Sunday, July 10, 2011

Dealmaking, Grandstanding, and Posturing

The Sunday evening network news sounded a pessimistic tone of Speaker Boehner and President Obama reaching an agreement on the debt ceiling or much else. I wanted to post here for my own memory the number of people on the political right, whose opinions I respect, who think the Republicans are stupid for not taking the $4 trillion deficit reduction deal on the table earlier in the week:

David Brooks wrote that this was "The Mother of All No-Brainers."
Megan McArdle seconded that, echoing Brooks' fear: "Why Can't the GOP Get to Yes?"
Tyler Cowen wrote "Take the deal, people."
Josh Barro doesn't even want a negotiation, he just wants Congress to raise the debt ceiling cleanly.
Bruce Barlett has been devoting a lot of ink to debt ceiling myths and how the debt ceiling is likely unconstitutional and argues that Sec. Geithner should just ignore it.
A friend of mine who is a fairly long-time Congressional staffer tells me he is likewise "worried."

According to the "journalists," The GOP is backing away from the table this weekend either a) because of anger of "the base," fueled by Tea Party unwillingness to compromise or b) because Obama is either lying about willingness to cut entitlements or c) the White House is demanding some increase in rates somewhere and not just closing loopholes or eliminating tax expenditures or d) all of the above.

Opening my Wonkbook on Monday morning, Ezra Klein puts it thus:
(D)on't ask why the $4 trillion deal collapsed...Ask why anyone ever thought it'd take off in the first place....It does not matter if John Boehner is a reasonable man...Boehner isn't the Republican Party. In fact, of the four major figures in the GOP leadership -- Mitch McConnell, Eric Cantor, and Jon Kyl -- Boehner is perhaps least representative of the modern Republican Party. The deal's collapse is...a reminder that what Boehner wants really doesn't matter...

We've reached an equilibrium where Republicans can't accept any revenues and Democrats can't accept a deal without any revenues...There was a brief, shining moment when it seemed the deal would be changes to the tax code that did raise revenues but didn't increase rates and so Republicans wouldn't count as tax increases. But Cantor and others have made clear that they will oppose any net increase in revenues...Republicans might come to regret rejecting Boehner's deal (because his framework was) comprehensive tax reform -- which would preempt the expiration of the Bush tax cuts. When the Bush tax cuts are set to expire (in 2012 the) Democrats will have most of the leverage. If Republicans could've agreed with Democrats this year, taxes would have gone up by $1 trillion. If they can't agree with Democrats next year, they'll go up by $4 trillion. And Republicans had a better hand this year than they will next year. I expect they'll come to wish they'd played it.


Ken said...

Let's see: (1) both parties spend like there's no tomorrow; (2) the public votes fiscal conservatives in at the House (and probably the Senate, next election); (3) fiscal conservatives say no to new taxes and desire to limit the debt ceiling increase by bridging the increase to spending limitations; (4) liberals and RINOs characterize step three above as irresponsible, unintelligent, and catastrophic.

JDTapp said...

To call the above "RINOs" you also have to call Ronald Reagan a RINO. So, you're clearly reinventing the definition of Republican. People like Jim DeMint had no problem raising the debt ceiling a few years ago, why the grandstanding now?

In a few of my classes I talk about the unethical nature of spending by borrowing, and then walking away from the debt like many do with credit cards and their underwater houses. Congress already spent the money, but now they don't want to pay their credit card bill. How is that ethical?

Rather than a bank failing because everyone walks away from their mortgage, in a U.S. default you have multiple banks fail as the collateral the world trades in, U.S. debt, becoming worth a good bit less. Why is that a good idea?

JDTapp said...

Other RINOs calling for an increase in the debt ceiling include all of these hundreds of business owners and CEOs on the U.S. Chamber of Commerce.

Ken said...

How should the cycle of overspending and debt increasing be intercepted? Seems to me the current cycle assumes the debt ceiling increase is part of the process, when it was not intended to be so. If increasing the debt ceiling is part of the process, then there is no end to the overspending.

