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August 01, 2011

The Debt Ceiling “Charade”

Maggie Mahar

In Washington, Medicare cuts are back on the table. Sunday afternoon, the Senate failed to find the 60 votes needed to pass Senate Majority Leader Harry Reid’s debt-cutting proposal, a bill which would have left Medicare and Medicaid untouched. The vote was 50 to 49.  That it was so close illustrates just how divided this country is.

Now the president and Congressional leaders have signed off on a “compromise” that might best be described as “Conservatives 10; Liberals 0.

What is mind-boggling is that none of this had to happen. We were not facing a debt crisis. Conservatives manufactured a crisis, and then demanded Draconian spending cuts.  For decades, the U.S., like other developed countries, has been lifting its debt ceiling on a regular basis.  Normally, raising the deficit ceiling does not lead to a pitched partisan battle.

No question, we are sitting on a heap of debt.  Going forward, we should rein in government outlays that are not adding to the wealth of the nation, and begin to reduce the deficit. But today we must invest in the country, and in the nation’s human capital. This is the worst possible time to slash government outlays; the economy remains mired in a deep recession. We need the stimulus that comes with government spending.  Instead, as a result of this deal, “Unemployment will be higher than it would have been otherwise,” the chief executive of the bond investment firm Pimco, pointed out Sunday on ABC.  “Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.” 

The compromise sets out to slice more than $2 trillion from federal spending over the course of a decade.  The cuts will come in two stages. When the legislation passes, today or tomorrow, this will trigger $917 billion in spending cuts over ten years while raising the debt limits by $900 billion. In the second stage, a new bi-partisan Congressional committee is charged with finding another $1.5 trillion this fall. Medicare, Medicaid and Social Security all will be on the table.  The committee also can consider raising taxes, but it is expected that the six Republicans on the 12-person commission will block any tax increases.

The Committee is required to deliver its proposal to Congress by November 23, Congress is required to vote on Committee recommendations by December 23.  If the two parties fail to reach an agreement, and the $1.5 trillion in savings does not materialize, the president would still receive a $1.2 trillion debt-ceiling extension.  But that extension would trigger $1.2 trillion in automatic spending cuts across government -- including defense and Medicare -- to take effect starting in 2013. Defense would be hit hard. Surprisingly, Medicaid will be exempt from automatic cuts. To its credit, White House decided to stand up for the poor.

The Associated Press fleshes out the details: “Social Security, Medicaid and veterans' benefits would be exempt from the automatic cuts, but payments to doctors, nursing homes and other Medicare providers could be trimmed, as could subsidies to insurance companies that offer an alternative to government-run Medicare.”  Medicare benefits to seniors would not be cut. 

While the White House protected Medicaid, no one protected the unemployed.  Incredibly, under the terms of the deal, unemployment benefits will expire at the end of this year. Would Congress actually let that happen?  The events of the past week have persuaded me that we are now living on another planet, so it’s hard to say. But I would wager that conservatives will fight to limit those benefits, all part of what economist Paul Krugman has described a conservative plan “to set us on a glide path to a much harsher society.” 

For a discussion of what each side wanted and what they got see, "Who Got What?" For more detail, the White House offers a fact sheet on the deal.

A “Contrived” Crisis

Last week former fed chairman Paul Volcker told Bloomberg:  “All of this uncertainty [over raising the deficit] was unnecessary. This is part of a charade that goes on from time to time. It’s an old story.” 

The debt debate does have “a particularly nasty tone to it this time,” Volcker acknowledged.  Nevertheless, he told Bloomberg, when everything is resolved, all of the nation’s bills “will be paid,” though Social Security checks may be delayed. We will pay our lenders first--ahead of seniors, ahead of the military. Defaulting on our debt is not an option, unless we want to set off a global financial crisis that, in the end, would have disastrous consequences for our own economy.

Volcker’s interviewer seemed nonplussed:  “You don’t sound very concerned.”

