Entries Tagged as 'debt ceiling'

What to Watch in the Debt Negotiations

July 7th, 2011 at 1:06 pm 4 Comments

While we await the news from today’s debt ceiling negotiations between Republicans and Democratic leaders, news outlets are already leaking and reporting on the possible contours of a deal. But which reporting is actually likely to be part of a deal and how much is smoke and mirrors? What developments would be unexpected if they become part of a final deal?


1. Medicare and Social Security are on the table.

Plausibility: Plausible, but what about Medicaid cuts?

Senate Majority Whip Dick Durbin has given reporters a broad outline of a deal: $1 trillion in revenue raising by closing tax loopholes, with the Democrats conceding cuts to Social Security and Medicare. This deal certainly looks like it could be a “Grand Bargain”.

But curiously, Durbin did not mention cuts to Medicaid. Earlier reporting had suggested that Medicaid cuts were a large part of the negotiations. Medicaid was always the more vulnerable program because the constituency that depends on it (the poor) carries less clout then the constituency that depends on Medicare (the elderly).

If Medicare cuts, and not just Medicaid cuts, are on the table, then it would be politically courageous for politicians to support them.


2. Republicans will accept revenue increase without tax cuts to offset new revenue.

Plausibility: Needs to happen if Republicans are serious about a deal, unknown how serious they are about a deal.

Several news stories are hinting that Republicans are buckling from their previous opposition to revenue increases that are not offset with tax cuts. This has been a key problem with Grover Norquists anti-tax pledge that many Republicans are committed to: it is hard to reduce government deficits over the long term if every time revenue is raised by removing a subsidy (for example, ethanol subsidies) that the revenue raised is off-set by a new tax cut.

Eric Cantor reportedly wants to “talk” about closing some of these tax loopholes which could increase revenue, but he still claims to want tax cuts to off-set them. Senator Kyl has also made comments about increasing “revenue” but its unclear from where the revenue would come.

Ultimately, if Republicans are serious, some sort of significant revenue increase that is not off-set by tax cuts will need to be part of final deal, both to get Democratic votes and to actually reduce the deficit within a reasonable time frame.

It might be that Republicans have no intention of supporting any sort of revenue increase which is what lead to David Brooks column from this week warning that the Republicans “may no longer be a normal party”.


3. Jim DeMint and Olympia Snowe will get a Balanced Budget Amendment as part of the deal.

Plausibility: No. Snowe is positioning to win reelection.

So far, the most out-of-left-field position is an op-ed by Senators Olympia Snowe and Jim DeMint arguing that any solution to the debt crisis must involve a balanced budget amendment being added to the Constitution.

You may recall that Bruce Bartlett referred to the balanced budget amendment as “quite possibly the stupidest constitutional amendment I think I have ever seen. It looks like it was drafted by a couple of interns on the back of a napkin.”

So is this meant to be a serious part of a debt deal? Probably not. What’s more plausible is that Snowe faces reelection next year and her support for the amendment coupled with an op-ed co-authored with DeMint seems designed to try and get her to run to the right of any potential primary challengers.

Here’s the Way to a Deal!

July 7th, 2011 at 8:52 am 72 Comments

Eric Cantor’s recent declaration that Republicans will look at “loopholes”is a step in the right direction but Cantor is wrong to insist that any loophole closing be met with an equal cut in taxes. In fact if he bends just a little on this point, he could easily come up with something that looks a lot like a Republican victory.

It’s pretty simple. As I’ve argued before, most of the trillion dollars in “revenue expenditures” scored by the Congressional budget Office comes from big-ticket items that serve purposes very similar to marginal rate cuts. Since almost everyone is going to pay state and local taxes, incur medical expenses, and (at some point) have a home mortgage, its important to insist that very broad changes to these deductions for these things be offset with similarly-sized cuts somewhere else.

Far more tax expenditures—all of them far less consequential than the ones noted above—are really just spending by another name. Credits and benefits for ethanol producers, blind people, wind farms, the working poor and others simply redirect spending in almost the same way as would happen in Congress simply appropriated the money to these purposes.  In fact, they may be less efficient at accomplishing their stated public goals than spending, since many go to people that might have done the same thing without the credit.

