The Debt Ceiling Deal is a Disaster

Yesterday, July 31^st the outline of what will almost certainly be the final agreement to raise the debt ceiling was announced. It calls for at least 2.1 trillion dollars in spending cuts over 10 years without a penny in tax increases. The Republicans get a spending cut almost equal to the size of the debt ceiling increase with no new revenues. The democrats get an extension of the debt ceiling beyond the 2012 election, the thing which all responsible economists said was necessary to prevent a downgrade in our credit rating and a spike in interest rates that would ultimately increase the deficit.

Here is how this drama unfolded. Republicans took the American economy hostage by saying that they will refuse to raise the debt ceiling unless they get spending cuts to reduce the deficit. Then, Obama agreed to tie a reduction in the deficit to raising the debt ceiling. If he stood his ground and demanded a clean increase in the debt ceiling, as Ronald Regan did, he could have at the very least negotiated the Republicans to much smaller spending cuts. When Obama agreed to tie the debt ceiling vote to deficit reduction he strongly demanded that the bill include tax increases. If he would have specified the percentage of deficit reduction that should come from tax increases, he could have negotiated down from there. But he didn’t.

When asked by a reporter at a press conference what changes he would make to entitlements to reduce the deficit Obama proposed raising the Medicare eligibility age, the one change to any government program that would have the largest and most inexcusable impact on the most vulnerable of our citizens, the portion of the elderly who live in poverty.  He could have easily trotted out a Democratic proposal, using Medicare to negotiate down the cost of prescription drugs, means testing Medicare and Social Security so that any cuts would be placed on the backs of those most able to afford it, or raising the taxable maximum on Social Security that currently makes our tax code far less progressive than it needs to be. Instead, he gave the Republicans their holy grail, and in so doing, guaranteed the denigration of our social safety net.

Then Obama gave away the only democratic idea left in the debate, tax increases. With an overwhelming majority of the American public on his side, he agreed to a deficit reduction plan with 100 percent spending cuts.

And after all of this, an economic advisor to the Obama administration told MSNBC, “This president stood firm, never blinked and this agreement reflects that.”

 Capitulation is nothing new for this president. He never stood up for the public option. He codified indefinite detention. He extended all of the Bush tax cuts. He gave the Republicans more and more cuts during the government shutdown battle earlier this year. For all intensive purposes, we don’t have a divided government.

On CNN’s reliable sources, Howard Kurtz interviewed Chrystia Freeland, a Thompson Reuters reporter, about how unemployment and the economy are being eclipsed by coverage of the deficit. She also points out, as few in the mainstream media have, that cutting spending is bad for short term economic growth. She also commented on Paul Krugman’s brilliant editorial, The Centrist Cop-Out,

I think mainstream journalism is adverse to making judgments and I also think that mainstream journalists are particularly scared of being labeled as liberal. We all want to be seen as objective and sometimes I think there is a bit of bending over backwards to be seen as objective by the right because that is where a lot of the criticism comes from.

An excellent example of this was seen on CNN today when CNN anchor Kyra Phillips described the debt ceiling deal as a compromise. A compromise requires both sides to give up something. Democrats gave up everything. Republicans gave up a balanced budget amendment and decided not to force the country into Armageddon. They received 2.1 Trillion in spending cuts, an amount almost equal to the 2.4 Trillion debt ceiling increase. The Republicans got 90 percent of what they wanted and Democrats got what every reasonable expert agreed was absolutely necessary in the first place. Compromise!

All of this stems from the Mainstream Media’s fear of being called liberal, even though the criticism comes no matter what they do. When a crisis emerges both parties are to blame. When a crisis is averted, it was the result of both sides compromising, never mind the facts.

Meanwhile in the alternative universe known as Fox News, their show America’s Newsroom did an unscientific poll on their website on whether their viewers supported the debt ceiling deal.  Their options were Yes its as good as this Congress can do, No we’re still raising the debt ceiling by trillions, and I don’t know need more details. There was no option for opposing the deal because they cut too much from the federal budget. But then again, that’s the kind of shoddy journalism we have come to expect from Fox News.

P.S. There is one bit of good news today; Platoon of Power Squadron released the first segment of its new episode.

Originally Written August 1^st, 2011

Republicans and the Debt Ceiling:

Legislative Edition

In two days, we will hit our country’s debt ceiling. The markets are already in freefall, the debt ceiling standoff has already had an impact on the larger economy,  and essential government services that congress has already decided to pay for are about to be shutdown. Its worth reflecting on how we got into this mess in the first place.

