More Fiscal Follies: Dancing Near the Debt Ceiling

Continuing in the spirit of  self-preservation, the Republican controlled House allowed a vote Wednesday to suspend the debt ceiling limit until May.   Perhaps they are catching on to Louisiana Governor Bobby Jindal’s recent advice:  “We’ve got to  stop being the stupid party.”  Exactly how they are going to do that remains to be seen, but at least they are avoiding general enmity for the moment.   They are still holding the debt ceiling hostage, but are at least giving “him” food and water for a few months.

Other fiscal shinaningins will take place between now and then, but they can wait while we try to better understand the tug of war since it is likely to continue throughout this presidential term.   As much as I don’t want to study the matter, and you probably don’t want to read about it, I feel compelled to for the simple reason that our inability to develop a fiscal path forward seems likely to sink us in upcoming decades, if not right to the bottom than leave our deck stranded along the water line.

To build a context for this debate, I suggest first looking at the seven minute video below by David Wessel, economics editor of the Wall Street Journal.  His portrayal undoubtedly has critics from the left and right, but his outline of the issues has been praised by moderates on both sides.

While ostensibly focusing on the fiscal cliff, his  points are relevant to the whole deficit/debt issue in terms of providing an overall snapshot.    He states a number of facts that I find illuminating, which is what facts should be, of course, but these days they are more often manipulated to obscure like peas in a shell game.

A case in point.   During the third presidential debate, Mitt Romney made a point that we have less ships in our navy now than in 1915, as if that meant anything.   Obama’s derisive response stemmed from the fact that Romney was implying that it did (*1).   The number of ships we have is not important;  their collective fire power and relative dominance is.   In that regard, “today’s navy is bigger than the next thirteen combined.”   Now that is an illuminating fact in contrast to Romney’s misleading one.

And the light source just happens to be David Wessel’s book Red Ink:  Inside the High-Stakes Politics of the Federal Budget.  

The book, by the way, is only 162 very readable pages.   If you read it, your expertise on these matters will largely match my own.

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(*1)   Part of  President Obama’s irritation with Romney’s point about the navy’s size in 1915 may have stemmed from his apparently cribbing the line from Obama’s own Defense Secretary, Leon Panetta, who in defending the Defense budget had given the same misleading statement to Congress. (Red Ink, p. 90).

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Kabuki Dancing on the Edge of the Fiscal “Clurb” (Cliff or Curb)

Although President Obama is meeting with Congressional leaders this afternoon, it looks like no fiscal deal will get done before 2013.  If some stop gap measure is passed, it will suggest that both sides have been working more closely beneath the surface than it has  seemed.  It’s called a Kubuki dance.

Katsuo-uri((dance of)fish seller(kabuki dance))

Katsuo-uri((dance of)fish seller(kabuki dance)) (Photo credit: Wikipedia)

The nature of Kubuki political dances is there is more agreed upon than what meets the eye, posturing being a fundamental part of the dance.  The problem is that the posturing can run out of time, just as it did in the car chicken run to the cliff in the movie Rebel Without a Cause referred to in a previous post.   One of the drivers jumped but the other had his jacket caught on the door and could not jump.

John Boehner’s jacket seems caught on a Tea Party door.  And he can’t free himself.  He seems living a life of quiet desparation.  Why else would he come up with what he called a Plan B solution, of allowing only the tax rates of millionaires (literally) to go up while maintaining the cuts for others?

He could not even get his own caucus to support it.   Surely, he must have realized the Tea Party types would reject the proposal which ignored their mantra of “no new taxes”  and did not even have spending cuts attached.  So, Plan B went nowhere and only adds to  puzzlement at the process.   Most observers seem to think Boehner just made a clumsy move and tripped.  Could he have been more clever than that in a way yet to be revealed?  Did he want to show conclusively how his hands are tied?

On the administration side, Treasury Secretary Tim Geithner sent a letter to Congress Wednesday that the federal debt ceiling would be reached this Monday.   As if they didn’t know.  This intensifies the scary image of a steep cliff only days away, which may be an Obama move to put more pressure on Republicans to make a deal on the debt ceiling now, so as to avoid making it another issue in two months.

That’s when the true debt ceiling will be reached after  Geithner has run out of a series of emergency steps – sort of like check kiting – to allow the government to keep paying its bills.   Obama wants a debt ceiling deal NOW, so he can’t be held hostage by Tea Party naysayers in another two months.

