Scots Taffer on 27/7/2011 at 00:50
I've been reading a whole bunch of op-ed pieces lately on the debt ceiling and admit to coming away more confused than learned about what it all really means for the future, so here's the opportunity for knowledgable peoples to educate the masses (or just interested parties like me) on what they think is really going on with US debt, why the debate is taking so long to resolve and what the implications are dependent on which way it goes.
From what I gather we have a situation where the congress sets the agreed limit for governmental lending and the US is about to breach that ceiling. For all intents and purposes it's a false ceiling as it can be moved at will but there seems to be a lack of agreement in doing this due to a lack of bipartisan unity required with a Democratic administration and a Republican congressional authority.
It seems the two arguments are:
- if they don't raise the ceiling then the current rate of borrowing will stop and this will stop the current level of spending which will threaten the US economy sliding into another recession
- they should not raise the ceiling to encourage a "balancing" of the US budget from spending to saving and reduce the debt amount to a (perhaps in perception only) "managable" level, hence avoiding recession
This looks like it then becomes a vicious circle as views then divide for each perspective.
Against the ceiling increase: rampant borrowing without check has no end in sight and could lead to a devastating future correction.
For the ceiling increase: if the current lending is allowed to continue that a more reasoned approach to balancing the budget can be achieved over time as allowed by the relative health of the economy.
Against the debt default/budget balancing: it requires such a slash in spending that it causes a recession which worsens the economic recovery.
For the debt default/budget balancing: a belief that responsible budget will bleed down to a responsible debt level, regardless of the economic health in the short term.
My question which is broadly encapsulated in some of the above is: is the lending/spending/economic stimulation that is currently saving the US from recession sustainable? Is it the right approach? When I say "right" we have to consider every facet - right for the people (now and the future), right for the economy (now and the future) and right for the country (now and the future)?
So we've got two scenarios that can play out:
- What does it all mean if the US does default on its debt? Are the loans going to be called in? Who holds the majority of their loans? Isn't it China? What does that mean on a macro-economic level as opposed to looking at the specific impacts on the local economy?
- If the debt level is increased, what are the future plans for the stability of the US economy? How will this massive imbalance finally be called back into check? Do the foremost economists predict a way that this ends well? Given the shake-ups that happen when administrations change how reasonable is it to have a long-term view of an economic recovery plan, how badly might that be impact if Democrat suddenly becomes Republican at the next election?
Let the education begin!
Pyrian on 27/7/2011 at 01:13
Huh. I wanted to ask RBJ a question on this subject, but it's a different question. What does the 14th amendment mean in this context? Only Congress has the power to issue debt, and we're constitutionally required to pay our debts. Some pundits opine that all payments are "debts" and therefore the debt ceiling itself is unconstitutional; others say that only paying back treasuries is strictly debt and therefore we cannot default but can still slash social security, etc.; still others are of the opinion that the 14th amendment doesn't mean anything important and can and will be ignored (just like a few others seem to be getting conveniently ignored). Something else entirely (that's usually what your responses come out as)? I don't know?
june gloom on 27/7/2011 at 01:40
Personally, I don't think a default is going to happen, because those politicians know that if it does, they'd all be out of a job in more ways than one.
The childish bickering is probably hurting a lot of their careers as it is. If this had happened in 2009 it'd be done by now; but another presidential election is coming up, and they're all pandering to their bases despite the fact that all it's doing is pissing everyone off.
demagogue on 27/7/2011 at 03:18
In my simple understanding of political economics I tend to understand it as a saltwater vs freshwater economics thing... The saltwater Keynesian types want to preserve the ability of the US to address downturns which takes deficit spending sometimes, and if you need to raise the ceiling to do what you need to do, you need to raise it; and then "events" like a default have innate systemic meaning, like signals that put things on tracks. Then the freshwater Austrian types want some fiscal discipline and anyway inherently distrust the efficacy of government spending as it is, so the debt ceiling is a nice tool to make that lesson stick, not just in spite of troubled times but *especially* at those times; and "events" like a default or serious cuts have effects, sure, but not as clear to them they have the deep systemic significance since markets are organic and will do what they can with the situation.
Or something like that... The point is the spectre of the default ends up looking like a rallying call to opposite ends, and it's sort of a problem that there's not a way to bridge these two schools; compromise is kind of tossing your hands up and saying well screw theory, we'll cut the difference.