A few of make a lot of sense (the Earned Income Tax Credit is a huge boost to the working poor) but most of them are special pleadings from one group or another. Only a handful of these handouts are defensible at all in the current fiscal climate and getting rid of the great majority of them would have no impact on the overwhelming majority of the population or the great bulk of businesses.  Ideally, they should be subject to a “zero base” policy similar to the procedure used in some states. The budget process should start with the assumption that none of them should exist and then they should be justified only if policymakers decide that an activity is a legitimate government role and that the tax expenditure in question is the best means to accomplish that goal.

So here’s how Republicans can get a victory for themselves Democrats would probably have to accept: agree to raise some revenue by eliminating indefensible tax breaks for things like ethanol, privately owned cars, new air conditioning systems, second homes (a change in the mortgage interest deduction, yes, but not a broad one), while also cutting marginal tax rates for many by playing with some of the bigger features of the tax code in a revenue neutral way. If Tea Party Republicans really want to prove their libertarian bona fides, they should eliminate the state and local tax deduction wholesale (it subsidizes high-tax states and encourages the growth of government) and devote some or all of the revenue gains to cutting marginal rates on many middle-income people. If spending cuts were also part of the package (and, at least rhetorically, both sides support them), Republicans could deliver almost everything they promised last November.

The end result could be a real Republican victory: no default, real spending cuts, real deficit reduction, and lower marginal tax rates. This would be a very good package to take to the voters in November of 2012. And Republicans could take credit for almost all of it.

The Debt Limit has to be Constitutional

David Frum July 6th, 2011 at 11:30 pm 70 Comments

The Balkin-Bartlett view of the Fourteenth Amendment and the public debt is tempting.  But having read and considered Ajay’s excellent blogpost, that view seems to me very clearly wrong.

The obvious way to pay a public debt is not by borrowing more. The obvious way is by levying a tax.

So if the Fourteenth Amendment over-rides Article I, Section 8 giving Congress exclusive authority over borrowing, surely it must even more emphatically over-ride Article I, Section 7 giving Congress exclusive authority over taxation?

Yet that answer cannot be right! If there is a fundamental principle in the original 1787 Constitution, it is that the Executive depends on the Legislature for revenue.

Which means that we have to read the Fourteenth Amendment as conferring on creditors a guaranteed claim on the Treasury. But the Republicans are not “questioning” that. The immediate 44% cut in the federal budget that would follow from exhausting federal borrowing power may wreck the US economy. Yet that cut would still leave the Treasury enough resources to pay the creditors. So the public debt clause would remain unviolated.

Here’s another question that drives home the wrongness of the Balkin-Bartlett view. If the Fourteenth Amendment “shall not be questioned” language can over ride Sections 7 & 8 of Article I, can it also over-ride the First Amendment? What if an ex-Confederate official made a speech in 1872 urging the repudiation of the national debt. Let’s make it fancier: suppose he gave that speech on the floor of Congress, assuming he was protected by the Speech & Debate clause. Could Congress punish him for this “questioning”? And if the Speech & Debate clause and the First Amendment continue to exist independent of the 14th Amendment, why not Article I?

I wish the Constitution could save us from the debt-ceiling problem. It can’t. Only responsible compromise can do that.

How the GOP Benefits From a “Constitutional Option”

July 6th, 2011 at 4:02 pm 5 Comments

As Matt Yglesias suggests, one of the big reasons for the left bringing up the “Constitutional option,” in which the president would override the debt ceiling by invoking the Fourteenth Amendment, is as a bargaining position: it gives the White House the opportunity to say to Republican negotiators that it doesn’t need them and has other options if they refuse to vote to raise the debt ceiling.

It’s pretty clear why the “Constitutional option” could be good partisan politics for Democrats. If the debt ceiling stands and government budgets run into it, we could enter a period of intense economic turmoil. That turmoil could sink the president’s chances of reelection (that is, if he doesn’t successfully deflect blame to the Republicans for the debt-ceiling fiasco). By giving the president leverage, this “option” can also allow him to parry cuts that he or his allies find unfavorable.