Concerning ethics, should one obtain a credit card, knowing s/he can not be disciplined enough to not overuse it? Should one obtain a second credit card, transfer debt to that second card from the first, only to buy time - knowing all along the debts incurred can not be repaid? Increasing the debt ceiling at this point is essentially the same as getting a new credit card offer in the mail and transferring the balance of an old card to the new one. Is it ethical to simply go along with this process as the feds are clearly willing to continue doing? I can't think of any more ethical response than to take the credit card away from the irresponsible parties.

The only way to stop the process at this point is to quit sending the president and congress credit offers in the mail. One might assume (incorrectly) that we must default or that a default is the end of the world. What if the federal government actually quit spending by cutting some programs? Do we need all these programs? And if we defaulted, would the outcome be catastrophic? No, it wouldn't. Discipline can be self-imposed or it can be experienced as a penalty, later on.

Once spent always spend is a mantra we can do without.

JDTapp said...

It wasn't that the Dems refused to "bridge the increase to spending limitations." The GOP's own study showed the ideal mix was 85% spending and 15% revenue. They were offered that by Obama, with Bush tax rates locked in for perpetuity, and still walked away. THAT is what the above are decrying as irresponsible and catastrophic.

JDTapp said...

I guess it depends on what is meant by "catastrophic," but the last default (1979) led to an estimated permanent 0.5% permanent increase, which ended up costing billions. There seems to be some concern on Wall Street about what would happen if Geithner pulled the 14th Amendment option. But defaulting on your debt when you CAN pay is always unethical.

No one is saying that the debt doesn't matter. The Republicans walked away from a deal that would cut spending massively while keeping taxes low. They walked away because they refuse to even touch tax expenditures-- like mortgages interest deductions.
They initially acknowledged they needed 15% in revenue increases (which is quite conservative compared to what the IMF and others estimate) but then they balked when they were actually given it by Obama. Meanwhile, Grover Norquist is running ads blasting conservatives like Orrin Hatch for "tax increases" like cutting ethanol subsidies. Do you agree with Norquist that cutting subsidies is increasing taxes?

And it's not like taxes are crushing our economy or that Obama has raised them to some record high. Tax revenue is about 15% of GDP, which is a 50 year low. We could eliminate the Dept. of Education or any programs you'd like, but Social Security, Medicare, Medicaid would still require more funding with the Baby Boomers retiring.

And this debt restructuring move is pre-emptive. The market isn't telling the U.S. that it's Greece, we still have a few years before this is a "debt crisis." Obama's former economists are almost unanimous in urging more spending. But, Obama was willing to give Boehner what he wanted anyway. He got blasted by the Left yesterday because he is insisting on spending cuts and even the mention of cutting entitlements riles his base. Note the AARP attack ads against his position today. 500,000 federal jobs have been cut since he took office, it's not like he's rapidly expanding government and you just want to take away the keys.

But what I see you saying is "That's not good enough. Massively moving toward a balanced budget in years to come while borrowing what we need to redeem our debt due this year isn't good enough, so let's just default."

JDTapp said...

Note above should say 1979 default led to a 0.5% permanent increase in interest rates as estimated by some economists.

JDTapp said...

Ken, I'm curious which programs you'd fund for August 3rd if you won't raise the debt ceiling on August 2nd. That website lets you make the budget.

Ken said...

It's a fairly blunt instrument but here are the results of what I would leave out for starters:

Selected programs that could be affected

Payments to defense vendors such as BAE Systems, General Dynamics, Northrop Grumman and Boeing
Tuition assistance for college students, special education programs
Current and retired Federal workers
3.7 million people on unemployment benefits
Food stamp recipients, child nutrition programs, and the Women, Infants, and Children program
HHS grants, such as National Institutes of Health, Centers for Disease Control and Prevention and Food and Drug Administration, for research and projects
Housing assistance for 1.2 million poor households, rental assistance recipients
Programs protecting health and the environment, such as oil spill cleanup and air quality
Smaller costs in such agencies as State Department, Agriculture Department, Federal Railroad Administration, and U.S. Post Service money orders and District of Columbia funds

I would not make 156.7 billion dollars in payments and would have a little over 22 billion dollars remaining "under budget." The entities representing true invoices against obligations made would get paid eventually. Those entities and programs that can be trimmed or cut may be laid off and/or their contracts terminated.

When the administration begins talking seriously about reducing pork, then social programs could be partially funded. For example, unemployment could be partially restored quite soon, upon signature of a law that requires a balanced budget every year.