All of this is aside from the politics of it though... except to say because there isn't a position or narrative in the middle -- compromise really comes across like the proverbial shit sandwich everyone has to take a bite -- the situation is understandable.
I think about something like the gov't shutdown of 1994 when Rep Congress & Clinton deadlocked, each presumably thinking they might actually score points for the other's intransigence. The common wisdom is that Clinton won that battle, which might encourage Obama who might really feel most Americans are going to take his side if push comes to shove; but nothing seems to stoke Reps better than apocalyptic talk, so who knows... It just lends itself to brinkmanship kind of strategy. (Edit: That's not to say they want the default & it's inevitable, just that brinkmanship seems to be the natural strategy for both sides.)
Quote Posted by Pyrian
What does the 14th amendment mean in this context?
As for the 14th Amendment, here's the language...
Quote:
Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.
It's kind of a bogey in the sense that (like a lot of the constitution) it was written for utterly and completely different reasons than what's going on now -- having to do with half the country rising up in insurrection and *our* public debts arising from that; they don't just disappear (for the rebels) just because the rebelling countries called themselves another country, as opposed to *their* debts in actually doing the rebelling, which are void. (Sort of a funny double-standard treating them as another country & not in practically the same breath.) But anyway, they weren't really thinking about "the [general] validity of the public debt" as the point they were trying to make, as is pretty clear from the context reading it. It's kind of just starts with this assumption, of course normal public debt is "valid" or "legal" public debt; the only issue we're really talking about here is debt incurred during a civil war... If it's *our* debt it's valid; if it's *their* debt it's void.
I don't see it really saying anything directly to the debt ceiling issue. You'd have to go a step further and say the baseline it's assuming in that first sentence (what it assumes about run of the mill public debt being "valid" or "legal") says something about it, e.g., does merely being "valid" or "legal" say anything at all about how it's to be paid, or even the discretion not to pay it or cap it, or what latitude there is there? But that's a risky argument since now you're trying to read the minds of 1860s legislators about what their assumptions might have been regarding late 20th Century political economics & macroeconomics theory, and that's terribly iffy, to say the least. You're probably doing violence to their assumptions even posing the question, as any respectable historian would probably point out.
If I put on my lawyer hat, my gut is the assumption is a very minimal one only that normal debt is "valid" or "legal", so within the discretion of the federal government & states to decide how they want to pay; contrasted to "invalid" or "void" where there's no discretion at all, it just doesn't legally exist. I read 14th Amendment just saying normal public debt legally exists. I don't see much grounds, on the language & intent by itself, for it speaking to the discretion in how it gets paid one way or another. Within reason, it's all constitutional; so it's back to a pure political decision.
Rug Burn Junky on 27/7/2011 at 05:19
Did I hear my name?
I don't know if I have the time tonight to get into the whole thing, but here goes, and pardon me if I approach this from a slightly different angle, mostly to give it an overview from the beginning.
Short answer: The current Republican caucus is composed of a lot of people who are truly ignorant with respect to economics. They are conflating a lot of issues that really shouldn't be, because it comports with a very simplistic and unrealistic ideology. Because of this, any hope of a rational solution is really probably overly optimistic.
So, again, let's start at the beginning. The lion's share of government is really composed of three primary things: Social Security, Medicare/Medicaid, and defense, totaling about 70% of the budget, with the remaining quarter "discretionary spending." As Paul Krugman says, the US government is essentially "an insurance company with an army."
So, Social Security and Medicare/Medicaid spending is fairly rigid - it's entirely dependent upon the needs of the population, and not directly under congressional control. Defense spending is fairly self explanatory - theoretically under congressional control, but realistically difficult for any politician to cut. That leaves everything else, which is such a complex web that it's difficult to characterize, but again, only so much able to cut - every congressman deems his own projects as sacred cows, but everyone else's as pork. It's a prime example of the collective action problem.
Ok, so now that we know what makes up the budget, let's fit the pieces together.
Social Security is OK. Really, it is. For the last ~25 years or so, it's been running a surplus during the height of the baby boomers' working years. Now that they are retiring and the working:elderly ratio is levelling off, we will draw down on that surplus. So as a share of GDP, S.S. is relatively flat. This "surplus" is held as T-bills, which is why you hear the Tea-tards screaming their head off about it being full of "IOU's" (and this brings up a whole host of other issues, mostly harmless, but blown out of all proportion by a small segment of ideologues).
