, leaving Senate Republicans alone and unprotected politically.  And, in the 1986 elections, all but one of the incumbent Republican Senators up for re-election lost.  The Senate went Democratic.

Since then, entitlements and Social Security in particular have been considered political C4 — dangerous to even think about touching.

This time though is different.

Look at Mitch Daniels in Indiana and Chris Christie in New Jersey, governors who have soared in public approval while vigorously attacking state deficits and spending.

Republicans have a choice–be cowed by the attacks already underway from the Democratic Senate and Congressional Campaign Committees; or, forge forward unabashed.  If they choose the former, they’ll suffer at the polls in 2012 as their 2010 supporters realize that the new bunch is just like the old bunch.  If they choose the latter course–call it the Daniels-Christie way–and attack entitlement spending without apology, their courage may well be rewarded by independents and the GOP base.

Disdain for Congress usually revolves around the phrase, “They don’t have any guts.”

What if Congressional Republicans joined Paul Ryan and showed some guts?

So far, the GOP has wasted lots of political capital fighting about a trivial amount of money in the Continuing Resolution for FY11.  Now, Ryan has opened a new front in the fiscal war–the FY12 budget and beyond.  Fighting on that front could really make a difference in what are now projected to be truly dangerous debt levels.

It’s instructive to remember that when Ryan first developed a version of his plan (back when the GOP was in the minority) almost none of his colleagues endorsed it.  Will his present colleagues rally to his cause or head for the hills?

I recall an incident several years ago when then-Sen. Domenici upbraided one of his GOP colleagues.  The colleague had become a great voice against deficits and government spending.  But, his target had almost always been the domestic appropriations bills, which comprise about 16 per cent of federal spending.

“Why don’t you get serious about this,” Domenici asked.

“What do you mean.  I am serious,” his colleague responded.

“No. I will know you are really serious when you begin to join the fight against entitlements, the real fiscal problem,” Domenici said, “instead of these little $4 and $5 million items.”

And that’s how it is today.  If the GOP simply made a deal on the CR for FY11 (at almost any level slightly more than the president offered) and then joined enthusiastically with Paul Ryan in the real war, then we would know that they are truly “serious.”

Many of the new members of the House Republican caucus have said that they aren’t career politicians — that they will vote for real change “even if it means I won’t get re-elected.”

Paul Ryan has given them a chance to back up those brave words.  Let’s see how many Republicans in the House are willing to vote with Ryan to get his plan out of committee and then to pass it on the House floor.

I suspect the reward for that kind of guts will be a good chance at re-election in 2012.

But, that’s not the wisdom of the moment in the nation’s capital.

Of course, that’s the same wisdom that said Reagan could never win the Presidency, Clinton would never win re-election, and, questioned why Obama would bother running against Hillary.


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Will Congress Buy Ryan’s No Nonsense Budget?

April 5th, 2011 at 5:43 pm 42 Comments

Paul Ryan, viagra House Budget Committee Chairman and realist, seek has taken the great leap.  He has publicly proposed a budget resolution for Fiscal Year 2012 that directly takes on Medicare and Medicaid, the two great drivers of the impending American debt crisis.

Ryan’s become the first elected federal official with any position of responsibility who’s decided to break the cone of silence surrounding the ugly and simple truth—you cannot put the United States back on a sound fiscal track unless you admit that the government has made promises that it cannot keep.

Some have already criticized the Ryan Plan: it doesn’t address tax increases; it hits the elderly; it breaks promises we have made to those who pay the payroll tax; it’s unrealistic.

Shortly after Ryan released his budget plan, the President and Republican leaders met at the White House.  Ostensibly the meeting was about the seventh Continuing Resolution for FY11 appropriations.  The meeting though really foreshadows the larger questions that will surround the FY12 budget and the upcoming attempt by Congress to raise the federal debt limit.

And, no deal emerged from that meeting.  Indeed, only snide remarks and political posturing made news.  But, sorrowfully, no one expected much more.

