Entries Tagged as 'deficit'

Boehner Shows Leadership in Debt Negotiations

July 11th, 2011 at 10:57 am 120 Comments

Let’s have some genuine applause for John  Boehner’s leadership: his acknowledgement that a smaller debt deal makes sense does seem to allow a path to avoid default and, ampoule simultaneously, click lets the Republican Party make the best of the politically disastrous decision to play with the debt limit.

The decision to bring up the debt issue in the first place was a no-win situation for the GOP. Under the initial plan, Republicans could either get real debt reduction by coming up with a plan that the administration and Senate Democrats want—modest spending cuts and big tax increases—or force default on the debt and thereby cause an even more serious recession. A modest plan that puts aside the “trillions” in cuts that Boehner once promised allows for a “plan C”: a package of spending cuts that can get Democratic votes and a Presidential signature in return for a short-term debt limit increase. Even better, from a rank-and-file point of view, such a plan could let many members stake out a position to the right of their own leadership and get away with it.

The real losers for real leadership may be Boehner and the rest of his leadership team. He’ll have to bring to the floor a package that, most likely, will pass only because Democrats will support it. The Democrats who support it will get kudos from the business community and, given the way such things work in Washington, whatever they want from the White House. (Want a regulation to benefit a big local employer? The President showing up at your next fundraiser? Some tax breaks for your friends? Senate consideration of a pet proposal? Step right up.)  Republicans will have many fewer favors to offer but will still have to twist arms. For every Republican “no” vote that pads his or her majority in a right-leaning “safe” seat and fends off a Tea Party challenge, another member in a less-safe Republican district will be stuck casting a “no right way” vote. Meanwhile, Democrats will get the credit for being the ones who favor a big-time deficit reduction package without actually having to vast a vote in favor of the painful choices it will involve. It seems quite possible that Boehner will face a semi-serious challenge to his leadership at some point: it probably won’t succeed but it could well lead him to decide to cut his career short.

Is this “Plan C” better for the GOP than any alternative currently on the table? Quite possibly.  Does Speaker Boehner prove his leadership bona fides by bringing it up? Yup. Is it a real political winner? Not at all. But, once the debt ceiling debate began, no Republican alternative ever was.

Red Tape May Be Hamstringing Growth

David Frum June 20th, 2011 at 1:17 pm 48 Comments

Matt Yglesias ridicules economic Nobelist Gary Becker for suggesting that President Obama’s policies might be to blame for the slowness of economic recovery over the 2 1/2 years of the Obama administration.

Soon after Barack Obama took office, investment bottomed-out and began to rebound. Neither Obama’s rhetoric nor his policies can possibly be responsible for the Obama-era drop in investment for the simple reason that no such drop occurred.

But take a second and closer look at that chart Yglesias embeds.

Business investment  does appear to have stalled since the middle of 2010, and at a level about three-quarters that of 2006-2007. Yglesias has a point that taxes do not seem the culprit. The Obama tax increases do not bite until 2014, and then they are more likely to bite personal consumption rather than business investment.

Becker suggests that fear of deficits and debt is the deterrent to business investment. He offers no evidence for this claim, just an intuition. And indeed it’s hard to understand why fear of rising deficits should be inconsistent with business investment in 2011 when business investors shrugged off such fears in 2002-2007.

The answer may be located in Becker’s own throw-away reference to regulatory changes. The headline debate over spending, deficits and debt diverts attention from the steady accumulation of burdensome regulation, which truly has been mounting in the Obama administration, so much so that Chief of Staff Bill Daley now apologizes for it.

“Sometimes you can’t defend the indefensible,” he told the National Association of Manufacturers this past weekend. (Daley’s words should be remembered as one of the great Washington quotes. Notice the implicit spin-doctor confidence that at many other times, you can defend the indefensible!)

Doug Starrett, president and CEO of The L. S. Starrett Company in Massachusetts, told a story about a struggle his company has had with the government that he sees as just one example of “government throwing sand into the gears of progress.” Starrett has been trying to rehabilitate a hydroelectric generating facility — the Crescent Street Dam Project — on the Millers River in Athol, Mass. The facility, Starrett told Daley, reduces the local carbon footprint, will save energy, and create jobs. But in March 2009, the US Fish and Wildlife Service intervened, worried that the installation of higher capacity machinery would hurt migratory fish, and in May 2009 the Federal Energy Regulatory Commission stepped in, saying the dam falls within its jurisdiction. To protect the fish,the US Fish & Wildlife Service suggested that Starrett install up to $180,000 in additional equipment. Starrett has spent more than $100,000 fighting the government. On Wednesday night, Starrett’s celebration of the Bruins’ victory was ruined by a 1st Circuit Court of Appeals ruling for FERC, though the judge wrote that he did so “with great reluctance,” and only because the law “requires the result reached here, not that the result makes economic or realistic sense.”

