The Budget Battle In Perspective

By Justin Gardner | Related entries in Democrats, Money, Republicans

I think David Brooks frames the debate pretty effectively…

If the Republican Party were a normal party, it would take advantage of this amazing moment. It is being offered the deal of the century: trillions of dollars in spending cuts in exchange for a few hundred billion dollars of revenue increases.

A normal Republican Party would seize the opportunity to put a long-term limit on the growth of government. It would seize the opportunity to put the country on a sound fiscal footing. It would seize the opportunity to do these things without putting any real crimp in economic growth.

The party is not being asked to raise marginal tax rates in a way that might pervert incentives. On the contrary, Republicans are merely being asked to close loopholes and eliminate tax expenditures that are themselves distortionary.

This, as I say, is the mother of all no-brainers.

Of course Brooks is getting raked over the coals by the right-wing blogosphere today, but does this not make sense? Especially since the administration is even willing to cut scared cows…

Obama administration officials are offering to cut tens of billions of dollars from Medicare and Medicaid in negotiations to reduce the federal budget deficit [...]

And David Frum weighs in about consequences…

Republicans in Congress need to understand that there will be a political price to them, not only to the president, if they force the United States into reneging on its contracted obligations. They need to hear that message from inside, from donors and supporters. That’s not a “pro-Obama” message as some hot-heads charge. It’s a pro “full faith and credit” message. The Obama program can (and in large measure should) be repealed. But default is not an acceptable tool of politics.

Brooks’ column is a manifesto for the times, it should be nailed to the Republican equivalent of the church door at Wittenberg.

At this point, I think Republicans will have to blink. There’s no squaring trillions in debt reduction with billions in tax increases. Well, unless they listen solely to the Tea Party. Then they’re exactly what Brooks describes…

The struggles of the next few weeks are about what sort of party the G.O.P. is — a normal conservative party or an odd protest movement that has separated itself from normal governance, the normal rules of evidence and the ancient habits of our nation.

Your thoughts?


This entry was posted on Tuesday, July 5th, 2011 and is filed under Democrats, Money, Republicans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

41 Responses to “The Budget Battle In Perspective”

  1. gerryf Says:

    A normal Republican Party would seize the opportunity to put a long-term limit on the growth of government. It would seize the opportunity to put the country on a sound fiscal footing. It would seize the opportunity to do these things without putting any real crimp in economic growth.

    I take offense to Brook’s label of “normal Republican Party.”

    It perpetuates the myth that the Republican Party is interested in limiting government, fiscal responsibility or enhancing economic growth.

    This might have been “normal” back when Eisenhower was president, but the Republican Party has not been about ANY of these things in my lifetime.

    It is the Republican Party that created thsi deficit. It is the Republican Party that has swollen the size of government. It is the Republican Party that has prevented economic recovery. It is the Republican Party that has done everything in its party to destabilize the country’s economic footing.

    This is about creating a crisis and then using that crisis to get what they want–more power.

    Stop feeding the myth, Justin.

  2. kranky kritter Says:

    I expect the Republicans to find a way to take yes for an answer fairly quickly. If they overplay their hand any further, I think Obama’s trial balloon to use the 14th amendment to bigfoot them is on the table. At which point we could go down 6, 5, 4, 3 … .

    If they can’t accept a deal with 3 or 4 or 5 or 6 ( Frum claims 6 is on the table) dollars of cuts for each dollar of tax increases, then they’re incapable of governing. Now, if they take a deal along these lines and then find themselves truly deserted by both the hardcore Tea Party and its penumbra of less ideological hardcore folks who are fiscally responsible independents, that’s a real problem for them.

    So what’s really going to happen? If the GOP nuts up and takes a deal that is, let’s face it, at least a 3/4 loaf win for conservatives, isn’t there a very good chance they capture as much independent support as they lose on the ideological fringe? Especially if they have to stones to call a win a win.

    Republicans probably are stupid and stubborn enough to take this deal while simultaneously complaining about its vast inadequacies and flaws. But I think it would be a smarter move to step up and spin this as “We’re pretty happy that we got an awful lot of what we were looking for. This is a win for our party and for Americans.”