Volcker replied, in a slow, slightly hoarse voice: “Well, probably that is because I’ve lived through 8 or 10 debt ceiling things in the past.” Volcker possesses the gravitas that comes with age, intelligence, and experience. After the tomfoolery of the past week, I found it reassuring to hear a wise, if world-weary voice.

As Volcker knows, in Washington,  raising the debt ceiling is all but a routine event.  According to the, Treasury Department, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit - 49 times under Republican presidents and 29 times under Democratic presidents.  Statistics on earlier debt limit raises show that George W. Bush raised the debt ceiling seven times for a total increase of 90 percent. Ronald Reagan raised the debt ceiling 18 times for a total increase of 199 percent, which is the highest ever percentage increase in U.S. history.  So far President Obama has raised the debt ceiling three times for a total increase of 26 percent. . .

When it comes to lifting the debt ceiling there really is nothing for politicians to  debate.  Last week Bill Clinton explained “what many Americans may not understand.”   Lifting the ceiling merely enables government to pay interest on the debt that we already owe, and continue borrowing to fund expenditures that have already been authorized. We have no choice.  Raising the limits on U.S. debt does not mean that Congress is giving President Obama a “blank check” to increase future spending.  The money already has been spent.  This is why, normally, a vote on the debt ceiling would not capture the attention of the nation. But this time around, conservatives decided to turn what should be a relatively routine vote into high drama.

We are just about the only major country in the world that [even lets] its legislative body to vote on raising its debt ceiling,” Clinton observed. Politicafact.com confirms that no other developed nation has a system that leads to the kind of political “brinksmanship” that we have just  seen in Washington.

From the beginning, this has been a “contrived” crisis, says Jim Grant, founder of Grant’s Interest Rates Observer, and one of the most honest commentators on Wall Street.  If you want to see a real debt crisis, Grant suggests, look to Europe.

On The Money View, Perry G. Mehrling Professor of Economics at Barnard College, Columbia University agrees: “The solvency of the U.S. government is not in any serious doubt.  The imminent S&P downgrade of Treasury debt is not about economics; it is about politics.  It is, at root, about the public display of political dysfunction in Congress. Since there is no real solvency problem, the point seems to be to provoke a liquidity crisis, [so that we won’t have enough money on hand to pay next week’s bills, even though we still have good credit] and to use that crisis to force the other guy to back down.” 

Much Ado about Nothing

This helps explain why House Majority Leader John Boehner worked so hard to bring his budget proposal to a vote in the House-- even though he knew that it would never become law. The Senate would reject it, and if, by some fluke, it passed the Senate, the administration already had said that it would veto it.

Nevertheless, for days, Boehner was bloodied as he battled to bring his plan to a vote in the House. There, ultra-right members of his own party publicly defied him.  Ultimately Boehner caved, and revised his bill, adding a balanced budget amendment that actually could make the deficit larger. (If government spending is cut and more Americans are unemployed, tax revenues will fall. The size of the deficit depends, not just on spending, but on revenues.)  Friday night, the Tea Party nation finally let Boehner’s bill scoot through the House with 218 votes--just two more than it needed to pass. Boehner’s plan then went to the Senate where, within a couple of hours, some Republicans joined Democrats to defeat it handily, 59 to 41. At that point, the two chambers were no closer to compromise than they had been at the beginning of the week.

What was the point of a week-long exercise that humiliated the House Majority Leader, and made it clear to financial markets world-wide that Washington is in disarray?

Boehner believed that if House Republicans succeeded in passing legislation, they could then tell voters: “We passed a bill. Senate Democrats did nothing. We are the ‘Grown-Ups’ on the Hill.” He also could claim that he had fulfilled his role as House Speaker: he had gotten “something done.” The fact that his proposal would never become law and never affect the debt didn’t matter. In other words, this fight has nothing to do with the economy, and everything to do with embarrassing the president.