We have talked before about the difficult challenge House Speaker Boehner has before him—trying to get Republicans of “form” to agree with Republicans of substance.  So far, the Michelle Bachmanns of the world have garnered most of the momentum—that is, from the Republicans for political advantage and “form.”  Now Ryan has spoken for Republicans of substance—that is, Republicans for serious fiscal reform.

So far, Ryan is a courageous but lonely figure.  No one knows if he has the votes to pass his plan out of his own committee.  No one knows what will happen to the plan on the House floor — if it gets there.  And certainly the Senate would reject the initiative if forced to vote on it anytime soon.

Will anybody else leap in with Ryan?  That question must occupy the thinking of Speaker Boehner as he tries to thread his way through the theologists and ideologues of his party.  He knows that he will get no help from the Nancy Pelosi wing of the Democratic Party.  Indeed, Pelosi and the political people in the White House must be delighted tonight as they begin to devise their 30-second commercials to use against Ryan and his supporters.

Only when the far left and far right are defeated on an important vote will the center of Congressional politics emerge and rule.

So, Boehner still faces fundamental challenge.  Will he side entirely with his ideological purists in the House GOP caucus, or will he begin real discussions with moderate and conservative Democrats in the House in order to get fundamental fiscal restraint?  Time remains for the Speaker to make his decision.  But, as the debt limit battle nears, Boehner has much difficult work to do.

Meanwhile, deficit projections worsen and warnings about debt increase.

Soon the United States will join some other notables in the world with deficits at 10% of gross domestic product and a debt limit that approximates 100% of GDP.  Those other notables?  Ireland, Greece, Portugal, Spain, among developed nations.

In a whimsical comment, someone asked me recently if I spoke Greek.  I said no.  He said I ought to learn soon since we are following the fiscal path Greece has forged.

We better hope that it remains a whimsical notion.


Why Centrists Can Still Win the Budget Fight

April 2nd, 2011 at 1:56 am 24 Comments

Please, sovaldi stop.

Whether it is Bruce Bartlett admonishing Republican Senators who have co-sponsored the Balanced Budget Amendment or Rep. Louie Gohmert (R-Tex) refusing to vote for the GOP “plan” debated on the House floor Friday, patient the small crack among Congressional Republicans that appeared during debate on the sixth iteration of the Continuing Resolution now threatens to become a chasm.

In his latest blog post, prostate Bartlett (a true blue conservative for decades) simply notes that “every Senator cosponsoring this POS should be ashamed of themselves.”  With my roots among the common man, I suspect I know what “POS” means and it is not “Point of Sale.”  The POS is the balanced budget amendment  cosponsored  by all 47 Republican Senators.

Rep. Gohmert, a fourth-termer who received his J.D. from Baylor, contended that it was Democrats who got the nation into the debt crisis, and “we do need to cut spending,” but the bill on the House floor is “unconstitutional” and  he would not violate his conscience by voting for it.  Apparently the Baptist ethic of telling the truth infuses Rep. Gohmert, whom, it must be noted, actually spoke at a Tea Party rally at the on Capitol Hill yesterday.

Why are Republicans doing this to themselves?

If the GOP “true believers” continue to substitute nonsense for substance, they will do exactly the opposite of what they have set out to do.  Eventually, they will isolate themselves, force the Republican leadership to make common cause with the moderate and conservative Democrats in both Chambers, and allow a true bi-partisan centrist landscape to develop in Congress.

That result—a true example of unintended consequences—would be good for the country and good for fiscal policy.  Such a center, moving on its own without official endorsement of the leadership of either party or body, might actually begin to regain trust and credibility among American voters.

Two things have become apparent in this long folly we call “the great Continuing Resolution debate.”