However, the “Constitutional option” may also be a partisan opportunity for Congressional Republicans. One of the many dirty little secrets of the current debt-ceiling talks is the fact that many Capitol Hill Republicans are quite glad to have trillions more in national debt. The GOP has voted for budgetary measures that would bust the debt ceiling. Moreover, the Ryan budget, backed by the overwhelming majority of Congressional Republicans, adds trillions to the debt and places most of the savings (some of which are premised on fantastic economic numbers) many years down the road.

But while Republican members of Congress have de facto embraced more debt, they also face a grassroots element and certain self-anointed tribunes of the conservative “movement” who increasingly believe that any vote to increase the debt ceiling is a sign of fiscal capitulation. Many Republicans thus find themselves between the rock of fiscal reality and the hard place of political positioning.

The “Constitutional option” offers the GOP an escape hatch. If Obama used this option, the GOP could keep on voting for massive deficit spending while also not making the politically hard vote about the debt ceiling. Obama’s exercise of the “Constitutional option” would also give Republicans an opportunity to rail against an “out of control” executive branch while not forcing them to do anything to rein in this executive.

The leaders of both parties certainly want the debt ceiling to be raised, but they are trying to find the least politically damaging way to do it. Republicans and Democrats may find that the “Constitutional option” is the easiest way of doing so.

Of course, the use of this “option” would very likely be a ticket to a Constitutional nightmareland and could set up a further corroding of our federal institutions and national consensus. The use of this option may be good partisanship for both parties, but it seems bad politics for the nation as a whole. It would be far better for Congressional leaders to hammer out some compromise that would allow the United States to meet its fiscal obligations over the short and long terms.

Originally Posted at A Certain Enthusiasm.

Politicians Will Kick the Can Down the Road

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

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

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

The President rejects a short-term deal.

What is the path of least resistance?

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

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

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

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

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

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

Except.

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

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

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

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

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

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

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

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

Will Politicians Ignore David Brooks?

July 6th, 2011 at 12:35 pm 33 Comments

One of the things that has attracted me to David Brooks over the years is his willingness to not get so heated in his writing.  In a time when it seems that what sells is trying to show everyone how outraged you are, Brooks quiet conservations about issues has always been a breath of fresh air.  Brooks has been critical of folks across the political spectrum, but it was never done in a withering attack style.  That’s just not David Brooks.

At least it wasn’t until yesterday.

Brooks incredible tounge lashing of the GOP for it’s dance with default should be a sign to Republicans that they are in danger of losing any and all credibility.  When you get the man who has made a living on calls for civility angry, you’ve pretty much lost the independents and moderates that are needed to win.

The modern GOP is in a bit of a bind. My guess is that even within the halls of Congress there are a number of GOP members of Congress who agree with Brooks.  They want to make a deal with Democrats to avert any kind of fiscal disaster.  But I also think the GOP is trapped by its own ideology; faced with a base that doesn’t want any compromise and will punish any lawmaker that goes against their wishes. As Jonathan Bernstein notes, citing a recent New York Times piece, GOP lawmakers are kept in line using fear:

What matters here, however, isn’t what actually happens in these primaries (after all, virtually all incumbents will survive them), but what’s in the heads of Republican Members of Congress. And for that, it’s possible that the ambiguities and unclear interpretations in Steinhauer’s story reflect accurately a focus on primaries and Tea Party short leashes that dominate the thinking of those Republicans.

All of which means that, at this point, it doesn’t really matter how many establishment figures defect or how harshly they complain: as long as Republican politicians are convinced that their main vulnerability is primary challenges from the right, they’re going to get crazier and crazier.

The thing is, it’s really not that crazy to worry about challenges from the right. Several Republican incumbents went down to defeat in primaries last year because they were not “pure” enough. It happened enough in 2010 to strike fear in the the hearts of GOP lawmakers. And as Bernstein notes as long as those politicos think this is their fate if they even make a deal, they will ride that crazy train no matter what a columnist says about them.

