By James Kwak

It pains me to see so much blogging fodder passing before my eyes and not have any time to do it justice. But here are a few thoughts:

• Why does anyone think that anyone cares about what a rating agency has to say about Treasury debt? Credit ratings matter for obscure companies because they represent new information that is not otherwise available to investors. In the case of the U.S. Treasury, all the information you need to know is plastered across the front page of the world’s newspapers, all the time. Your not going to change your opinion because of something that Fitch says.
• Since the debt ceiling mess started heating up, the yield on the one-month T-bill has increased from about 2 basis points (the rough average for September) to 32 bp. It makes sense to me that, if you absolutely have to get your cash back on October 31, it might make sense to be nervous about a bill coming due on that day. But otherwise, there is no chance that you won’t get your principal back. Does anyone think that the government won’t get its borrowing authority back one of these days or months? And does anyone think the Treasury won’t go back and redeem all the bills that came due during the hiatus? Which is why I’m not particularly worried about my holdings of the Vanguard Short-Term Treasury fund.
• I am probably one of the few liberals who don’t think the Tea Party caucus is engaged in irresponsible hostage-taking. Sure, I disagree with their policy objectives, and they are risking economic catastrophe by trying to force the government into default. But they are also fighting for a principle, misguided as it may be: Obamacare is evil, and should be stopped. The debt ceiling is an absurdity that should not exist. But since it does exist, it is leverage that conservatives can use to try to achieve their policy goals. The problem is that the debt ceiling exists; given its existence, you can’t blame people for using it for their ends. It’s like the filibuster: you can say that the 60-vote requirement is bad, but you can’t blame people for taking advantage of it. As Norman Ornstein said (quoted in White House Burning, p. 103), “If you hold one-half of one-third of the reins of power in Washington, and are willing to use and maintain that kind of discipline even if you will bring the entire temple down around your head, there is a pretty good chance that you are going to get your way.”
• Warning: If we get through this crisis alive, it’s because there are just enough Republicans who are just moderate enough to get sixty votes in the Senate, and John Boehner is enough of a realist (or a coward) that he doesn’t want to be known as the man who single-handedly caused a default (by refusing to let a compromise bill come to the floor). One more round of Tea Party elections, and Eric Cantor or Paul Ryan as speaker, and all bets are off.

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.

Continue reading “A Few Thoughts on the Debt Ceiling Deal” →