America’s Debt Bill Comes Due

David Frum June 9th, 2011 at 10:37 am 32 Comments

Politicians are jockeying for position as the bill comes due on our gaping national debt. As I explain in my latest column for The Week without an agreement soon, we’ll all be stuck with the check.

As everybody knows, the country faces a huge mismatch between its obligations and its projected income. One way or another, the disparity will have to be resolved. That reckoning will inevitably lead to the disappointment of some people’s expectations. But whose?

That’s the fight that has been underway for two years.

President Obama’s 2009 stimulus plan attempted to protect the expectations of state and local government employees by funding state governments to avoid budget cuts. Then the stimulus funds ran out… and the layoffs began. Now state and local governments are feeling the shock of adjustment, with probably more shocks to come.

The December 2010 battle over the extension of the Bush tax cuts was a battle over the expectations of taxpayers, especially upper-income taxpayers. They got a two-year stay of execution — with a threat from the president to return to the issue in the 2012 election year.

Paul Ryan’s budget opens a huge, angry front in the battle over future expectations.

People under 55 would progressively receive less and less generous retirement benefits in the years to come. People who rely heavily on tax deductions and tax credits would pay more taxes. Meanwhile, people with large incomes would not only escape the burden of adjustment, but actually emerge ahead of the game. Or anyway — they will try to.

Click here to read the rest.

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Did Geithner Really Kill The Recovery?

June 9th, 2011 at 10:03 am 46 Comments

Zachary Goldfarb’s reporting in the Washington Post has revealed an important piece of information about why the economy is slowing down. Forget about Republicans in Congress and their gold-bug nonsense, case blame Timothy Geithner for pushing austerity from day one:

The economic team went round and round. Geithner would hold his views close, rx but occasionally he would get frustrated. Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was “sugar,” and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an “antibiotic” for a sick economy, she told Geithner. “It’s not giving a child a lollipop.”

But is Geithner the source of all our current woes? Or would any Treasury Secretary make a similar argument?

It’s one thing if high unemployment can be pinned on Republicans treating Atlas Shrugged as gospel but it is another when the prime driver of the austerity caucus is from the White House itself. It’s unsurprising, then, that most of the criticism of Geithner is emerging from liberal sources.

John Judis at The New Republic writes that Geithner “is also behind the Obama administration’s unseemly obsession with reducing the debt and deficits — even if that should throw a few people out of work, prolong the Great Recession well into this decade, and pitch American politics to the right.” Paul Krugman describes the reporting on Geithner’s role as “deeply depressing” and Atrios simply notes: “We Are Doomed. Geithner is awful.”

But when FrumForum called up noted conservative economist Bruce Bartlett for his take, he suggested that blaming Geithner ignores the fact he is simply doing what any other Treasury Secretary would have done, and that his critics should really be concerned about the institution of the Treasury, not the person:

The Treasury Secretary really has one job, and one job only, which is raising the money to pay the government’s bills, either through taxation or through borrowing.

… There has never been a Treasury Secretary in the history of this country that wouldn’t have his life made a lot easier by having as little as possible to have to borrow or raise in terms of taxation. It’s an institutional attitude.

As for why it’s hard to get a person into Geithner’s job who might be more willing for the U.S. government to take on larger bills in the short term to help with an economic recovery, Bartlett explained the powerful financial interests which would oppose such a policy:

If they ever tried to appoint somebody, say a Robert Reich or another outspoken liberal, the constituency of the Treasury, which is essentially Wall Street, would have a cow it. It would be extraordinarily embarrassing to the President. You can’t even get appointed to the Federal Reserve if you have a Nobel Prize in economics.

The situation is not entirely without options (Bartlett suggested that had the President focused on the weak economy instead of healthcare reform, he could have used the bully pulpit to keep Washington seized of the jobs situation) but short of Obama appointing a liberal or progressive economist during a recess appointment, it seems that whoever would have been Treasury Secretary would have had a strong voice in pushing against stimulative measures.

This ultimately suggests that while a lot of criticism has been directed at conservatives in the Congress, more attention also needs to be given to the institutions within the executive branch and the incentives they face.

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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GOP Running Out of Time to Win Debt Fight

June 1st, 2011 at 8:46 am 40 Comments

The clean debt limit vote has predictably failed. Of course, it wasn’t the best conceivable option.  A debt ceiling increase coupled with serious long-term spending reform would be preferable. However it may now be the least difficult of all realistically remaining options. For all of the GOP’s talk about tying the debt vote to spending cuts or entitlement reform, is there really time to accomplish that?