First, too many new members of the House GOP caucus simply don’t know where federal spending really goes.  They, like many of their constituents, apparently believe that 25 per cent of the budget goes to foreign aid and cutting that 25 per cent and getting rid of “waste, fraud and abuse” will solve the growing debt crisis.  That may account for the recent House GOP study camp on the federal budget provided to the caucus.  Imagine their horror when they realized that the vast majority of spending goes to Medicare, Medicaid, Social Security, other pensions, payments on the public debt, and farm programs!  “Oh, no, now what?”

Second, somehow these new members must think that the 2010 election turnout model will prevail in 2012.  That is, young people and minorities will continue to stay home and independents will remain rented by the Republican Party.  Somebody needs to sit down and carefully show the vast differences in the composition of Presidential year and non-Presidential year electorates.  While the far right can distort GOP primaries (and nominate Republicans unable to win vulnerable Democratic  Senate seats such as those in Nevada, Colorado, and Delaware in 2010), it will lose much of its sway in the general election in 2012.  And independents are notoriously fickle.

Perhaps  one should add a third unintended consequence: the Tea Party and its adherents in Congress risk losing seats in the House in 2012, not winning control of the Senate, and allowing President Obama to continue being President Obama in 2013.

One irony.  Republican House members read the Constitution aloud on the House floor as almost their first act of the 112th Congress.  Senate Republicans extol the virtues of a strict reading of the Constitution. Then isn’t it peculiar that this week House Republicans concocted a clearly unconstitutional piece of legislation to support and Senate Republicans decided that the present Constitution needs to be amended?

The need to raise the federal debt ceiling nears.  This latest descent into silliness cannot make global bond market participants optimistic that Congress will handle the challenge with courage and grace.


Will Blue Dog Dems Save Boehner’s Budget?

March 30th, 2011 at 12:32 pm 6 Comments

Students of history immediately recognize the phrase Alea Jacta Est, “the die is cast”: spoken by Caesar at the River Rubicon, as he made the decision to head for Rome and civil war. If media reports are to be believed, it may well be that House Speaker John Boehner, deliberately or inadvertently, has crossed his own personal Rubicon.  Many sources reported this morning that Boehner has turned to Blue Dog and moderate Democrats in the House in order to pass the next and perhaps final version of the Continuing Resolution for Fiscal Year 2011 Appropriations (the CR).

Yesterday, House Minority Whip Steny Hoyer reiterated his position that he would help Boehner pass the CR, which expires a week from Friday, if he needed help.  Recall that 54 Republicans voted against the last version of the CR, leaving it to many Democrats to provide final passage on the House floor.  That aid was not publicly requested by Boehner.  If media reports are correct, Boehner is now proactively reaching out to Hoyer for help.

It remains hard to see how either House Budget Committee chairman Paul Ryan or Boehner can garner the votes needed either for the CR or for the upcoming Fiscal Year 2012 budget that Ryan has pledged to begin devising April 4.  That is, unless moderate and conservative Democrats come to their aid.

We have written before about the distrust that exists between Boehner and many of the newly-elected Republicans.  If, and we emphasize if, Boehner has indeed decided that he cannot depend upon his own troops, then indeed that split will remain.  The influence on upcoming fiscal events cannot be over-stated.

Apart from the details of budget process changes, balanced budget amendments, and other strategems to get Republican unity, the situation will be simple: Boehner will have shown that he will lead the House, not just a sub-set of the House.  This dynamic will continue through deliberations on the FY12 budget, on attempts to increase the federal debt ceiling, and the FY12 appropriations process.

It may well be that the Speaker can command a majority of his Republican caucus, even if only a bare majority.  Thus, he will be able to follow what has been an almost iron rule for decades for leadership in both chambers: pass legislation only if it gets a majority of your majority.

Much remains to be written and discussed about these reports and about Boehner’s fellow members in the leadership.  The Speaker can win, if the GOP leadership is united.  If disunity prevails, 2011 will be an even messier year than anticipated.


