[kenberg]

There are things we can afford, things we cannot, things we could afford if we went at them more sensibly. Probably no one disagrees. I have not accused anyone of not caring if people die in the streets. Not even close, as far as i can recall.

[awm]

An interesting puzzle: Is it possible to balance the budget without directly cutting spending or raising taxes?

Seems to me that the answer is actually yes. The main idea is to fix the economy. This will put people back to work (so they are paying taxes) and increase business profits (so they and their investors pay more taxes). It will also reduce government spending, because fewer people will need unemployment insurance, food stamps, medicaid, etc. Here's what I'd suggest to do just that:

(1) Get rid of tax breaks for companies that pollute our environment, screw up our economy, or send massive amounts of cash overseas. Change the way income from outside the country is treated so there is no advantage for big companies to keep their profits sitting in bank accounts in the Cayman islands. Get rid of the ridiculous "carried interest exception" that allows billionaire hedge fund managers to pay 15% tax on their earnings. Take all the savings and put it into a huge tax break for businesses based simply on the number of people they employ. The whole thing would be revenue neutral, and instead of rewarding people who damage our economy we would reward the "job creators" that Republicans are always talking about... in exact proportion to the number of jobs they create (okay, restrict it to full-time jobs for US citizens or permanent residents to prevent gaming the system). This is not a one-time bonus for hiring (which has a lot of issues and arguably wouldn't work) -- it's a permanent tax break for companies which employ people, funded by eliminating other tax deductions. Companies will hire when the expected revenue gained from the added employees exceeds the cost of employing them (note that this is mostly independent of corporate income tax rates) -- this kind of tax deduction directly reduces the cost of adding employees and creates a real incentive to hire.

(2) Stop spending so much money on military adventures. Waging war all over the globe is very expensive, and a lot of the money either gets blown up (i.e. missiles and bombs) or is spent trying to rebuild parts of other countries that we already blew up, or just goes to waste in places with a lot more corruption than we have here. We could easily cut military spending by 25% or more. Spend most of that money here at home to improve our infrastructure, where it directly creates jobs and helps businesses grow here in the US.

(3) Improve our medical care system. There are two easy reforms that could save huge amounts of money (and lives). The first is to allow medicare to negotiate with drug companies as a single large buyer the way the government programs in Canada and other countries do. The second is to add a public option (basically medicare for anyone who pays the subscription fees, which should be sufficient to cover costs). Again, this is without cutting benefits for anyone.

(4) Give the IRS more money and let them do their job. Enforcing the existing tax code is not a tax hike -- but could easily bring in more revenue.

[mike777]

1) I strongly agree that permanent tax breaks are an excellent first step.
2) I doubt in my lifetime or yours we will see a candidate win advocating 25% or less reduction. My guess is the "war on terror" will outlive us both.
3) public option, bring on the debate
4) old point but see Italy, Greece etc where not paying taxes is the national public sport. We dont have room or can afford more prison space.(side note, I must have 20 old buddies who work for the IRS, the stories they tell)


btw when the tax rates used to be 90% etc we had the three martini lunch and a million more tax deductible ideas. No one paid those "old" rates.

My second job my boss took me and another new worker out for a liquid deductible lunch on day one.
How often does your boss do that today?

On my first job out of college my boss told me to never again skip lunch or the breaks, which I did on my day one.

[hrothgar]

 hrothgar, on 2011-July-14, 18:54, said:

Quote

My understanding is that there are still international treaties whereby nations can demand repayment of another nation's debt in gold. If so, what happens when China says "you owe us $1Trillion, give us the gold."? I think we still have it, but who knows? And what if all our other creditors follow suit? I don't think the US going bankrupt can be good for anybody.

my understanding is that US debt is dollar denominated which means that we need to pay it back in dollars.
This is quite advantageous (For example, Greek debt is Euro denominated)

I'd certainly welcome seeing any treaty that is still in effect that suggests that US debt is denominated in gold.
(And, if so, what the exchange rate might be...)