I really don’t know what the solution is.  Of course, GOP lawmakers should make deals, but the reality is they won’t because of what could be the repercussions of compromising.  Brooks slap across the face should be a wake-up call, but I doubt it will.  So far, there hasn’t been any consequences for going crazy.  There have been consequences for making deals.  Only when a price is paid for ideological rigidity will the GOP be able to change its course.  The question then will be if it’s too late.

Originally posted at Big Tent Revue.

Sorry, the Debt Limit Looks Constitutional

July 6th, 2011 at 12:00 pm 107 Comments

With negotiations over the debt limit going down to the wire, the threat of a catastrophic default looms on the horizon. In order to prevent this disaster from happening, some analysts and experts think they have found a way to prevent the crisis: declare the debt limit itself to be unconstitutional. Economics columnist Bruce Bartlett, one of this view’s main supporters, cites section 4 of the 14th Amendment, which states that “the validity of the public debt … shall not be questioned.” However, this view is not universally accepted. Three legal scholars contacted by FrumForum invoked the powers granted to Congress under Article 1 to dispute the case against the debt ceiling and offered rival interpretations of the passages cited by Bartlett and others.

Michael McConnell, a former federal judge who now teaches at Stanford Law School, has recently written about the issue. He noted that “Article I, Section 8, Clause 2 gives Congress authority to borrow money on the credit of the United States, [so]  Congressional authorization is … constitutionally required for the Treasury to borrow.”

Theodore Seto, a law professor at  Loyola Marymount University who specializes in public finance, agreed and pointed out that standard interpretive practices gives the section from Article I precedence over the 14th Amendment. “You want to try to interpret constitutional provisions so that they’re consistent with one another,” he said. “If section 4 were meant to override the Congressional control over borrowing mentioned in Article I, you would expect that to be stated clearly.” Seto admitted that “politically, I’d love to defang the Republicans on this [by showing that the debt ceiling is unconstitutional], but I just don’t see the argument.”

Calvin Massey, a professor of constitutional law at the University of California at Hastings who has also written about the debt-ceiling debate recently, took a different view of the provision of the 14th Amendment that Bartlett cites. “I think that what the constitutional provision in the 14th Amendment means is that the government is directed constitutionally not to default on its debts,” he said. “That means that you take current revenue and devote it first of all to paying the existing debt, but that doesn’t give the Treasury Department carte blanche to borrow additional funds.”

Opponents of the debt ceiling also cite a constitutional provision known as the Take Care clause, which requires the President to “take care that the laws be faithfully executed.” They argue that the prioritization of spending which Massey recommends would violate this requirement since it would involve disregarding laws which require spending money on other federal programs. However, the scholars FrumForum spoke to were skeptical of this argument as well.

“[The President has] a constitutional obligation that’s paramount to ordinary legislation to make sure that the public debt is paid,” Massey said. “Legislation is always subject to constitutional limitations, and … in [this] situation … that means paying the public debt first.” McConnell agreed, arguing that “among the laws he must faithfully execute is the constitutional prohibition on borrowing without authorization by Congress.” Both McConnell and Seto also noted that, if the Take Care clause allows the President to borrow without Congressional authorization, it would also allow him to levy new taxes without consulting Congress; they both saw this as a clear sign that the argument the debt ceiling was unconstitutional was mistaken.

The Real Debt Debate Sticking Point?

David Frum July 6th, 2011 at 10:28 am 16 Comments

Politico insinuates this morning that a big sticking point for the GOP in the debt-ceiling negotiations is a demand that the earnings of hedge funds continue to be taxed at the 15% capital-gains rate rather than income-tax rates. Can this be true?

Indeed, with more than $1.5 trillion in spending cuts on the table, House Republicans have sent signals that eliminating breaks for jet-makers and oil companies could be palatable as part of a debt-limit package. But they will fight to prevent a tax hike on hedge fund managers, who earn on the income they generate for investors.

