Tag Archives: debt ceiling

The Debt Ceiling Confrontation Is Playing With Fire

Posted on January 24, 2013 by | 26 Comments

 By Simon Johnson

Congressional Republicans are again threatening not to increase the ceiling on the amount of federal government debt that can be issued. On Wednesday, they agreed to postpone this particular piece of the fiscal confrontation, but only until May. The decision to turn the debt ceiling into some form of showdown is a big mistake for the Republicans — and dragging out the indecision is likely to prolong the agony of uncertainty and have damaging economic consequences for the country.

I made these points at a hearing on Tuesday of the House Ways and Means Committee, but unfortunately the Republican majority seems determined to persevere with its destabilizing strategy. (The hearing can be viewed on C-SPAN’s Web site; see the playlist on the right.) Continue reading →

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A Few Thoughts on the Debt Ceiling Deal

Posted on August 2, 2011 by | 64 Comments

By James Kwak

1. Obama still has his hostage—if he wants it. As far as I can tell, the Bush tax cuts are nowhere in the debt ceiling agreement, which means that at current course and speed they expire at the end of 2012. Extending the tax cuts would reduce revenue by about $3.5 trillion over the next decade. According to news reports, Obama was willing to extend the Bush tax cuts in exchange for $800-1,200 billion of additional tax revenue—in other words, he was willing to cut taxes by about $2.5 trillion relative to current law. Boehner and Cantor walked out because of some combination of (a) they couldn’t get their members to vote for that tax “increase” or (b) they think they will be able to extend all the tax cuts if they negotiate that deal separately. I wouldn’t be so sure about (b). Remember, gridlock means the tax cuts expire.

2. The next step of the deal is that a joint Congressional committee is supposed to come up with a plan to reduce deficits by $1.2-1.5 trillion over ten years. If they fail to come up with a plan, or their plan is rejected by Congress, then there will be major automatic cuts in discretionary spending, including defense. (There will also be cuts in Medicare reimbursement rates, but not in Social Security or Medicaid.) The idea on Obama’s side is that the prospect of major defense cuts will force Republicans to negotiate. But if they were willing to let the government default rather than increase taxes—even by closing tax loopholes—why do we think they will be afraid of some defense budget cuts? Traditional Republicans may have liked high defense spending, but not the new breed. Ron Paul is basically an isolationist; Grover Norquist thinks the defense budget should be reduced.

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Two Can Play

Posted on July 26, 2011 by | 44 Comments

By James Kwak

Quick, what was the greatest conservative accomplishment of the George W. Bush presidency? It wasn’t Medicare Part D: that was a clever way to steal a Democratic issue and pass it in a form that was friendly to the pharmaceutical industry. It wasn’t Roberts and Alito: yes, they are young and conservative, but the majority is still only 5-4. It wasn’t Social Security privatization: that didn’t happen. Iraq? Getting political support to invade Iraq was a major coup, but everything went downhill from there.

The answer is obvious: the tax cuts of 2001 and 2003. Together, they were a wish list of conservative tax policy: a reduction in the top marginal income tax rate from 39.1 percent to 35 percent; a reduction in the top rates for capital gains and dividends to 15 percent; much higher contribution limits for tax-preferred retirement accounts (meaning that if you have enough money to save, you can shield more of it from taxes); and eventual elimination of the estate tax. In total, when fully phased in, the Bush-era tax cuts sliced almost 3 percent of GDP out of federal government revenues.*

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What Is Obama Getting?

Posted on July 22, 2011 by | 58 Comments

By James Kwak

Nothing, as far as I can tell.

The media are reporting the potential Obama-Boehner deal as $3 trillion in spending cuts and $1 trillion in unspecified future revenue increases. But as far as I can tell (details are vague), the baseline for that $1 trillion tax increase is a world in which all of the Bush/Obama tax cuts are extended.*

President Obama can personally guarantee that none of those tax cuts will be extended, simply by promising to veto any bill that extends them. That would increase tax revenues by $3-4 trillion over ten years, not $1 trillion. That is enormous bargaining leverage against a Republican Party that only cares about one thing: tax cuts.

So as far as I can tell, Obama is handing the Republicans $3 trillion in spending cuts, and also handing them $3 trillion in tax cuts. There are only two possible interpretations that I can think of. One: Obama thinks this is the best deal he can get — but if that’s the case, then you have to ask why his starting point wasn’t letting all of the tax cuts expire. Two: Obama thinks this is a good outcome.

But this certainly isn’t a progressive outcome. And giving up $3 trillion in revenues isn’t a fiscally responsible outcome, either. So what does that say?

* That’s how Ezra Klein reads it.

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So What?

Posted on July 14, 2011 by | 112 Comments

By James Kwak

Everyone (well, the media at least) seems to be acting as if Moody’s downgrading the United States would be a bad thing. I feel like I must be missing something.

First of all, we know what bond ratings are worth. See, oh, the entire past decade for evidence. (It wasn’t just mortgage-backed securities; they didn’t downgrade Enron until after the SEC announced an inquiry and CFO Andrew Fastow was forced out, and less than five weeks before the company declared bankruptcy.)

Still, the point of bond rating agencies is to do research on securities that other investors may not know well. If I’m a buy-side investor, I don’t have the time to review tens of thousands of different debt securities I could buy. It makes sense for me to turn to someone like Moody’s or S&P, because I can count on them to do at least some level of research and analysis on them. In other words, the ratings may not be great, but they still carry information.

But this is emphatically not true when it comes to U.S. government debt. Enormous amounts of information about the government’s finances are open to the public and are pored over by thousands of analysts from all around the world. Moody’s is no better at estimating future tax revenues and spending commitments than anyone else.

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Will The United States Default?

Posted on July 7, 2011 by | 50 Comments

By Simon Johnson

There are three views on whether the US will default on its government debts.  The first is: Hopefully yes, and this August offers a good opportunity.  The second is: Possibly yes, but this would be bad – so we need some form of fiscal austerity.  The third is: Under no circumstances, and any talk of a need for austerity is a hoax.

The first view is mistaken.  The second view hides a dangerous contradiction. And the third view borders on complacency.  How can we find our way to fiscal responsibility?  We need tax reform.

People in the first camp think that the US government has become too big and the only way to cut it down to size is to limit its ability to borrow.  A constitutional amendment to limit the size of government relative to GDP or to require a balanced budget could work – but experience suggests there are always ways for a future Congress to escape any such constraint. Continue reading →

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