Still waiting on those treaty citations...

[Foxx]

 awm, on 2011-July-21, 23:27, said:

An interesting puzzle: Is it possible to balance the budget without directly cutting spending or raising taxes?

Seems to me that the answer is actually yes. The main idea is to fix the economy. This will put people back to work (so they are paying taxes) and increase business profits (so they and their investors pay more taxes). It will also reduce government spending, because fewer people will need unemployment insurance, food stamps, medicaid, etc. Here's what I'd suggest to do just that:

Next year, in the booth, I'm writing you in.

[kenberg]

David Ignatius,
http://www.washingto...PIUI_story.html
speaks of "tipping points". In my home edition, the title is "When the middle gets mad". I like to think that he has this right.

An exerpt:

Quote

Sometimes there is a galvanizing fact that drives the shift in opinion — a riveting new detail such as the phone hacking of a 13-year-old girl that breaks through the fog and makes the general public pay attention. Most people don’t usually follow politics all that closely. But in such moments, says Jon Cohen, The Post’s director of polling, “the reality becomes clear, and people react to facts on the ground.”

This is what finally happened on the debt-limit debate, which initially was abstract and confusing but became more concrete. Cohen notes that as the Aug. 2 deadline approached, Americans began to focus on the potential costs of a default. A Post poll last week found that 80 percent of Republicans believed a default would cause “serious harm” to the economy. Public opinion data like these changed the Washington debate.

I don't regard myself as a deep political thinker nor as being particularly savvy about economic forces. But Howard Baker and Nancy Katzenbaum Baker (I offer a belated congrats on their marriage) wrote a recent piece emphatically stating the need for raising the debt ceiling. It's become a sport to find old Ronald Regan quotes when he had to cajole Congress into action. He did not mince words about the consequences of inaction. Note that it is Republicans in the quote from the article: "80 percent of Republicans believed a default would cause “serious harm” to the economy". Of course we have the assurances of Michelle Bachman that this is all just scare tactics. Somehow her assurances have failed to relieve my concern.

It appears that we will find out. The time has now passed where any sort of compromise bill could be put together and passed. That's true even if Republicans were willing to compromise and there is no indication that they are. They certainly will not agree to raise the debt limit as a stand alone bill, there is no time left for anything else, so I guess we will see if Ms. Bachman is right.

We were over for dinner yesterday at the home of an ardent Ron Paul supporter. Part of our conversation:

Phil: The Republicans are willing to compromise on the budget.
Me: Name one thing they are willing to compromise on.
Phil (after some thought): They will agree to raise the debt ceiling.
Me: If I agree not to shoot you if you agree to do everything that I say, that's not what most people describe as a compromise.

The conversation turned to more productive areas such as planning a trip to the Shenandoah National Park.

[PassedOut]

 kenberg, on 2011-July-24, 09:25, said:

We were over for dinner yesterday at the home of an ardent Ron Paul supporter. Part of our conversation:

Phil: The Republicans are willing to compromise on the budget.
Me: Name one thing they are willing to compromise on.
Phil (after some thought): They will agree to raise the debt ceiling.
Me: If I agree not to shoot you if you agree to do everything that I say, that's not what most people describe as a compromise.

And the gun is not just pointing at Obama -- everyone will be hurt by a default, including the morons making the threat.

[awm]

(1) Republicans seem to think that having a huge federal debt is so awful that they should cut even programs most Republicans support (like social security and defense).

(2) The main problem with having a huge debt is that we might not be able to pay it off, and then would have to default.

(3) The Tea Party is suggesting that we should voluntarily default on the debt, and that it wouldn't be so bad.

Anyone see an inconsistency here?

[PassedOut]

Congress Continues Debate Over Whether Or Not Nation Should Be Economically Ruined
Got to look at both the pros and cons.

[luke warm]

if the present bill makes it to the president, should he veto it?

[PassedOut]

 luke warm, on 2011-July-25, 14:16, said:

if the present bill makes it to the president, should he veto it?