The answer, for all of the complex economics involved, is quite simple. Paul Krugman of the New York Times explained it best in his editorial, “The Centrist Cop-Out,”

The facts of the crisis over the debt ceiling aren’t complicated. Republicans have, in effect, taken America hostage, threatening to undermine the economy and disrupt the essential business of government unless they get policy concessions they would never have been able to enact through legislation. And Democrats — who would have been justified in rejecting this extortion altogether — have, in fact, gone a long way toward meeting those Republican demands.

The debt ceiling has been raised dozens of times before. Sure, the party out of power has always made remarks about how the other party is fiscally irresponsible, but they have never before attempted to require the country to hit the debt ceiling. Only Denmark uses a procedure similar to our debt ceiling, but they have never used it the way Republicans are using it now.

In the supposedly liberal mainstream media, the parties are always represented as having equal blame in creating the crisis, even though this crisis is almost exclusively the result of Republican absolutism. Krugman made this point well.

Let me give you an example of what I’m talking about. As you may know, President Obama initially tried to strike a “Grand Bargain” with Republicans over taxes and spending. To do so, he not only chose not to make an issue of G.O.P. extortion, he offered extraordinary concessions on Democratic priorities: an increase in the age of Medicare eligibility, sharp spending cuts and only small revenue increases. As The Times’s Nate Silver pointed out, Mr. Obama effectively staked out a position that was not only far to the right of the average voter’s preferences, it was if anything a bit to the right of the average Republican voter’s preferences.

But Republicans rejected the deal. So what was the headline on an Associated Press analysis of that breakdown in negotiations? “Obama, Republicans Trapped by Inflexible Rhetoric.” A Democratic president who bends over backward to accommodate the other side — or, if you prefer, who leans so far to the right that he’s in danger of falling over — is treated as being just the same as his utterly intransigent opponents. Balance!

The Mainstream Media is incapable of being liberal even when reality, to quote Steven Colbert, has a liberal bias. This can be seen in the coverage of climate change, the science of which is agreed upon by the overwhelming majority of climate scientists, but is always presented as undecided because one of the major parties refuses to accept the facts. Liberal mainstream media bias? Absurd!

Meanwhile, Fox News and their allies in spin at Fox Business insist on assigning responsibility for the crisis to Obama by refusing to differentiate between the debt and the debt ceiling. They say hitting the debt ceiling is Obama’s fault because he ran up so much debt in the first place. Nevermind that much of the debt was caused the collapse of tax revenue in the wake of the Great Ressesion or that Bush initiated both the Auto and Bank bailouts. Let’s look at the deficit spending that occurred exclusively under the Bush administration: unpaid wars in Iraq and Afghanistan, the Medicare prescription drug benefit, and the Bush Tax cuts. Other than that the debt is all Obama’s fault!

So the next time someone assigns half or all of the blame for the debt ceiling crisis on Obama and congressional Democrats you will know they are wrong.

P.S. I can understand assigning blame for this crisis to the 82 Democrats who voted against a clean raise in the debt ceiling in the House of Representatives. All 236 Republicans in the house voted against the measure in order to require spending cuts for deficit reduction as a condition to raising the debt ceiling. If the Republicans hadn’t tried to use the debt ceiling as leverage for spending cuts then many of those Democratic votes would have been reversed.

Simply put, if Republicans hadn’t acted irresponsibly, we wouldn’t be in this mess today. They deserve the overwhelming majority of the blame for this crisis.

P.P.S. Mmm Cheetos 

UPDATE (7/31/11): NPR’s On The Media also covered how the media is falsely ascribing equal blame for the debt ceiling crisis to Republicans and Democrats. I am a regular listener of On The Media, a show that always produces thought-provoking segments. Some of their greatest segments involved Artificial Intelligence, Edward R. Murrow’s college Joseph Wershba, and the inability of the Pew Center for People and the Press to find an ideological bias at NPR.

Republicans and the Debt Ceiling

On Friday, July 15^th, Jonathan Alter, columnist for Bloomberg View, joined Lawrence O’Donnell to talk about the debt ceiling negotiations.  During his appearance he made a statement that I found unbelievable, that all republican candidates for president oppose raising the debt ceiling.

“Even now all the [Republican] presidential candidates are on record wanting to take the American economy all the way over the cliff into default if necessary.”

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I had trouble believing that all of the Republican presidential candidates opposed raising the debt ceiling, so I did my own investigation. Below are the positions of the major Republican candidates for president on the debt ceiling.

Ron Paul                               No

Ron Paul political director Jesse Benton told CNN, “Dr. Paul is committed to leading the charge against raising the debt ceiling and is running this campaign to win the presidency.”

Gary Johnson                       No

Gary Johnson said in an interview with the Fiscal Times, “For all the talk of Armageddon—and there will be tremendous hardship if we don’t raise it, the problems we’ll face by not doing so will pale in comparison to what’s down the road."