Boehner Faces GOP Budget Revolt

March 29th, 2011 at 5:06 pm 13 Comments

Today’s news that conservatives in the House Republican Study Committee will draft their own alternative Fiscal Year 2012 budget to challenge the GOP leadership highlights Speaker Boehner’s problems in keeping his caucus unified. But he’s not the only one. In the budget fight, cialis neither President Obama, capsule nor Speaker Boehner, nor Leader Reid can lead, because by and large their troops won’t follow.

So far in the spending fight, delay may have actually helped congressional leaders.  All the strum und drang has been about very tiny spending numbers and the CR.  The FY12 budget (and its five- and ten-year projections) will involve very big numbers and very basic fiscal policy.  And the debt ceiling will involve both.

Instead of trying to make a deal on FY 11, then another on the FY12 budget, and a third on the debt ceiling, the best strategy would be to make a “grand bargain” on all three at the same time.  If Ryan delays a couple of weeks, and Congress forges another CR until mid-April or so, then the debt ceiling may be nearly breached and a “global” discussion of all three could take place.

All of this complicated scenario-devising can’t hide the underlying problem.  Just ask yourself these three questions:

  • How can Chairman Ryan get the necessary votes either in committee or on the House floor when he will be asking his colleagues to vote for at least 2 years of trillion dollar deficits?
  • Who in either party will vote to radically change federal pensions, Medicare, Medicaid, and other entitlements with an aging voting population and no short term deficit reduction in the offing?
  • Why would the President begin public negotiations when it is clear that neither Boehner nor Reid have their own troops in line?

In short, none of the three principals can make a deal that they may be able to deliver on.

The revolution in the GOP ranks is dramatized by the announcement today that the Republican Study Committee within the House caucus will develop its own budget, countering what they perceive will be an insufficiently aggressive budget by Boehner and Ryan.  Since almost two-thirds of House Republicans belong to the RSC, their challenge cannot be ignored.

At the same time, House Democratic Minority Whip, Steny Hoyer, has repeated that once again it may be the House Democrats who come to Boehner’s aid and provide enough votes to pass the CR for FY11.  Recall that at the last vote, it was Democrats who voted in enough numbers to pass the CR, as 54 Republicans voted against it.  Whether Hoyer’s remarks help or hurt Boehner remains unclear.

One of the most famous verses in the Bible is 1 Corinthians 14:8.  It reads, “For if the trumpet give an uncertain sound, who shall prepare himself to the battle?”

The President has sounded the trumpet—we have unsustainable deficits and debt and we must take action.  Boehner and Reid agree resoundingly.  Every serious policymaker and economist concurs—America’s fiscal path will lead to fundamental damage to America’s economy and international standing in the future.

And yet, in his own way, each sounds an uncertain trumpet to the troops.  The president wants Congress to go first; Reid wants the House to act first; Boehner doesn’t know if he has the votes to go first.  The American people look on, confused and bemused, in a state of “buyer’s remorse” over the election of November 2010.

In such a melee, with no one blowing the trumpet and leading the charge, the troops haven’t even formed up yet.

The dust will clear one way or the other.  Congress will act in a convincing fashion to get projected deficits trending down or the bond traders in international markets will strike.  So we end with a final question:

“What happens when a 30-year-old bond trader in London all of a sudden wants 5.5 per cent on the American 10-year note, instead of the current 3.4 per cent?”

Stay tuned.


Boehner’s Budget Battle Is Just Beginning

March 25th, 2011 at 5:27 pm 11 Comments

As predicted, buy the Fiscal Year 2011 budget fight seems very likely to morph into a general fiscal battle that includes the 2012 budget and a fight over increasing the present $14.3 trillion federal debt ceiling.

As they say in the country, find this means the Congress is “wrapped around the axle.”  There are four important constituencies carefully watching the budget fight.  And so far, Congress hasn’t a clue about how to resolve any of their spending fights in a way that would satisfy all four groups.

Who are these important budget battle watchers?

First up are the new members of the House Republican caucus. They want more real cuts, and they want them quickly, so they can tell folks back home that things are different now in Washington after the November midterm elections.