Medicare/Medicaid: That's the biggest problem. It's expensive and increasing. The incentives in the system favor profiteering, and the way to fix it is to re-align the incentives. Fix this, and you fix the long term debt problem. It really is that simple. I don't know if any of you remember this, but there was actually an attempt to do so in recent memory, but, well, we all know how that turned out, right?
Defense Spending: It's expanded rapidly for about 10 years, being flushed down a large toilet in central asia. Ending the Iraq/Afghani wars alone will slow that growth, but it really should be cut more substantially than that. Obviously this is a problem ideologically, especially for neo-cons (important distinction: "NEOCON" is a very distinct breed of right winger, devoted to aggressive foreign policy, mostly in support of a conservative Israeli agenda. George W. Bush was not a Neocon, Cheney and Rumsfeld were. It is not socially conservative, nor is it small-government tea party paleo-conservative). But even if you accept an aggressive/expansive military, it's probably the one aspect of government most subject to waste, fraud and abuse.
Discretionary spending is something I can't really dig into, since it's so varied. Either you accept the validity of federal action or you don't, but it's really case-by-case, even for the most die-hard conservative (ie. all of the bitching by Texans about cutting NASA spending).
Now, let's go back to first principles. Conservatives hate Social Security and Medicare. They don't generally accept the validity, effectiveness or necessity of a social safety net. This current crisis is really part of the Grover Norquist plan: reduce revenues, and force a crisis so that you can claim the inevitability of reducing the social programs ("drown the government in a bathtub").
So yeah, revenues. Two things are in play. One, the Bush tax cuts. I believe I'm on record on this very forum from 2002 saying that they were reckless (though, I may have snarkily pointed out that I benefited from them myself). Again, this is too complex to get into, but on top of the decrease in revenues for the government, it increased income inequality - which has negative effects on the overall population and is a long term drag on GDP.
Second, obviously, is the current recession. Without rehashing the blame, the effect is substantially decreased economic performance and thus less government revenue. Which is why you hear all of these mischaracterizations about the "growth" of government under Obama, of course ignoring the fact that there are two numbers involved in any fraction: Government spending is a much higher percentage of GDP only because GDP is so low. And the gap between revenues and spending (ie. the deficit) is so large only because revenues are down. Historically, government spending is about 20% of GDP. The raw numbers of government spending is directly in line with that trend, but the GDP is substantially down, so it's a higher percentage, even with the same levels of spending.
The only "increase" is the stimulus, which, in effect, was $350B in spending, spread over 2 years - a blip really (the other $350B being even MORE tax cuts). It's also already spent - so the stimulative effects are over. Plus, in total, "government spending" is down once you include the massive cuts in state and local government.
Long term, the way to fix the the long term budget problem is - to put it at its most naively simple - decrease costs and increase revenues. The prime target for costs are Medicare and defense spending. To increase revenues you need a combination of growing the economy and raising taxes. The key to growing the economy is, really, more stimulus (unless you're in the tea party, in which case it's "lower taxes" since that's the answer to everything).
So now that we have all of the parts in place, what does it have to do with the Debt ceiling? Absolutely nothing. The debt ceiling is an arbitrary artificial limit. The debt itself is a function of all of these issues (which are already baked into the system), not a cause. It's like saying you're going to balance your household budget by defaulting on your mortgage. You can say this, but you still have to go out and get a job and pay for the things you need. The republicans are holding the debt ceiling increase hostage for unrelated ideological points, not because they're necessarily linked. (ie. "I'm not going to pay the mortgage, unless you agree to stop going shopping for shoes." it's out of all proportion.)
There's nothing magical about the amount of debt we are currently carrying (it's actually not nearly as high as it was following WWII, which was paid down easily because of more sensible tax structures (other than the top-top rates in the 50's) and a flatter level of income inequality overall.
The reason I start out by saying that the Tea Party ideology is simplistic is that it is virulently opposed to debt and taxes in every form. Which is unrealistic because both are obviously necessary. As I said earlier, Government spending is about 20%. Revenue however, is historically 1-2% lower than that. If you think about it, that's roughly how money enters the economy (it's more complex than that, but it's a good analogue).
So, what about effects?
Capping the debt ceiling isn't going to help the long term debt. Austerity measures now are only going to be harmful to economic growth, so it's going to be counterproductive on that front. Resources will remain idle, revenues will remain down, and going down that road will only require more spending cuts, it's an endless killer cycle. You can't truly balance the budget without getting the economy back to full capacity, and you can't get back to full capacity if you knee-cap the recovery by cutting spending and creating more unemployed.