I would also get a bit creative: transfer funds from the bloated and innefective dept. of education to the small business administration, underwriting businesses that are created to educate k-12 students using market competition as a basis for low cost loans to get the programs started and to create a voucher system to allow low income earners to send their kids to competitive schools.

Lots can be done. This is just a 10 minute exercise.

Ken said...

A word about your general approach to addressing economics and as applied to the current budget crisis:

When making an argument there are different levels or categories of foundation on which one can rest. Two that come to mind are the consequentialist and the deontological foundations. (sometimes the latter is called a foundationalist)

On which foundation should we base a belief (encased in policy?) on what is right or wrong? (some would argue that is an illogical question, since actual right and wrong are indiscernible - which would place them in the consequentialist camp, by the way).

A historical review of founding documents, personal histories, and recorded decisions of the various persons that have contributed to the leadership of our country provides for serious questions about what exactly is the philosophical basis of our democracy. It is difficult to know for sure and we increasingly call into question whether this nation was ever a "Christian nation."

For example, when you combine the work of Locke, Payne, Hume, and Smith you find a clear, non-Christian, utilitarian ethic and economic foundation. We can infuse the unseen hand with a faith motive, if we prefer. Even within the stream of behavior and decision-making career of one individual (Ronald Reagan, Jerry Brown, Bill Clinton, both George Bushes) we will find instances of contradiction and inconsistency.

To forward that Reagan increased the debt limit, therefore we should, too, is non substantial. The economy we (rather, some of us) are attempting to save does not live in the past, though the principles we should use to govern live in the present have existed in history. Whether or not we called upon them for guidance in any instance is an open question.

To argue on the inconsistencies takes us no where. Inconsistent behavior merely underscores human limitations - and is most often polemical fodder. What principles should be put forward as definitive for promoting a policy, generally, and solving the budget crisis, specifically?

Ken said...

Did both parties, recently and historically, overspend in budgets and outside of budgets? Yes! In fact, it seems to be a planned occurrence. Is it right or wrong? Do you want to continue doing it? Don't you think that each time a party gets away with it, the probability for continuation of the practice is then strengthened? Do you think those affected can and will be made whole, if the practice is abated sooner rather than later? When is too late?

Did the public respond by voting some into office who want to change this practice? I believe so, which is their (my) right to do. It is a legitimate function of voters to do so, by definition (not consequence). Arguments by opportunists may turn out to be consequential, but the voter has a right and an opportunity to signal a desire for change. This signal occurred as a result of an election and it would be wrong morally to suggest otherwise.

Do some people want to change the tax policy (no new tax increases and a redistribution of the tax structure to make more people pay a fairer share)? Yes, this is the case. Public arguments for the increasing the debt limit tend to focus on our obligations, based upon commitments of prior legislatively approved budgets. But what if those budgetary commitments were not "good faith" commitments to begin with? It is not, in my opinion, a good faith commitment if you really don't care who pays the bill as long as a political career is promoted through the particular policy in question at the time. (a consequentialist argument) some people will make more money than others and tax policy should be fair. Shouldn't all people pay some taxes? Why should some people pay almost all the taxes? (Try to avoid a consequentialist retort, here.)

It is true one can argue for redistributing the tax structure from a consequentialist position, not it is not necessary. And one can argue for an unequal allocation of tax responsibility from a foundationalist position.

Finally, a consequentialist would argue that it is irresponsible and would add % points to interest rates for years to come, or that it is unintelligent b/c of the damage it will do, or catastrophic when people don't get paid (for awhile) or lose contracts (even forever). But is this not simply a delay of what would have occurred anyway, on some level? Should interest rates be close to zero? Doesn't it make sense that real inflation and interest be somewhat aligned?

Glad to hear your reading Hayek's own words. I hope you find solace in his openness toward an appropriate role for government. When Reagan said "... government is the problem" he wasn't making a universal claim. Neither does Hayek. The CBO debt projection I posted the other day very much represents our future. Other "needs" this and similar administration conjures up will certainly drive rise over run exponentially.

JDTapp said...

I'll grant you the "what foundation/standard are you using to decide?" question.