Next, any budget deal will need to pay close attention to the members of the Democratic Senate and House caucuses.  They want to keep “critical” spending programs safe from the “unwashed” Republican House majority;

Then there’s President Obama, who watches from Olympian heights now, but at some point will have to get down and dirty in order to keep the government open, programs alive, and his own reputation intact.

Finally, and, perhaps as important as any: the bond markets of the world, who expect very little real action from Washington, D.C., and will eventually demand higher and higher interest rates on American sovereign debt.

In that last regard, it was James Carville who once famously said, “If I am re-incarnated, I want to come back as a (expletive deleted) bond trader.”

Here’s the approximate timeline for all this fun:

April 4 is the scheduled beginning for the development of the Fiscal Year 2012 congressional budget resolution.

On April 8, we’ll have the expiration of the present Continuing Resolution that funds appropriations for FY11.

Later in Spring, the present debt ceiling expires and Congress will need to vote on increasing it.

What will happen?  Here’s my bet on outcomes:

The budget resolution for FY12 is likely to take the form of just numbers, with promises that some process will eventually be found to someday help make those numbers fiscal reality.  Ryan will get enough votes in committee to pass it out, but it will be a resolution that finds little support in the Senate.

As for the continuing resolution, expect a 1 or 2-day “shutdown” of the government over the April 8-10 weekend, and passage of a long-term CR for FY11 based upon Ryan’s budget resolution promises, and an agreement with the Senate on the CR.

In regards to the debt ceiling, expect passage of at least one short-term extension ($300-$500 billion increase to the ceiling) and perhaps more, as Congress begins to forge a process through which fiscal promises can be made real, with movement on the process starting in the Senate with the “Gang of Six.”

In short, a 30 per cent or so chance exists that circumstances could compel a true, comprehensive process to enact legislative changes to Medicare, Medicaid, pensions and other entitlements.

If, indeed, this is the fiscal anna mirabilis, then bond markets, currency markets and equity markets should be pleasantly surprised and odds are that the slow economic recovery could speed up.

Complicating all this and tightening the rope around the axle, are various policy fights—for example, funding for Planned Parenthood and Environmental Protection Agency restrictions—that may force some members, regardless of how rosy fiscal numbers look, to vote “no.”

Even in the best possible world, Ryan and Speaker Boehner will have to ask their members to vote for a deficit for the next couple of years that will likely exceed $1 trillion.  That reality can be finessed, but it will take extraordinary work.

Oh, and did we mention before that John Boehner has the toughest job in Washington, D.C.?  He has been able to avoid a collapse within his caucus so far, which in and of itself is remarkable.  The job ahead, however, dwarfs the challenges he has already surmounted.


GOP’s 2012 Budget: Dead on Arrival?

March 21st, 2011 at 11:14 am 125 Comments

Apparently old-fashioned snail mail has made a comeback in the United States Senate.  Two sets of letters roiled the fiscal policy process last week, capsule as both the Continuing Resolution for FY11 and the debt ceiling increase loomed closer.

Twenty-three Republican senators wrote a letter vowing never to support a debt ceiling increase without presidential leadership on cutting entitlement spending, ask such as government pensions, Medicare, Medicaid, and farm programs. Then sixty-four senators wrote the president, implying that if he would devise a comprehensive fiscal package, including entitlement program changes, they would support him.

Meanwhile, anti-deficit stalwart, House Budget Committee Chairman Paul Ryan, pledges to start markup of the Fiscal Year 2012 budget on April 4.  The Ryan plan reportedly contains a comprehensive entitlement reform regime.  If Ryan’s plan can pass committee it will be on a party line vote.  And, if it gets to the House floor, again it will likely take almost unanimous GOP support to pass.

It remains unlikely that such a plan can pass the Senate at this point.  In the Senate, emphasis has been on a goal-oriented process reform, followed by an attempt to pass a budget that enforces the debt or deficit goals Congress devises.