The White House supports the Reid bill, so I'd be surprised if Obama vetoed it.

[luke warm]

i meant the house bill, the one that raises the ceiling by $1T and requires a $1.2T in cuts... if that one (somehow) made it to his desk, should he veto it?

[blackshoe]

IMO, no. But it wouldn't surprise me if he did.

[awm]

I think Obama should veto a short-term bill, then use the 14th amendment to argue that the debt ceiling is unconstitutional.

There are two main reasons for this. One is that this constant bickering about the debt ceiling is bad for our country. Even if we don't actually default, the interest we are forced to pay on the debt will go up because the markets will perceive a danger of default. Further, the debt ceiling bickering is making it hard for the government to do other important things (like say work on immigration reform). The second reason is that Obama has said publicly that he will veto such a bill, and I think he has to draw a line somewhere and fight for it. The problem is that the Republicans think he is a pushover and will never compromise on anything if he keeps giving in. As long as they refuse to compromise, we will have a government which is dysfunctional and/or does whatever the craziest and most extreme right wing of the Republicans wants.

[blackshoe]

Sure. Then we have about a week to get the case through the courts and get a ruling. That'll work.

I agree that the ceiling is probably unconstitutional. But I think the time to deal with that, at this point, is after we make sure there's no default on our debt.

I think that any President who receives a bill he believes will be bad for the country should veto that bill, and not wuss out. But sometimes it's a matter of lesser of evils. Obama will have to weigh the consequences of a veto against the consequences of letting the law go through.

I also think that the description "craziest and most extreme" is not limited to Republicans.

[awm]

 blackshoe, on 2011-July-25, 22:26, said:

I also think that the description "craziest and most extreme" is not limited to Republicans.

Are there crazy and extreme people on the other side? Surely there are some... Greenpeace maybe... Dennis Kucinich maybe if we're naming politicians.

But Obama has governed very much as a centrist. His signature accomplishment (health care reform) is almost identical to Republican Bob Dole's proposal in the 90s and Republican Mitt Romney's law in Massachusetts. He has continued Republican foreign policy to a great degree (even keeping a Republican defense secretary for his first couple years in office). He has refused to investigate the Bush administration for war crimes despite people clamoring for it on the left. His plan for dealing with climate change (cap and trade) was the Republican plan back when some Republicans believed in climate change (and has been endorsed by both Mitt Romney and Tim Pawlenty at various times in the past). His stimulus bill was about half tax cuts. He wants to extend the middle-class portion of the Bush tax cuts (unlike most progressives) and while he claims to want to raise taxes on the wealthy (back to Clinton rates) he was willing to back down on that at the end of 2010.

Even the Democrats in congress have been willing to compromise. Most Democrats (including Kucinich) voted for the health care bill despite the lack of a public option. A bunch of Democrats voted for last year's "compromise" that extended the Bush tax cuts. Despite being one of the more liberal Democrats, Nancy Pelosi has "found the votes" for a lot of Obama compromises that the Progressive Caucus initially railed against.

The point is, there may be a few lunatics on the left here and there. But they aren't in charge. They aren't running the asylum. The Republican party has gone off the deep end; they can't do anything they see as a "tax hike" even if it's removing a small number of truly ridiculous subsidies in exchange for massive concessions from their opposition. They won an election claiming Obama had cut medicare, then passed a budget that basically eliminates medicare. They are driving our country to the brink of default despite having been offered a sequence of extremely generous deals. A significant percentage of them don't believe in global warming, don't believe in evolution, and oppose the rights of muslims to practice their religion in the united states. Some of their leaders have expressed opposition to civil rights and the 14th amendment, and some of their likely presidential contenders seemingly endorsed secession from the union. These folks are pretty far from the mainstream in the US, and I'm not just talking about a few crackpots on the fringes of the party.