Michelle Bachmann                 No

Michelle Bachmann says in a campaign ad, “I will not vote to increase the debt ceiling.”

Tim Pawlenty                        No

A Politico article cites Pawlenty as saying, “I don’t think we should raise the debt ceiling.”

Mitt Romney                          Won’t give a straight answer

David Frum explained Mitt Romney’s answer about a debt ceiling question quite well with the headline, “Mitt Romney dodges on the debt ceiling.”

Romney’s unintelligible answer was, “The answer for the country is for the president to agree to cut federal spending and cap federal spending and put into place a balanced budget amendment. That for me is the line in the sand. It is within the president’s power to say to the leadership in the house and the senate that ‘I’ll cut spending I’ll cap the amount of spending and I’ll pursue a balanced budget amendment and if the president were to do that this whole debt limit problem goes away.”

Herman Cain             Raise the ceiling this time then prioritize spending

Herman Cain’s position is complicated and lengthy. You can hear him explain it at length on a Fox News Sunday clip. He says that you must raise the debt ceiling this time because the republicans in congress waited too long to prioritize spending, meaning specify what is paid and what isn’t once the government hits the debt ceiling and must drastically cut government services. He says that we should prioritize the payments on the debt, military spending, Social Security, and Medicare. That actually totals pretty close to what the government would be allowed to spend without borrowing, but would require the end of college aid, Medicaid assistance to the states, meat and poultry inspections, food stamps, and unemployment benefits. I explained the effect that not raising the debt ceiling would have on government services at length in a previous post.

Rick Santorum                     Yes, if it comes with specific concessions

Rick Santorum said on his campaign website that he would support a debt ceiling increase if it was accompanied by cuts and caps on government spending and a balanced budget amendment.

His full statement was, "I urge Speaker Boehner and Minority Leader McConnell to stand fast against attempts by President Obama and Congressional Democrats to use the debt limit vote as a vehicle to raise taxes. This is a real opportunity for our nation's leaders to come together, cut and cap government spending, and, most importantly, pass a Balanced Budget Amendment to our Constitution so that we never have to raise our nation's debt limit again."

Newt Gingrich    Raise the debt ceiling as much as Obama is willing to cut

Newt Gingrich said at a campaign stop, “Don’t give him a penny more in debt ceiling than he accepts in spending cuts and if he only wants to accept enough spending cuts to get through the next 6 months that’s fine. Then six months from now, you’ll have another fight and get another round of spending cuts from it, but insist that we turn the corner and we move on a trajectory that gets us back to a balanced budget and then stay on that balanced budget long enough to pay down the national debt.”

Jon Huntsman                                 Yes

Huntsman told the St. Petersburg Times (which runs Politifact), “I think everybody agrees that it’s a big deal to get serious with the debt ceiling. And I have every confidence that cooler heads will prevail and by our deadline. It is my hope that we’ll have cuts commensurate with the raising of the debt and some serious steps toward a balanced budget amendment. … There seems to be a deal in the works," Huntsman said.

Where does this put Alter’s claim that all Republican presidential candidates oppose raising the debt ceiling? Four Republican candidates [Gingrich, Santorum, Cain, Huntsman] support raising the debt ceiling at least one more time. Four [Bachmann, Paul, Johnson, Pawlenty] state without hesitation their opposition to raising the debt ceiling. One response [Romney] is simply unintelligible. Jonathan Alter is wrong and I will be writing The Last Word to ask for a correction.

But let’s look at the consequences of the positions stated by the candidates.

If the US doesn’t raise the debt ceiling, credit ratings agencies will downgrade the creditworthiness of US debt. When the federal government is allowed to borrow money again it will have to pay a higher interest rate on its debt. That will mean that the US debt will be larger than if we had passed the debt ceiling on time. It would also mean that businesses, students, and families will face higher interest rates when they try to borrow money to finance their home, college tuition, or expand their business.

These higher interest rates coupled with the collapse of demand caused by the immediate 43% cut in government spending could send the country into a double-dip recession.

As for the balanced budget amendment, which was brought up by Santorum, Romney, and Huntsman, you actually want to have a deficit during a recession to act as a stimulus. This is why we shouldn’t cut spending before the unemployment rate is back to a normal level (which I define as under 6 percent). It’s during economic boom years that you want to pay off the deficit.  Ezra Klein has a great column where he explains why a balanced budget amendment is a bad idea.

Of all of the republican candidates for president only Newt Gingrich and Jon Huntsman hold what I consider to be a reasonable position on the debt ceiling.