Most importantly, it's counterproductive because one of the few advantages of the liquidity trap is that borrowing is cheap - yes, we can run debt, but at no interest. This episode, if anything, is going to increase borrowing costs, making it harder to finance a recovery.
But getting back to the simplistic tea party ideology. It is, as are most extremist ideologies, black & white. Taxes bad, social security bad. They've pledged not to ever, ever, ever, ever raise taxes. They are likely to hold a very hard line, even after they've gotten most of what they demanded in the first place. They actually don't see the downside, so I'll be pleasantly suprised if they can come to a deal. I see one of two scenarios: A) the few rational political animals in the Republican caucus cynically strong-arm a deal out of the more recalcitrant idiots in the Tea Party, or B) they actually don't come to the table until after August 3rd, once S.S. payments stop being made, and people see the full effects of a government shut down.
Christ that was long, but it gets me most of the way there.
As to the 14th Amendment "solution," I'm dubious. Properly issued debt can't be disavowed - but that doesn't allow mean any issuance is necessarily valid. On the other hand, it's questiuonable whether the SC would have jurisdiction to review, since there are standing thresholds which may be unreachable (though I woulnd't put anything past Roberts/Alito). IT really boils down to more of a political game than legal question, and I don't know if that's a road the administration wants.
Without congress's imprimatur, the administration can try to issue more debt, but it doesn't mean it's valid, and furthermore, it remains to be seen if the market will bite (if it doesn't, it would be disasterous).
The more valuable effect of the 14th amendment option is simply as a threat - it gives a credible threat that the administration can use to get Boehner & Co. back to the table. It's small, but it's something.
So, is that enough for now?
I've got a couple of long weeks ahead of me, since my work schedule is totally fucked thanks to this mess. I'll be back tomorrow evening to check on progress in this thread.
/edit - I think demagogue and I are pretty much on the same page on the 14th Amendment. I disagree with his characterization of the debt ceiling debate itself - there's no viable middle proposal because right now what we're dealing with is a right wing proposal and a far right wing proposal. The true left wing stance is: Finish reforming health care to lower medicare costs, don't touch SS, cut defense spending, and let portions of the Bush tax cuts expire now for those earning over $250k. Throw in a legit increase in the cap gains tax and Bernie Sanders might do a Peter North impression all over Nancy Pelosi's face.
Scots Taffer on 27/7/2011 at 09:49
Cheers for the response and so much of it!
I guess I feel better about being completely confused as to how the two ideological stances can come together to resolve this seeing as you also seem to see no viable middle ground at the moment that will resolve this. However you leave it on an ominous note that didn't address one (actually several) of my questions...
Quote Posted by Rug Burn Junky
B) they actually don't come to the table until after August 3rd, once S.S. payments stop being made, and people see the full effects of a government shut down.
...
Without congress's imprimatur, the administration can try to issue more debt, but it doesn't mean it's valid, and furthermore, it remains to be seen if the market will bite (if it doesn't, it would be disasterous).
What are those full effects? What is the disastrous results of being unable to issue debt? I'm keen to understand what these exposures are for the US and also the global economic outlook given the recent instability again in Greece etc.
And then there's:
Quote Posted by Rug Burn Junky
Capping the debt ceiling isn't going to help the long term debt. Austerity measures now are only going to be harmful to economic growth, so it's going to be counterproductive on that front. Resources will remain idle, revenues will remain down, and going down that road will only require more spending cuts, it's an endless killer cycle. You can't truly balance the budget without getting the economy back to full capacity, and you can't get back to full capacity if you knee-cap the recovery by cutting spending and creating more unemployed.
I'm interested at getting at below all the noise of the current debt ceiling to discuss the long-term sustainability of economic recovery and all that implies. Watching a reductive yet fun doco like
Inside Job made it apparent to me thd that the level of corruption inherent in the financial institutions is shared on a base level with the greed of the general public and their endless consumption of all things material.
Given that the massive correction in the GFC made it clear that people could not continue to live on mountains of personal debt, around the world lending criteria have tightened, holes in the regulatory functions of the financial markets have been exploited and (potentially/hopefully) should be closed to ensure no return to those problems. I would hope we would see a future where a sensible level of return can once again reign as opposed to the stratospheric and frankly obscene profits people were recording during the boom years, and that will flow down to more realistic levels of personal debt and expenditure.
Is this likely? Is it going to be supported? I'm not so sure.