Congressional activity has accomplished one thing, if nothing else—Republicans have succeeded in lowering their approval ratings dramatically the last 90 days.  Several polls reveal that Americans view both the GOP and Obama about the same—only 3 in 10 have a favorable view.  If and when the Ryan plan receives support from the Republican caucus in the House, those numbers may decline.

Americans seem to be saying: “Japan is fighting destruction and radiation;  Libyans are fighting and dying against Qaddafi; 8 million Americans can’t find jobs;  housing prices remain low;  and Congress can’t even pass a budget for a year already half gone.  Come on, man!”

If, and it seems more probable than not, the seventh iteration of a CR for FY11 leads to real deadlock, and a short-term shutdown of much of the federal government on March 28, then Congress will have confirmed what too many Americans feared—last November’s elections didn’t really change much at all.

Even more dangerous than a woman scorned is an electorate misled.  As the poet wrote, “April is the cruelest month.”  April looms.


Budget Fight: GOP & Dems Dig in For Round Two

March 2nd, 2011 at 2:08 pm 12 Comments

The Monongahela, generic Allegheny and Ohio Rivers converge in Pittsburgh.  Most readers will find that fact neither new nor particularly insightful.   Sometimes those rivers have teamed up to simply overwhelm their banks, sildenafil flooding the city.  Thus, the famous saying by former Pittsburgh Mayor Tom Murphy, “My mother always used to warn me, make sure you’re home before dark and don’t go near the rivers.”

Washington, D.C., may soon learn about the dangers and confusions surrounding the convergence of three rivers, metaphorically.

While present media concentration has been on congressional action on the FY11 Continuing Resolution (CR) for Appropriations and the looming increase in the federal debt ceiling, a third legislative river finds itself largely ignored—formulation of the FY12 federal budget.

These three legislative rivers threaten to converge this late spring or early summer, leaving Congress with a complicated and chaotic fiscal flood.

Budget geeks, like I am, find a slightly sinful pleasure in watching this unfold.  We have been through this before—the 1985 Gramm-Rudman-Hollings adventure, the 1990 and 1993 budget wars, the 1995-6 shutdowns of the government, and the 1997 “Andrews Agreement” that led to four balanced federal budgets.

This time may prove even more demanding than any of those previous efforts.

Here’s the rundown:

a.) Congress confronts another extension of the FY11 CR on March 18;

b.) Hearings on the FY12 budget recommendations from the President have begun;

c.) Treasury now predicts a breach of the debt ceiling between April 15, 2011, and May 31, 2011.

d.) House and Senate Budget Committees begin final deliberations on the FY 12 Congressional Budget Resolution in April, with House and Senate approval, followed by a conference, by the beginning of summer.

e.) Based upon that Budget Resolution, the various committees of the Senate and House, and the Sub-Committees of the Appropriations Committees, begin their work to comply with the spending and revenue totals in the resolution and any Reconciliation Instruction attached to the resolutions.

Now, isn’t this fun so far?

So, theoretically, Congress could have to pass another (third) FY11 CR, just about the time that the debt ceiling reaches its legal limit, and while the Budget Committees try to put together the FY12 budget.

As a former Senate Budget Committee staff director, I have to warn folks:  “Lock the windows so staff can’t jump.”

Let’s make a couple of assumptions now.

a.) Congress will not and cannot produce a comprehensive deficit and debt reduction agreement and put it into law in the next 6 months;

b.) Some sleight-of-hand will enable congressional leadership to pass another FY11 CR, but with considerably less spending restraint than advertised.

c.) It will prove extremely difficult, if not impossible, to pass budget resolutions in either the House or Senate, let alone a conference agreement on the budget for FY12.

d.) Thus, even if Congress reaches some “Process/deficit reduction” agreement, to actually save money that agreement will have to become law.

e.) In the past, such initiatives required the use of the Reconciliation Process, a critical part of the budget process;

f.) But, if Congress doesn’t pass a Budget Resolution, it cannot use the reconciliation process to demand that the relevant committees make changes in laws within their jurisdictions to meet the spending and revenue goals demanded in the FY12 budget.