I basically see a Pareto-efficient (welfare-enhancing for all parties) position that the Republicans passed on, and see you encouraging them to do so. A $4 trillion deficit reduction package that would have kept marginal tax rates low. Now, we're much more likely to see a smaller package and a battle over a large increase in taxes next year.

I'm arguing the point of a view that a 2-party Democracy is supposed to work toward pareto-efficient outcomes and not be dictated by a tyranny of either majority or minority.

I'm also arguing from the neoclassical synthesis' tradition that unnecessarily prolonged periods of unemployment and below-potential production are to be avoided. Suspending payments that you mention-- TANF, unemployment, salaries to thousands of people, would cause a further increase in our deficit as the economy tanks and further erosion of wealth as the stock market crashes.

U.S. Treasuries are used as collateral for all kinds of financial transactions. Repos, short-selling, etc. T-bills have characteristics that make them fit the textbook definition of "money." Interest rates are close to zero because there is currently a very high demand for those assets because they are the lowest risk in the world.
But if you suddenly suspend interest payments or do not redeem notes due, the value of those assets diminishes, and makes those financial transactions for which Treasuries are collateral harder. (Or the world suddenly shifts to a different asset instead). Interest rates will rise for ALL firms desiring to raise capital. This is why the Chamber of Commerce issued its letter. The price of stocks will likewise fall. As contraction happens and tax revenues fall, the deficit will widen further. Hence, you've created a couple of perverse outcomes.

I don't understand why any of the above is a good or necessary idea.

1. I didn't forward that we should increase the debt because Reagan did. You labeled the conservatives I was citing as "RINOs," for their position. But by your logic Reagan is a RINO too. Maybe you believe that, but it's an odd definition of Republican then.

2. There are no honest economists, even ultra-conservative ones, who argue that the government can't run a deficit in perpetuity. Even Robert Barro has made it clear that governments can perpetually run deficits so long as they are growing at a rate higher than what they are borrowing at. While for a household I always advise a balanced budget, it's the fallacy of composition to argue that for an entire economy, including a government.

3. Even permanently eliminating the programs you would suspend payments to, the U.S. would still have a long-term debt problem. See most recent post on entitlements.

Ken said...

To what principles is Santelli referring?

Bring it on!

Why would he implore us to face this problem now? Simply "granting" me my comments on consequentialism and foundationalism doesn't equate to factoring them into analysis. See comments below on emotions.

Recall my earlier comment about the Reagan myth myth? Please don't assume all conservatives view RWR as the gold standard for Republicanism. The sources you read may enforce that myth, but thy have their reasons for such claims. Reagan was not on my mind when commenting about RINOs position on the debt decision.

Again, I refer you to the CBO chart. Modest debt and deficit in perpetuity is fine - my mortgage is my personal statement toward debt acceptability. But the trend is startling and there is no reason to assume a different outcome unless clear policies dictate otherwise.

On the debt elimination web site: Hey, it was yours, not mine. I told you it is crude (blunt). But it is also a bit late for a one-shot fix, don't you think? I wouldn't fully fund any other line items either. Shared sacrifice and all that.

Obama, lose-all-your-money-Larry (Lawrence), and Christi Romer can't account for in formulaic Keynesian accounting - the emotions of the populace. At least Reagan knew when to engage the affective domain. Tax increases do the opposite. I'm not sure I agree with your description of the deal the Republicans declined. But for many years deals with Democrats have meant unexpected taxes and backdoor maneuvering. Conservatives get excited and energized when someone says no to a liberal. There are simply too many tangible indicators the liberal pathway leads to demise. A jobless recovery? Who believes that? Who can get energized about that? The other day Romer was caught declaring this period as a growthless recovery. Now I've heard everything.

JDTapp said...

I've been posting CBO charts of debt on this blog and in the classroom for about 5 years now so please stop referring to your chart as if I've never seen it. If you read the CBO report you find that it's not pork or education or any discretionary spending that creates that massive debt overhang-- it is almost completely health care and defense spending. I see nothing in your comments to trim the long-term deficits, nor has either party officially proposed anything that would. (The Rivlin-Domenici plan is my preferred option.)

But what you are supporting--either technical default or slashing about 40% of government expenditures overnight--would further widen the deficit, a perverse outcome that I just wanted to point out.