CCCToad on 27/7/2011 at 12:14
Quote:
it's probably the one aspect of government most subject to waste, fraud and abuse
What he said on this is something I can vouch for. The Department of Defense loses a dollar amount equal to the Marine Corps' entire budget to fraud each year. One of my jobs is a Field Ordering Officer, and the amount of oversight at my activities is minor at best. Its supposedly stricter at the higher levels, but its not uncommon to hear of a high ranking officer caught with a couple hundred grand stashed in a suitcase..
And that is not even counting the crony contracts that are awarded by DoD. For example, the government pays about twenty dollars a meal for the food provided overseas. You can buy food around mega-bases (like Kandahar and Kabul) for eight to twelve dollars a meal. If thats what restaurant price is, there's no way in hell that Supreme Food Group pricing was able to win that contract with a "lowest bid". Kickbacks are a more likely way.
But, still, the whole debt "fight" in washington isn't worth paying attention to. Its a foregone conclusion
Inline Image:
http://lib.store.yahoo.net/lib/realityzone/UFNgopdebtceilingcartoon.jpgStill, though, the reason I'm not hopeful for a long term solution is that the government is just too corrupt to action on any of the tough decisions that need to be made.
. Nobody wants to cut defense spending because the war gives them immense financial benefits and a rationalization for power grabbing. This administration(
http://washingtonexaminer.com/blogs/beltway-confidential/2011/07/obama-campaign-even-more-dependent-wall-street-cash-time-around) doesn't dare touch the financial sector, and politicians have no interest in attacking a medicare system that provides them with generous kickbacks.
fett on 27/7/2011 at 15:06
As a former card-carrying Republican, I can say with absolute certainty that the Republican party is not going to sit down and resolve anything as long as Obama is president because you simply can't expect them to have a rational conversation with a negro.
Maybe I'm oversimplifying but, I shit you not, that is A LOT of what lies at the base of their spite and stubbornness.
CCCToad on 27/7/2011 at 18:59
You're forgetting that the only thing that the Republican party despises more than liberals is their own base. They'll do what they did in the spending debate: put up a loud show of hating big government spending while the party elites quietly put together a bipartisan proposal that will be passed without a fuss. In many cases, they are already having a "rational conversation with a negro". For example Obama is working with the GOP to push social security cuts.
And, while racism is a particularly odious example, most of American politics since the founding has been more about hating the cartoon caricuture villians of the opposition than supporting any rational position.
edit: One idea I've had in my head that I'd like feedback on, I'll keep it very simple (oversimplified). It seems to me that a genuine economic recovery is going to be very difficult currently. The new "service economy" was widely touted as the greatest thing ever, that would bring us all to new hights of prosperity. My impression that this idea should be ridiculous to everyone who had taken econ 101, due to the amount of white collar jobs that would be made. I remember that there are three main economic sectors: Primary(harvesting resources), secondary (turning resources into goods), and tertiary (management and other white collar jobs). The problem is that the number of jobs created by each sector forms a pyramid:
Inline Image:
http://www.regionalentwicklung.de/bilder/sectors_of_economy.jpgDue to the fact that the number of tertiary jobs is in most economies only a small fraction of the jobs produced by the primary and secondary sectors, it seems unlikely that the new "service based economy" would ever be able to permanently replace the massive number of jobs lost to outsourcing and automation of America's production economy, and anecdotal evidence seems to back this up: what I hear about most commonly is people laid off from producing jobs and forced into extremely tough competition for a limited number of (usually poorly paying) service sector jobs.
Is this completely wrong, or is there any bit of truth in my assessment?
Nicker on 28/7/2011 at 00:50
Quote Posted by fett
As a former card-carrying Republican, I can say with absolute certainty that the Republican party is not going to sit down and resolve anything as long as Obama is president because you simply can't expect them to have a rational conversation with a negro.
Maybe I'm oversimplifying but, I shit you not, that is A LOT of what lies at the base of their spite and stubbornness.
I was going to ask if people thought that the Republicans might slit the country's throat to kill its head. Yours is pretty much the answer I was dreading.
I heard a Teapublican rally on the radio today - all sorts of patriotic blather and virtually zero comprehension. Do they think that astronomical interests rates for the working class, will cost them less than higher taxes for the rich?
This sort of partisanship is exactly why I am opposed to an elected Senate for Canada. It's either stalemate between the houses or a runaway train.
As far as that economy pyramid, there's a fourth layer above tertiary and that's administrative, including elected and non elected aristocrats.