[phil_20686]

A few points:

(1) Its really hard to understand how congress cannot raise the ceiling. It simply must happen. Even if it does not happen, I still will not beleive it. Its political suicide for the republican party. Well, they have already commited suicide by allowing themselves to get into this position. If they do not raise it then social security will end. Unemployment insurance, veteran's pensions. At that point the voters will be angry at the politicians for not protecting them from their own stupidity, which is about 50% of the job of the political classes. If they do raise it people will not realise how bad it could have been, and they will be blamed for breaking their promises.

(2) It is hard to imagine quite how bad a US default will be for financial institutions. In order to do so lets revisit one of the prime causes of the financial crisis. Since this is tied up in the concept of money supply, I will say a bit on that first.

The money supply is bigger than the total amount of cash, essentially because there are a lot of things that can be traded for cash on good terms at short notice. Say I had a bar of gold, on any given day, should I need cash, I can trade my gold on the market and get some cash, thus, in economics terms, my bar of gold is a part of the money supply. "Broad money" may be loosely defined as those assets which can be rapidly converted into cash without taking a significant penalty in value.

Banks create money in exactly this way, the first step is fractional banking, in which they are allowed to lend out most of the value of their deposits. (retail) Banks in most countries are not allowed to lend out more than the value of their deposits, contrary to what was written above, if you deposits $1000 dollars in a bank, at a 10% fractional reserve rate, then the most I can loan out is $900. However, having loaned out this money to another customer, I now `own' a debt. By packaging up my depts into a security, I can create something which, statistically, is a very safe investment. The bank will now sell this security to a private investor, and recover its cash (and make a profit). It can now lend out the original deposit again. If the security is regarded as "safe" then it too counts as part of the money supply, and as a "triple aaa" security can be exchanged for cash on very favorable terms.Thus, provided that there are people willing to invest and people willing to take out morgages, the banks can expand the money supply almost infinitely. Thus banks were holding these securities as part of their "reserves", as they were more profitable than cash, and could be exchanged on the shadow banking market for cash via a repo agreement basically instantaneously.

The problem came when the market woke up and realised that there was a problem with the rating of sub prime mortgages. They were much more risky as collateral than had been generally believed, though it is likely that an economic downturn of some description preceded the financial crisis, by causing an uptick in the default rates on sub prime mortgages. At this point it became impossible to exchange the securities based on these morgages for cash on any reasonable terms. Banks that had held these in place of hard cash as part of their reserves effectively had their reserves decimated, as they could no longer exchange these for cash without taking a large "haircut", effectively meaning that companies were demanding a lot more collataral for their repo agreements. This acts like a withdrawal on the banks reserves, thus they could only raise cash by lowering their reserves. Hence a liquidity trap.

Of course, in general this crashed the money supply. The M2 measure % change fell to zero % during the recession, which is really very rare, and the M3 money supply year on year change went negative, which is almost unheard of (the monetary base, whatever measure you use, should increase year on year to keep pace with the amount of capital in your country, as lending roughly occurs against manufactured goods like houses, hence it should grow roughly exponentially as the integral of gdp). Conversely, there was a spike in hard cash (the monetary base) as people attempted to avoid the liquidity trap by converting securities into cash at almost any price.

This left banks unable to meet demands for cash from their creditors/customers etc, and led directly to the meltdown. Indeed, some banks, like RBS in Scotland, managed to go bankrupt while their assets vastly outweighed their liabilities, if they were measured at current market prices (ie less than pre meltdown levels, but far more than during the meltdown).

This lowering of the money supply is why many economists have suggested a period of high inflation as the cure for the financial system. Painful though it might be, this would certainly put the money supply back on trend, and it would also lower the nominal losses on toxic assets.

Why is this important for the US risk of default? The US dollar is the ultimate reserve currency. It is held as part of the fractional banking reserves of banks the world over. If it became impossible to redeem dollar bonds on the open market it could potentially decimate reserve banking in all of the major industrialised countries. Not to mention the foreign currency reserves of central banks. A US default could conceivably trigger a global contraction in the monetary supply severe enough to drive every major industrialised nation into recession. If this seems like a disaster scenario, note that the world's total money supply is equal to less than 100 trillion dollars, so US public dept represents some 14 trn, or around one sixth of the broad money supply for the world economy. (o got my figures here, no idea if they are reliable, as 100trn seems low to me, but then the US has a large fraction of the worlds wealth, so maybe 100trn is about right.