When Reagan signed the 1982 tax hike--the biggest since WWII-- it was in a recession with 9.5% unemployment and out of concerns for the deficit. He was so good at striking the affective domain that his approval rating dropped to the mid 30s.

I feel we're talking past each other here. I don't really understand your points. I am closing comments.

Ken said...

I intended no offense with the CBO chart. I am not finding a philosophical foundation for your position, only a set of techniques. What's the goal? Debt increases are not a goal, they lead somewhere. Debt reduction is not a goal either, as it leads to something. I suspect the former is wealth redistribution and a broad disruption of the free market to alter the nature of the economy in the US. I guess you're walking out of this discussion much the same way Barack vacated the debt talks.

JDTapp said...

I feel I have to respond to this:
"Please don't assume all conservatives view RWR as the gold standard for Republicanism. The sources you read may enforce that myth, but thy have their reasons for such claims."

The sources I read? John Huntsman purposefully launched his campaign with the identical backdrop of Reagan. Gingrich, Bachmann, Santorum, Romney, and Palin mention Reagan in every speech, as did John McCain. Just from reading their websites and press releases, where they proclaim themselves "Reagan Republican," and listening to the Christian media of Dobson, Robertson, etc. that often talk longingly for Reagan, not to mention Rush Limbaugh and Sean Hannity every single day on the radio, I think I can be forgiven for thinking conservatives hold Reagan up as a gold standard. They certainly don't hold up Dwight Eisenhower, Richard Nixon, Ford, or either Bush. The problem I have is that in many cases they are at best misstating facts.

Ken said...

Reagan raised taxes. Reagan compromised with Tip O'neill. Rumor has it, he even managed to get along with Ted Kennedy. I appreciate Reagan's overall philosophy which (eventually) help me keep more of my earnings. But, like other presidents, his administration was a response to the work of his predecessor and the conditions of the times.

Have you read The Conservative Mind: From Burke to Eliot? In it Russell Kirk consolidates the 6 essentials of conservatism. He also identifies historic elements of radicalism. As you might expect, republican thought more or less follows elemental conservatism - however, not entirely at all times in applied policy. Kirk develops a constellation of conservative thought leaders in history, placing the broad set of political economists into an order of influence and relationship with one another. The book can shake your faith in "conservatives" while simultaneously solidifying conservative thought.

Love to hear your book review of this text.

Ken said...

Middle class conservatives (core republican voting block) hold to the Reagan myth. Liberals can't overcome the myth, per se. Rather, they have created the Reagan myth myth. (Of course, they don't call it by that name.) As in, "Fine, you want superman, you get him. Then they punch holes in the Reagan that didn't exist."

Here's a quote from a Feb 4, 2011 article entitled "Ronald Reagan Myth Doesn't Square with Reality"
By Brian Montopoli

"These facts [a list of compromises and tax increases] have largely been lost as the right has enshrined Reagan as its patron saint, and they may fade further amid the speeches at this weekend's centennial celebration. But the reality is that Reagan was a president who held firm beliefs but was also willing to work with his ideological opponents. And that's the sort of thing that doesn't much lend itself to mythmaking."

On net, he was a conservative. Day-to-day, he was pragmatic. Those of us who earned a paycheck in both the 1970s and 1980s know this and still appreciate what he accomplished. It's no myth to us. Otherwise, maybe he was a RINO.

jared said...

This doesn't have to be difficult.

The pros for expanding the debt ceiling are that it allows the US to maintain its current standing in financial markets as effectively 100% safe. This is not something that we should be ready to relinquish, in my opinion.

The cons are clearly that it allows for the debt to continue to increase over short and long runs. That's not a problem that can be overlooked, but this is neither the proper tool nor time for extreme austerity. You're suggesting to knock a wall down with a nuclear weapon.

No one's debating that the debt should shrink, but not at the expense of our shaky recovery or global financial strength. Let's not flush the baby out with the bath water.

jared said...

I'd also add a note on the general discussion. Tapp, you laid out many points in attempting to add color and proof. It's important to not miss the forest for the trees is important, Ken. Things like whether Reagan would have raised the debt ceiling are ancillary arguments.

As I said, the bottom line is that we can't afford to skip out on our payments. Working in a hedge department that purchases a lot of government securities, I can tell you that we'd start being much more creative in our interest rate/duration hedge purchases should the US default.