There are no more than two months remaining until the debt ceiling has to be raised, and even before that a serious market downturn may precipitate a quick increase. Reforming Medicare on a tight deadline is just not a good idea. Such major legislation shouldn’t be rushed, and if it does get rushed, the result may end up being even worse than doing nothing.

In the end, the GOP has only itself to blame for not getting a good outcome. To govern is to choose, and the Republican Party seems to be more interested in campaigning than in governing. It refused to put forward any coherent platform before last year’s election, so it wasn’t a surprise to anybody when House Republicans waltzed into their new majority status without any well-defined set of goals and priorities.

Had Republicans clearly prioritized long-term spending cuts, they could have offered a deal to Harry Reid and president Obama in early January whereby they would agree to pass a reasonable budget for the remainder of FY2011 (along with a debt ceiling increase sufficient to run the government until the start of the new fiscal year in October) in exchange for $20 billion in immediate cuts (not affecting Harry Reid’s beloved cowboy poetry festival funding) and, most importantly, a firm commitment to start serious bipartisan work on entitlement reform in February. They also could have given assurances that passage of such reform would facilitate the subsequent smooth passage of FY2012 budget.

Instead, House Republicans failed to prioritize the long-term over the short-term and wasted a lot of legislative time funding the government in two- and three-week increments.  They only achieved very modest budget cuts and didn’t address any long-term structural problems. Unfortunately, that was actually the most productive use of time in the House. The rest was totally, completely wasted on symbolic actions designed to please some (not even all) segments of the Republican base while driving away independents and setting a confrontational tone in Washington (thus making it harder to accomplish anything, given that the Democrats still control the Senate and the White House).

Congressional Republicans voted to repeal Obamacare – without offering any alternative. They conducted hearings on NPR funding – measuring in the mere millions at a time of trillion dollar deficits. They voted for the Ryan Plan – a charade that can be called a “budget” only in some alternative universe in which a 2.8% unemployment rate is actually attainable and sustainable. Besides everything else, the overly enthusiastic embrace of the Ryan Plan makes it much harder for Republicans to negotiate Medicare reform.

Still, maybe it isn’t too late to negotiate an increase in eligibility age for Medicare and/or Social Security. But time is running out.

A Debt Fight the GOP Can’t Win

May 31st, 2011 at 9:52 pm 15 Comments

Congress’ rejection of a “clean” debt ceiling increase isn’t surprising and probably won’t have many short-term consequences. Largely because most people don’t really understand what the debt ceiling is or the consequences of default, sales voting against raising it is and will probably remain popular.  On the other hand, recipe the calamitous consequences of default combined with Democratic control of the White House and Senate means that Republicans cannot score a “clean” victory and use the debt ceiling alone to achieve a laundry list of conservative priorities. There’s a real possibility that asking for too much may result in total defeat: a deal that gives Republicans nothing to speak of and opens the door to huge tax increases in the near future.

If Republicans want to avoid this and get a real victory for spending restraint, thumb they should follow the path that Senate Minority Leader Mitch McConnell has laid out and call for immediate cuts in Medicare spending coupled, perhaps, with cuts in Social Security benefits for wealthy near-future beneficiaries. None of this would be popular, of course, and it might well cost a fair number of members their seats. But going for near future cuts in big entitlement programs (and being willing to take the political heat for it) would make a big difference for the country. Such cuts, focused on Medicare, were key to the budget deals that gave the United States a run of budget surpluses in the 1990s. It’s worth trying the same thing again.

The entire debate over the debt ceiling is, and will remain, a bad idea. But if Republicans want to eek out a victory for the country and good public policy, they should focus on near future cuts to entitlement programs.

Want Big Budget Cuts? Weaken the Dollar

May 31st, 2011 at 1:12 pm 46 Comments

Republicans promise that rapid action to cut government spending will lead to a quick return to prosperity.

They have some evidence on their side: the experience of some small countries that used these methods back in the 1990s (Finland, Ireland, Netherlands, New Zealand, Norway and Sweden).

Republicans could cite another example, a bigger economy more similar to America’s: Canada. Canada cut spending in the 1990s, balanced its budget, and ignited rapid economic growth.

But here’s the problem: Canada and the six small countries cited by Republicans all allowed their currency to depreciate deeply. The cheaper currency triggered an export boom, and since these economies were small and depended heavily on foreign trade, the export boom translated into more activity throughout the whole economy.

The cheap currency was essential to reinvigorate each economy.

Canadian economists admit to this even while they insist they don’t advocate a weak currency as policy. Ross Laver, Vice President of Policy and Communications of the Canadian Council of Chief Executives, explained some of the benefits of a devalued currency: “To the extent that a weak currency helped exports – well, yes, that encouraged economic growth which in turn led to higher government revenues.” He made clear that the government did not seek this: “But that weak currency was imposed on Canada by international markets – it wasn’t something we went looking for, or for that matter celebrated.”