Boehner may have his jacket caught in the car door, forced to fall over the Clurb, but Obama seems willing to jump, believing the landing will be softer for the Democrats.   Polls indicate the Republicans are being blamed more for the impasse.  Also, after income tax rates  have gone up the Democrats can press to reduce them for most Americans forcing the Republicans to either go along with their proposals or finding themselves in the awkward position of resisting tax cuts.

A pre-2013 deal does not seem likely, but one  reached in two or three weeks seems more so, and it shouldn’t do too much harm as provisions can be made retroactive to January 1.   Helping that along will be  more nerves wracked  and louder citizen clammer aimed at Congress.  Consumer confidence is already down to the level of last August and who knows when the stock market will lose confidence that anything will get done?  Oh, and there is the world economy, by the way, in which we still remain the lead actor even when we aren’t playing our part well.

If a deal does get done in the next couple of days, my guess is it would…..oh, I don’t know.  I’ll just wait and see and hope that Obama and Boehner turn out to be great Kabuki dancers, that the stumbles and apparent head knocking were mostly just steps to increase the relief most of us will feel when they actually do come together publicly and take a bow.

Is it a Fiscal Cliff or Curb or Slope or What?

 We have all heard our upcoming congressional budget battle referred to

Cover of

Cover via Amazon

as a fiscal cliff, but some have called it either a “fiscal curb” or a “fiscal slope ”  instead.  What a difference a choice of words can make.   A slope sounds much less scary than a cliff, doesn’t it? Couldn’t we roll down a slope and not get hurt?

Simply put, we are facing in January the expiration of some major tax cuts if they are not renewed along with automatic across-the-board spending cuts in the federal budget.

If congress cannot come up with some sort of compromise between now and January, all of these tax breaks and spending cuts automatically go into effect, which might seem a dream come true to super deficit hawks.  Except for one thing:  Most economists believe such a sharp reduction in tax breaks and government spending  would throw our economy in reverse. i. e. back into recession.

The latter spending cuts are the result of a congressional agreement made in 2011, so that Republicans would allow for the debt ceiling to be raised (in pre-Tea Party days, largely a formality for decades (*1).  These automatic cuts were put into place to supposedly force congress to work together to come up with sensible reductions before this January deadline, but since they failed to do that, the cuts will simply be made across-the-board (though with some exceptions).  This is commonly described as cutting the budget with a hatchet instead of a scalpel.  Another rhetorical flourish.

All that happening at once would be a fiscal cliff, but not likely to play out that way given the well-proven ability of congress to make deals lacking immediate consequences.  Most likely they will come up with some mini-partial deal, while giving themselves another six months or so to work out the details (of which in truth there would be many if tax loopholes, let’s say, were actually going to be broached).

And even if congress doesn’t get an agreement by January, they can make an agreement later and make it retroactive, which might initiate a slip off of the fiscal curb in the interim, rumblings in the  stock market, and an increase in overall national anxiety, but we wouldn’t be falling off a fiscal cliff.

Also,  Treasury Secretary Geithner could freeze paycheck-withholdings — the government’s cut out of each paycheck — even if tax rates rise at the end of the year.   To summarize a report from Bloomberg News, “By letting taxpayers keep about $10 billion per pay period, that would single-handedly curb about half of the economic effect of the fiscal cliff and help the country avoid a recession.”

People who, in contrast to me, actually understand these matters, undoubtedly could suggest other factors that will more or less soften the landing, implying that we won’t fall off a fiscal cliff unless most of the key players become brain dead simultaneously.   My guess is the “cliff” will be ground down to a slope over the next few months, albeit a bumpy one with some potholes added by global economic events.

If I’m right, that’s the good news.  The bad news is the huge iceberg of debt will remain dead ahead.  At best, this will only move the steering wheel slightly.

Also, sometimes there are unintended consequences.  Anyone who saw the movie Rebel Without A Cause (1955) or just know about it through the legend of James Dean, will recall the “chickie run” in which a teenaged Dean and a local hood test their courage by driving jalopies full speed towards a cliff to see who will jump first.

Technically the hood won because he never jumped.  His jacket got caught on a door handle.   Oops.

Let’s just hope the budget negotiations don’t get caught on a door handle.

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(*1)  Why do they have a debt ceiling?  The U. S. government since its inception has operated with varying degrees of debt.  The debt ceiling might be thought of as a periodic pause for thought as to how much debt government is willing to tolerate at a given time.  Raising the debt limit had become almost automatic prior to 2011, but Republicans made it an issue then.  More on that battle can be found here.