A Rubik’s cube indeed;  but one in which the colors change without warning—what will new House GOP members think of voting for a budget resolution that contains trillion dollar deficits?  What kind of process reform will gain the confidence of Senator and House members?  How can that process really get at the underlying reality that achieving real debt stabilization requires painful changes in Medicare, Medicaid, Social Security and other pensions, and other entitlements (like farm subsidies)?

One rule of thumb that always holds:  “Don’t believe anyone who tells you that he or she knows how this will all turn out.”

And don’t believe anyone who tells you that they can predict flooding on the Three Rivers.


Boehner’s Budget Truce Averts Shutdown

March 2nd, 2011 at 12:00 am 17 Comments

As Congress dithers on the federal budget, the states have taken the bull by the horns.  Sometimes, as in the case of Wisconsin Gov. Scott, maybe too close to the horns.

Ironically, Wisconsin really does face a potential government shutdown; but the federal government doesn’t because the House and Senate leadership, along with President Obama, have concocted a two-week extension of the Continuing Resolution (CR) for Fiscal Year 2011 that has passed the House and awaits a Senate vote this week.

In one case, with Wisconsin Governor Scott Walker, overreach has led to a decline in support for his position.  Rather than take the givebacks that the public unions offered earlier in this chaos, Walker decided to take on the underlying proposition that these public unions should even exist.  Like the Allied army at Arnhem, he may find that he has tried to reach a bridge too far.

In the other case, with House Republicans. underreach has led to an uneasy truce that will allow the government to operate for another two weeks and, we are told, save $4 billion in spending that would otherwise have occurred.  I have written about the gimmicks in both presidential, Senate and House “cuts,” so I won’t belabor the point other than to say at some point that the eighty-seven new Republicans in the House will catch on to the act.

House Speaker John Boehner gained enough goodwill from his new caucus members by the open rule on the CR two weeks ago that, as we predicted, the House GOP went along with the two week extension.  But the next bite at that apple might prove very sour for the House leadership if no long-term CR with big cuts emerges. This play is still in Act 1.

The game cannot continue much longer when seven months of the fiscal year have passed; agency heads will simply not be able to sustain the kinds of savings envisioned by House Republicans.  At some point, the Congressional Budget Office will have to opine on the impact of $4 billion in “cuts” every two weeks on the federal workforce.  Already, a couple of analysts have predicted somewhere between 600,000 and 700,000 jobs lost.

Use the whole salt shaker when analyzing these predictions.  The assumptions underlying them are rarely fully revealed.  How long a shutdown? Of what kind? Which personnel?  They are all questions relevant to the answer. My own view is simple no federal personnel are going to lose their jobs and these estimates represent attack points for Democrats against Republicans.

One way to gauge how serious Congress is may be by comparing the crowds in Madison, Columbus, and Indianapolis protesting state government action, with the lack of any crowds, or even any perceived tension, among federal workers in Washington, D.C., or anywhere else in the nation.  Most feds have been through this before and may well look at a shutdown as three or four days of paid leave.

Hovering over all of this is the looming debt ceiling increase vote set for spring or summer.  I still forecast that the CR battle and the debt ceiling fight will merge in a couple of months.  Since real structural restraint continues to seem very unlikely in the 112th Congress, the best that debt hawks can expect are some minor appropriations restraint and a large “process” reform that promises cuts in the future.

Meanwhile, more and more House Republicans will hear from their friends and neighbors as the non-security discretionary cuts begin to hit home — cancer research, education assistance, infrastructure.

As I’ve noted before, the House GOP has taken the route of maximum political pain for minimal deficit restraint gain.  It won’t be fun to be in the House leadership when this becomes apparent to even the newest Members of Congress.