    Not that I necessarily agree with that particular spin. My point is that the GOP has played very hard and are on the verge of winning this round pretty big. Read between the lines of Gerry’s predictable rant. Irrespective of whether he has any point about the nature of Republicans, even he is acknowledging that the GOP is playing hard and winning.

  3. kranky kritter Says:

    moderated

  4. Gerryf Says:

    Allow me.

    Blah, blah, blah, right wing talking point.

    Blah, blah, blah, make argument that seems related but isn’t.

    Blah, blah, blah, you’re a douche, Gerry.

    Was I close?

  5. Thomas Says:

    Fareed Zakaria made an good point the other day. The looming, and largely manufactured, default crisis is a matter of simple arithmetic. The gap can simply not be closed by spending cuts. Short of scrapping Medicare, Medicate and the DoD, no amount of expenditure reduction is going to solve the problem. Revenues have to go up. The fact that Republicans can’t admit to this only shows how far they’ve buried themselves under ideology and how little they are interested in actual governing.

  6. WHQ Says:

    The debt is obviously a huge problem, considering the high rates of interest we have to pay to entice people to buy our bonds.

  7. WHQ Says:

    moderated, too

  8. Mike A. Says:

    Thomas,
    You may be referring to this interview. Regardless, excellent points from Fareed Z. Immediately went to Amazon and bought his book.

    http://www.npr.org/2011/06/30/137522219/what-does-a-post-american-world-look-like

  9. WHQ Says:

    The debt is obviously a huge problem, considering the high rates of interest we have to pay to entice people to buy our bonds.

    (asdl;fkjasf – just to make the text of the comment different)

  10. cranky critter Says:

    As far as you could feebly discern Gerry, Yes.

  11. gerryf Says:

    well, I knew I got the last part right….maybe if you posted in a responsible, reasonable non-combative manner you wouldn’t get moderatorated all the time….

  12. Tully Says:

    LMAO. A “responsible, reasonable non-combative manner” like your initial comment in this thread, gerryf? The comment queue holds were related to a rash of spam from the same domain where both WHQ and KK’s registered email addresses are. That lowered the trigger rating for queue holds from that domain. Actual live-person “moderations” do NOT re-appear. They get shit-canned.

    Brooks’ entire screed adds up to whining that the upswell of fiscal hawkism in the new House is not responding to the usual Beltway Buyouts and back-scratching horse-trading. They’re just not playing the Establishment game! Why, those bastards elected on bringing Washington spending under control seem to actually mean it! True enough, though some see that as a feature, not a bug. Frum’s comments add up to “What Brooks said!” Heh. Why we should listen to those two Canadians is another question.

    The Obama admin’s proposed “cuts” add up to “We’ll brutally slash Medicare and Medicaid in stupid ways that hurt seniors and the poor the most, and then blame the Republicans for it.” Sucker bait, but the suckers aren’t biting. Maybe they’re not really suckers.

  13. kranky kritter Says:

    Low interest rates prove the debt isn’t a problem? Really?

  14. Jim S Says:

    So you’ve bought into the “Compromise of any kind is evil.” meme, Tully? Your last paragraph is utter crap because the Republicans want those programs cut even more than what the Democrats are proposing and they don’t care one little bit about the people hurt by the cuts. They have never made one proposal that would ameliorate the effects of the cuts they want so don’t lay this on the Democrats. Are the Republicans suckers? Maybe not. Sociopathic in the name of ideology? Probably.

  15. WHQ Says:

    Low interest rates prove the debt isn’t a problem? Really?

    Well, not for the people lending dollars to the US federal government, apparently. Don’t you believe in markets?

    What we do with that money might be a problem, but it’s a separate problem, though they could merge at some point. I mean, we could (continue to?) do such a crappy job of allocating real resources that we reduce our productive capacity to the point that the world loses confidence in our economy and decides that there’s an amount of risk associated with our debt that it requires the payment of higher interest rates to be worth buying. So far, that hasn’t happened.

    That, or we could threaten to voluntarily default. That would be a big problem, too, but not one of the debt, per se.