It may not have been a “deliberate strategy” but there is no denying that the policy helped.

The following is data on the volume of Canadian exports courtesy of information from the Canadian government. [The data only goes back as far as 1992.]

It shows a significant increase in exports from Canada to both the United States and to all countries globally, which can at least in part be attributed to the weak currency in the nineties.

However, it is questionable whether the larger and less trade-reliant US economy can benefit as much from rising exports as Canada did, let alone Finland. In the nineties Canada’s currency was cut by a third to instigate the export boom (90 cents on the dollar to 60).  Given that the US economy is even bigger than Canada’s and the percentage of exports is smaller, one wonders how weak the dollar would have to become before we would see real change.

Republicans, however, demand a stronger US dollar at the same time as reduced government spending.  This would mean that there would be no export boom at all while the government would be withdrawing its purchasing power from the domestic economy.

This certainly raises questions about whether implementing the Republican approach is necessarily the best way to balance our budget, or whether it would even work at all.

Slow Growth Numbers Call for Smaller Cuts

May 26th, 2011 at 3:06 pm 8 Comments

The okay-but-not-great economic numbers (1.8% economic growth) posted yesterday offer talking points for both Democrats and Republicans. But the GOP seems to have a slight upper hand with these numbers–if it plays its cards right.

Talking points for Democrats: Our policies reversed the recession that Republicans and George W. Bush caused. The less-than-stellar growth numbers–which actually aren’t that bad anyway–stem from cutbacks in government spending that the Republicans have forced on us. We need another “jobs” bill now, however, to prevent a double dip recession. (Want details on how government spending is effective at creating jobs relative to private sector efforts? Let us get back to you on that.)

Talking points for Republicans: These numbers show the failure of President Obama’s policies and the uncertainty that his health care and financial reform bill have caused. The deepest cuts were actually to defense spending which we weren’t that crazy about making so this isn’t any evidence that cutting government doesn’t work to create prosperity. We need policies that will create certainty including lower taxes and real spending reductions. (Want details on how we’ll reduce spending in the short run? Let us get back to you on that.)

Both of these agendas have real problems although the Democratic message seems weaker since it simply promises another dose of medicine that hasn’t worked very well to date.

If Republicans want to seize the moment, they need to come up with a government cutting agenda that borrows significant details from the one they’ve already proposed (the Ryan budget) but is more politically palatable, realistic, makes more cuts now (and fewer later) and focuses on confronting problems of the future rather than undoing not-so-good policies of the past.

U.S. Can’t Cut Its Way to Growth

May 26th, 2011 at 11:14 am 27 Comments

In a recent blogpost debunking claims that reducing government spending always leads to a quick economic recovery, FrumForum‘s Noah Kristula-Green offered a (short) list of countries that cut spending, reduced deficits, and then realized healthy economic growth.  His list offers several important revelations.

First—as he points out—reducing spending isn’t a surefire way to cause sustained growth. Second, as Kristula-Green also observes, the countries that saw growth following spending cuts were quite different from the United States: not only had all of them had straightforwardly socialist governance but all of them are reasonably small. The largest of them, Netherlands, has an overall economy about the size of Florida’s. But there’s more too: the spending-cutting reformers were people strongly committed to preserving (and even improving) the provision of core government functions.

New Zealand’s 1993-1994 reforms, led by then-finance minister Ruth Richardson of the right-leaning National Party, took place in a context of trying to save portions of the country’s welfare state following a nominally left-wing government’s rather radical reforms of it.  (The same conservative government also engineered a huge bank bailout immediately after taking office.) While spending did fall, “real investment” (admittedly, under calculations that the government itself designed) in public services actually increased as duplicative programs were merged and the government figured out new ways of providing services. Maurice McTigue, now of the Mercatus Center, for example, contracted out every single function of what had been a huge state-owned construction company then called The Ministry of Works (he even contracted with law firms to negotiate the contracts) but, at the same time, actually increased the number and quality of roads and bridges built.

And some situations may be sui generis. Although their actual impacts can be debated (there’s some evidence that such payments are inefficient), the spending cuts that helped bring about Ireland’s “Celtic Tiger” economy were made possible in part because European Union transfer payments had reduced the need for infrastructure investment. That economic boom collapsed, spectacularly in the late 2000s, as a combination of huge deficits, tax cuts coupled with spending increases, and a housing bubble sent the economy for a tailspin. Sound familiar?

The bottom line: cutting one’s way to prosperity probably is possible if difficult. But the countries that have done it best seem to have paid a lot of attention to governing.