Conservatives reasoned that if the President’s party failed to pass a bill of its own, and the U.S. wasn’t able to pay all of its bills next week, the president’s opponents will be able to claim victory. As Washington Post’s Ezra Klein has said, Republicans were willing to let the nation default. Granted, default would constitute an economic catastrophe, but for them, it would be a political victory.  As Senate Minority Leader Mitch McConnell has indicated in the past, "the single most important thing we want to achieve is for President Obama to be a one-term president.” 

As it turns out, today no one was declaring victory. Except perhaps McConnell. This the first time that I can ever remember seeing the man smile.

Our Real Economic Crisis: Unemployment

The single most important thing that Washington could accomplish this year is to create jobs.  Unlike the debt, unemployment is the  immediate economic crisis in threatening this country.  As Bill Clinton pointed out last week “You can’t balance the budget on a busted economy. . . Republicans think they have Democrats and the president over a barrel. . . . We have to stand up to them.”

But in what became a game of chicken, President Obama did not stand up to them.  Did the president have optoins?   Yes., says Princeton economist Paul Krugman and I agree. 

“First of all,” Krugman argues, “he could and should have demanded an increase in the debt ceiling back in December.  When asked why he didn’t, he replied that he was sure that Republicans would act responsibly. Great call.”

Nevertheless, the Washington Post’s Ezra Klein is among those who suggest that once conservatives decided to take this route, it is “difficult to see how [the story] could have ended otherwise.”  President Obama was bound to lose. 

 I disagree. As Krugman observes: “The Obama administration could have resorted to legal maneuvering to sidestep the debt ceiling, using any of several options. In ordinary circumstances, this might have been an extreme step. But faced with the reality of what is happening, namely raw extortion on the part of a party that, after all, only controls one house of Congress, it would have been totally justifiable.

At the very least, Mr. Obama could have used the possibility of a legal end run to strengthen his bargaining position. Instead, however, he ruled all such options out from the beginning.”  Once again, the President surrendered before the debate began. No doubt he hoped that by being reasonable, he could soften up the opposition. But these folks don’t soften.

“But wouldn’t taking a tough stance have worried markets?” Krugman asks, and answers his question: “Probably not. In fact, if I were an investor I would be reassured, not dismayed, by a demonstration that the president is willing and able to stand up to blackmail on the part of right-wing extremists. Instead, he has chosen to demonstrate the opposite.”

Again, Krugman is right. Throughout the week I was following Wall Street’s response. The Street was dismayed by the spectacle of reckless politicians taking the economy to the brink of default, and the fact no one was stopping them.  Who was in charge? Most on Wall Street realized that even though, in the end we wouldn’t default because we couldn’t (as smart investors know, “what can’t happen won’t”), but the damage has been done. I

In the months ahead at least one credit rating agency will almost certainly down grade our debt. Does that matter? It will if interest rates begin to climb and more families find that they can’t pay their variable rate mortgage , or that the interest rate on their credit card debt is soaring. The unemployed will find it especially hard to make payments, especially if unemployment benefits are not extended before the end of 2011. Then there are the graduate students who will discover that, under the terms of the “compromise” they must begin paying interest on their loans while they are still in school.  (CNN reports that “the savings taken from the pockets of students [to help pay down the debt] will total $21.6 billion over the next ten years.) . )

Krugman continues: “It is, of course, a political catastrophe for Democrats, who just a few weeks ago seemed to have Republicans on the run over their plan to dismantle Medicare; now Mr. Obama has thrown all that away. . . .

“In the long run, however, Democrats won’t be the only losers,” Krugman concludes. What Republicans have just gotten away with calls our whole system of government into question. After all, how can American democracy work if whichever party is most prepared to be ruthless, to threaten the nation’s economic security, gets to dictate policy?”

Again, none of this had to happen. Lifting the debt ceiling should never have precipitated the high drama of the past two weeks. But now, a contrived crisis has turned into a real one. This comprise deals a savage blow to an already sick economy. By “the economy” I don’t mean “Wall Street” I mean “Main Street,” where you and I live.

 

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