What’s Obama’s position? He wants congress to raise the debt ceiling past the 2012 election that’s accompanied by a grand deal to slow the growth of the national debt over time that includes both spending cuts and tax increases. This comes despite his own vote against raising the debt ceiling when he was a senator in 2006.

Here is my position on the debt ceiling. We shouldn’t have one. The treasury should be able to borrow the amount required by the taxes and spending congress authorizes each year. We shouldn’t have a separate vote which is politically difficult that threatens to shut down large portions of the government, raises the cost of borrowing, and hurts economic growth.


My plan to deal with the deficit was explained at length in a previous post.

P.S. Here is a Planet Money (NPR) podcast about the history of the debt ceiling.

Originally posted July 16, 2011

Factchecking the Peacock

On Tuesday July 5^th, NBC Nightly News did a segment on the debate over the debt ceiling. Brian Williams said that if the debt ceiling isn’t raised, “in less than a month the United States will not be able to pay its debts.”

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The best explanation of why this isn’t true was stated by Brit Hume on Fox News’ Special Report,

As President Obama enters the negotiations over extending the borrowing authority that is the debt ceiling there’s some things that need to be understood. The first is that there is almost no chance that government will default on its debt payments even if the debt ceiling is never raised. That’s because revenues will continue to flow into the treasury from income tax withholdings, which will be more than enough to cover the debt payments. So the only way that a default could occur would be if the treasury department inexplicably chose not to make the payments; but there will come a time when there won’t be enough money to fund all government departments and agencies, which would mean real disruptions. The administration would then get to decide which programs are funded and which are not.

Debt payments would almost certainly be the first bills to be paid because, just like a credit card, if you do not pay the interest on your debt, creditors will jack up the rate next time you need to borrow money. It is a possibility that this will happen simply due to creditors’ fear that the government may not pay the interest on its debt. But that is irrelevant to Williams’ claim that the government won’t be able to pay its debts.

The structure of the federal budget is very similar from year to year. So one could easily compare the effect that not raising the debt ceiling would have on government agencies this year based on its spending last year. Here is the breakdown of the federal budget for Fiscal Year 2011, which is the period from October 1^st 2010 through September 31^st 2011.

                                                         Billions          Percent of Budget

Receipts (Tax Revenue)                      2174                56.9%

Outlays (Spending)                              3819                100%

Deficit                                                 1645                43.1%

Interest on the debt                               207                  5.4%

Social Security                                     742                  19.4%

Medicaid                                              276                   7.2%

Medicare                                              488                  12.8%

Other mandatory programs                   716                  18.7%

Non-Security discretionary spending     507                  13.3%

Security discretionary spending            908                  23.4%

These categories are explained very well by the Politifact article that lead me to these numbers.

Not raising the debt ceiling would mean that the government couldn’t spend any more than it collects in tax revenue. It would leave the government enough money to pay its debts, but not nearly enough to pay for all the services provided by government agencies. That means that the treasury department (which is part of the Obama Administration) would have to cut 43.1 percent of the budget, the proportion of federal government spending which is financed through borrowing.

Brit Hume also explained the practical effect of cutting even the small portion of budget represented by the Agriculture Department (which is part of Non-Security discretionary spending)

I do think that when it gets closer to it the democrats and the white house have a certain advantage in that they get to decide when the money runs short which agencies and departments get funded and which do not. And they will be able to pick and choose in such a way as to put maximum pressure on republican lawmakers on the hill. One senator I know of has told his leader that if for example the agriculture department were not able to fund the meat and paltry inspections which would effectively shut down that industry because you have to have inspected meat to sell that that would be the moment that he caved and voted to raise the debt limit.

Not raising the debt ceiling would be disastrous, not because America wouldn’t be able to pay its debts, but because it would require the suspension of large numbers of critical government services. So politicians who tell you they don’t support raising the debt ceiling are really advocating for a drastic restructuring of the federal government or they’re being dishonest.

But even if the debt ceiling is never raised, the government will be able to pay its debts and will likely do so. Therefore Brian Williams is wrong. It is a rare thing indeed to find a factual error in an NBC report, but today the peacock hangs its head in shame.

Originally posted July 6^th, 2011

UPDATE (July 7, 2011): ABC and CBS News (both usually reliable sources) made the same mistake that NBC News did.  The website for ABC World News with Diane Sawyer features a countdown clock titled, "Countdown to US Debt Default". CBS Evening news introduced a segment on the debt ceiling by saying, "With the D-day for default less than 4 weeks away...," implying that the US will be required to default on its debt if the debt ceiling isn't raised.

P.S. I would like to thank Fox News, The Young Turks, Politifact, and whitehouse.gov for assisting in this factcheck.