Monday, January 7, 2013

Eliminating the Debt Ceiling

There are many problems caused by the so-called U.S. “Debt Ceiling” negotiations, but I’ve decided one solution is to change the incorrect framing of the issues. Just as anti-abortion advocates recast the conversation after Rowe vs. Wade by calling themselves “Right-to-Life” advocates, we need to reframe this conversation about the issue of our Federal debt.

Debt Ceiling is a misnomer. The only ceiling to the debt is whatever mathematical limit Congress implicitly authorizes with its tax and spending policies. If they authorize less in taxes than they do in spending, the amount of outstanding debt will increase.

Since Congress has shown an ability to avoid cliffs—or at least defer them—I suggest the Debt Ceiling should be renamed the “Default Cliff.”

The most recent incantation of the Default Cliff came about in 1995 when Republicans changed a House rule that automatically increased the Treasury’s authorization to borrow whatever was necessary to implement Congressional spending and tax laws. Republicans wanted leverage over then President Clinton and forced (and got blamed for) a couple of government shutdowns as a result. The Republicans are at it again, although in fairness, when the Democrats regained control of the House, they did not manage to change the rule back to the common sense approach Democrat Rep. Dick Gephardt had implemented back in the late 1970s.

If Congress, in another show of politics over reality, does not vote to have the U.S. government pay the bills THEY racked up with THEIR previous spending authorizations and tax cuts, THEY will cause the U.S. Government to default on its obligations. On a cash-flow basis, falling off the Default Cliff immediately requires a balanced Federal budget. Such a default will not cause a miraculous cessation to the increasing debt because that is determined on an accrual basis. Cumulative debt will continue to increase because the government will owe someone money for unkept promises—those debts continue to accrue.

Assuming Congress drives us over the Default Cliff, the big question is whose oxen (for surely it will be more than one ox) get gored. If we default on the interest or repayment of principal on U.S. government bonds (an actual default), a world-wide financial crisis would shortly ensue since U.S. obligations are the foundation for much of worldwide commerce. To avoid that, the Obama administration would likely continue to pay those obligations. However, it could choose to cut back the Social Security benefit my mother receives or pay part or none of the bill a defense contractor sends for supplying food to our soldiers in Afghanistan or defer paying the Medicare invoice from a doctor or hospital. As it did in the 1990s, the government could immediately shut down most “nonessential” departments, laying off millions of people.

This is the world those who want to immediately balance the budget by spending cuts will bring us. Kept in place for longer than a few days and regardless of the choices, GDP would fairly quickly drop about 10% (more than twice as bad as the recent “Great Recession”). Then the ripple effects kick in.

Government contractors would soon terminate employees, as would suppliers to those contractors, not to mention the barbers who no longer had people coming to them because they couldn’t afford haircuts and so on and so forth.

We would shortly have a depression with no safety nets in place. The depression would spiral downward, unchecked by the ability of government to stimulate the economy because it could not borrow more. Eventually, the economy would bottom out at a much reduced level.

But we won’t do that because the House Republicans are not that stupid. Are they?

It’s time to find out. We citizens of these United States need mature conversations AND decisions on what we expect our governments to do and how we will pay for those services. Holding the Default Cliff over the economy’s head does not inform the conversation. House Republicans should show leadership by reinstating Rep. Gephardt’s House rule to automatically extend the Treasury’s ability to borrow as needed to implement enacted legislation.

~ Jim

Thursday, January 3, 2013

Republicans Blink

The deal hammered out in the U.S. Senate and reluctantly approved by the House this week was massively flawed; however it did call the Republicans’ bluff on no tax increases. Technically they might be able to hang their hats on the proposition that since they did not vote until January 1, they were actually voting for a decrease in taxes because the so-called Bush tax cuts had expired. The only people who might buy that are the politicians themselves.

Lots of people will focus on the many flaws of this legislation, but let’s look at the real positives.

(1) A bill passed Congress with bipartisan support. Huzzah! Everyone was grumbling (which is often the case with legislation that has bipartisan support) but a supermajority in the Senate and majority in the house voted yes. This proves they can do it!

(2) Republicans and Democrats voted for a tax increase. As I have written before, our annual deficits cannot be solved with spending cuts alone. Although House Republicans voted almost 2-1 against the bill, this vote shows recognition by a majority of legislators that we must also have increased revenue.

(3) Congress made most of the changes permanent. It’s important to recognize that permanent does not mean they may not be changed in the future. It means they stay in place forever until they are changed by law.

This differs from Congress’s typical approach of short-term fixes that they need to address year after year after year. This practice of temporary changes became standard because of the way Congress “scores” the cost of legislation. It minimized the costs and maximized benefits to make legislation look good. This process allowed politicians to make claims supported by incomplete economic analysis and also caused myriad opportunities for junk measures (aka pork) to ride along with a bill that must be passed. Making these changes “permanent” takes away “must pass” bills that are tar babies for pork.

(4) It returns the marginal tax rates on those with $400,000 (single) $450,000 (joint) back to 39.6% and also limits deductions and the personal exemption for those earning over $250,000 (single) $300,000 (joint). Capital gains rates will also be greater for higher income earners. These changes show a recognition that those well off must bear more responsibility for our tax revenues than they did.

(5) The AMT (alternative minimum tax) is finally indexed to inflation so it will apply to targeted groups and not add unintended taxes on middle class taxpayers.

(6) Eliminates the payroll tax holiday. While effective as a stimulus in getting more spending money to those working, it was ineffective in its appreciation by those receiving it. Further, it eroded the security of Social Security, which is particularly important at a time when so-called entitlements are all under attack.

(7) Congress blocked an increase in their pay. They actually thought they deserved one for their performance? I’ve said before Congress should get no pay until they pass a complete budget for the fiscal year.

Of course I wish this legislation had done more, but what it did accomplish was mostly pointed in the right direction. The next battle will be waged by the next Congress as it tackles the artificial debt limits imposed in the same short-sighted manner as the “fiscal cliff” by previous Congresses.

Happy New Year.

~ Jim