I think a US default could be catastrophic for the worlds financial systems. Massively more serious than the sub-prime crises. There is no way that banks are prepared to deal with a US default.

[kenberg]

When actions make no sense, we have to look at the assumptions. Ezra Klein had an op ed pice the other day about the Republican's disdain for compromise.
http://www.washingto...HVIYI_blog.html

As he points out, the Republicans have already won on most all of their demands.

They could compromise on some remaining issues and declare victory. To a large extent, they might find an appreciative response. After all, they have brought the deficit issue front and center and brought about some concrete changes in policy.

So why not go this route?


My answer: The budget deal is the means, not the goal. The goal is the complete humiliation of the President. They wish to make it totally clar that in fact Obama should simply be ignored. It does not matter at all what he says, the Tea Party is in charge.

There are really just two options:

1. Sign whatever bill the Republicans send along. He can also announce that Ron Paul will be replacing Tim Geithner at Treasury. He will work with Congress to produce a Balanced Budget amendment to the Constitution, and he will work to repeal whatever amendment it is that has Senators chosen by direct election instead of appointment (I never understood this demand, but it seems to be a biggie for the Tea Party folks).

2. He can announce that for the next year and some months, he is President. If folks think Michelle Bacmman would do a better job they can vote her in next year. He can make it clear that when there are people with the willingness and ability to cause great trouble, there will be great trouble So things are probably going to go to hell a bit, maybe quite a bit. He can announce a hope but no certainty that there are enough members of Congress who think that having a functioning government is more important than humiliating the president.

And then we will see. I am very pessimistic.

[luke warm]

i personally don't see a lot wrong with the present bill in the house (though i'm sure someone can find something)... to adam: if obama vetoes any bill at all that reaches him, how will that play politically? do you think it will help him and/or the dems? to phil re: political suicide: there were many on this very forum who said the republican party was dead and buried after obama won the presidency...

i personally think people here aren't as politically astute as they like to believe... to ken: in your opinion, has obama been the leader you'd want and expect during this crisis? remember, the deficit has grown 10 fold since 2007 (dems took control of congress)... there has been much opportunity to get a handle on this, but imo there has been a failure of leadership... in hindsight (some of us were calling for it at the time), all that stimulus money, every penny, should have been used on highways, bridges, railways, the infrastructure of the country... in hindsight (some of us were saying so at the time), if there was to be universal healthcare, if that was the goal, it should have been done right... only one system of universal healthcare would (could) work - a single payer system modeled on medicare

[Zelandakh]

Luke, I think perhaps you misunderstand some of the basics of economics. The Democrats have been in power during a time of low growth or even recession. It is normal in such times for a government to spend more. The time to cut the deficit was before this, during the 1995 - 2005 period when economic growth was strong. It is the failure to take action in this time which allowed the American deficit to reach such a level.

My understanding of the situation based on international news (I am in Europe) is that the 2 sticking points remaining are whether the bill should be complete (Obama's choice) or temporary with a second bill next year; and, most crucially, whether the President can raise taxes. My feeling is that Obama is actually being pretty smart politically here by showing weakness and offering alot to the Republicans up front, but nonetheless holding onto red lines on the key issues.

If the Republicans refuse to compromise now they will surely get the blame from the American people for the resulting fallout. It is easy for the Democrats to catalogue their concessions and there is really no answer. This would likely lead to a second term just as hawkish Republican action did for Clinton. The smart thing for the Republicans to do now is really to concede this point, thus alleviating themselves of most of the blame for the probable pain that is coming, while also making great political capital for every tax rise that Obama makes ("We told you so!"). This approach would, imho, most likely lead to Obama losing the next election, assuming the Republicans can find a candidate that is not too far to the right.