House Majority Leader Eric Cantor has said he didn’t exit the talks over those provisions, but rather Democrats’ desire to eliminate certain tax breaks for people who make more than $200,000 or couples who make $250,000 or more. Another sticking point was Democratic efforts to ban “last in, first out” accounting, in which the most recent assets acquired are assumed to be the first sold off. Cantor has also signaled openness to ending ethanol subsidies.

Obama Calls for Lopsided Negotiations

David Frum July 5th, 2011 at 5:45 pm 53 Comments

And now President Obama has summoned Republicans to another round of negotiations over the debt ceiling.

Perhaps he will there deploy some previously invisible form of leverage.

To the uninstructed eye, however, it looks like Obama has set up yet another lopsided bargaining table: He needs the Republicans to give him something, anything, that he can claim as a victory. This need, however, perversely puts the Republicans in the situation where if they give him something, anything, it will be represented as a defeat. The president’s own weakness has had this perverse effect on his political opponents: it has reduced the value of his own concessions (no matter how big) and hugely exaggerated the significance of any offset he achieves (no matter how small).

Obama’s Weakness Made Debt Crisis Worse

David Frum July 5th, 2011 at 11:17 am 82 Comments

In my latest column for CNN, I discuss how president Obama’s weakness in his negotiations over the debt ceiling have made the debt crisis worse:

Why aren’t the Democrats rebelling?

The debt ceiling negotiations have amounted to a succession of retreats and concessions by President Obama.

At this point, the president confronts two possible outcomes in the coming weeks:

Outcome 1: The president and congressional Republicans reach agreement on a budget package weighted overwhelmingly in favor of the GOP. The president opened negotiations by offering $3 of spending cuts for every $1 of tax increases. His current offer tilts even further to the GOP: $6 of spending cuts to $1 of tax increases.

Better still (from a Republican point of view), the spending cuts come from programs Republicans dislike, like Medicaid, rather than programs they like, like the farm budget. The tax increases meanwhile are designed to be as acceptable as possible to the GOP: no increases in tax rates, but instead trimming some of the less defensible deductions in the tax code.

Outcome 1 represents a very big win for Republicans over the future shape of the federal government, and a correspondingly big defeat for the president.

Outcome 1 also represents the president’s best-case scenario.

The worst-case is Outcome 2. Republicans reject the president’s concessions as insufficient. They refuse to lift the debt ceiling. Denied the legal authority to borrow further, the federal government exhausts its cash sometime in the next three to four weeks.

At that point, the United States will face some kind of federal bankruptcy: paying some claims, deferring others, plunging the U.S. government into financial crisis and probably plunging the whole world into renewed economic crisis.

How in the world did the president arrive at this disastrous predicament?

You can blame his opponents if you want. Yes, the House Republicans have played politics very rough. Not since the era of the Vietnam War has a house of Congress used the threat of national bankruptcy to gain its way on a policy point.

But the roughness of the president’s opponents does not excuse the president’s own mistakes and weakness. On the contrary: from the point of view of the president’s supporters, the roughness of the president’s opponents makes all the more inexcusable the president’s mishandling of the situation.

As Marc Ambinder of the National Journal suggested at the time, the president could have included an increase in the debt ceiling in the December deal to extend the Bush tax cuts. The Republicans dearly wanted that extension. Obama did not use leverage when he had it — and so he became a victim of leverage when he lacked it.

Then, as Republicans discovered the power of their new tool, the president decided to assume they were bluffing, that they would never actually do anything so reckless. Waking up to the reality of the situation too late, he commenced bargaining by offering what he assumed would be an irresistible deal. Wrong again. The Republicans did resist. So Obama offered an even better deal — which predictably only whetted the GOP appetite for still more.

Obama never publicly branded the debt ceiling as “if the Republicans force this country into bankruptcy.” He issued no public call to constituencies like the financial industry to bring pressure to bear on the issue. He did not warn that he would manage any crisis in ways that Republicans would not like. (“If the Republicans in Congress deny me the authority to pay everybody, then I’m going to have to choose some priorities. I don’t think it’s likely that Texas-based defense contractors will find themselves at the top of my list.”)

Instead, he appealed again and again to Republicans’ spirit of responsibility. Good luck with that.

Click here to read the full column.