  16. WHQ Says:

    moderated, kk

  17. gerryf Says:

    The simple truth of the matter is we could solve all of our problems in less than a decade if the rich and powerful did not think that every single penny belonged to them.

    Roll back tax rates pre-Reagan, increase the ceiling for social security tax cap, reinstate Glass Steagall, repeal the commodities and futures modernization act, kill NAFTA and other ridiculous trade agreements and reinstate tariffs.

    It’s that simple. The rich would still be rich. The debt would become manageable. Social Security would be saved. The banks would be banks again instead of a cross between casinos and ponzi schemes. Speculation in oil and grain would disappear and prices would fall. Manufacturing would return and jobs would be plentiful.

    It would be like the 1950s again, just like the conservatives claim they want.

  18. cranky critter Says:

    I am extremely skeptical of the notion that one’s debt is not a problem, no matter its size, because lenders keep lending to you at good rates. It’s true though, that so long as those good rates are granted to you, the lending is sustainable.

    The question that begs to be asked is how long the debtor can continue to rely on access to capital loaned at great rates. IMO, lenders tend to be sane, the 2008 crash notwithstanding. That means they look at your accumulated debt and ability to repay.

    The best that can be said for us is that for the time being the US continues to be the least worst option in the subjective opinion on global bond buyers. That can change, and if it does, it will happen far too quickly for anything to be done at that point. Like a landslide.

  19. cranky critter Says:

    moderated again

  20. WHQ Says:

    That can change, and if it does, it will happen far too quickly for anything to be done at that point. Like a landslide.

    I’m not sure why that should necessarily change so quickly. It could, particularly if members of congress keep threatening to voluntarily default, but, otherwise, I’d say the onus is on the person saying there’s a problem to point to evidence of such a problem.

    The most compelling evidence suggests there is no immediate problem, that being the eagerness of domestic and international investors of various stripes to purchase our debt instruments at very low rates. Simply saying it’s some big number or it’s X% of GDP isn’t really evidence of anything except that it’s a big number that is X% of GDP. And the government owes about half of it to itself.

    Don’t get me wrong, the debt could become a problem, but we could run very large deficits for several years without that happening, provided we invest in our own productive capacity, which is the thing that enables us to make our IOUs worth accepting.

    Slashing social programs isn’t going to help. Most of that money goes straight back into the domestic economy, unlike the money in the portfolios of our most wealthy and therefore untaxable citizens.

  21. WHQ Says:

    moderated again, also too

  22. gerryf Says:

    all good things in moderation

    p.s.–trying to read that last captcha just made me go blind

  23. Tully Says:

    Sure, gerry, blame it on the captcha … ;-) I think you’ve been squinting too hard trying to visualize those magic beans.

    I am extremely skeptical of the notion that one’s debt is not a problem, no matter its size, because lenders keep lending to you at good rates. It’s true though, that so long as those good rates are granted to you, the lending is sustainable. The question that begs to be asked is how long the debtor can continue to rely on access to capital loaned at great rates.

    Bingo. And “sustainable” is not remotely the same as “not a problem.” In any case, our current path is NOT sustainable. See below.

    Simply saying it’s some big number or it’s X% of GDP isn’t really evidence of anything except that it’s a big number that is X% of GDP. And the government owes about half of it to itself.

    Well, yes, it IS evidence of a problem. We’re bumping the 100% debt/GDP line right now. Not horrible, but not very good. What’s more worrisome than the current level is the trend — as long as debt grows faster than GDP, national bankruptcy is inevitable, the only question is when the crisis occurs. And our debt/GDP ratio grew in leaps and freaking bounds over the last few years. Today we are borrowing 40% of every dollar the government spends, in a clearly unsustainable path.

    Conversely, when GDP grows faster than debt, the debt/GDP ratio shrinks. Which is why no one other than the “no debt ever” people makes a fuss about minor deficit spending as long as that ratio keeps shrinking. Of course, we pay for that deficit spending in other ways, such as inflation, but at levels low enough that it’s more of a stealth tax than a crisis.

    As for the money the government owes itself, it’s still a problem and legitimately part of the debt/GDP ratio, as it’s money the government is legally obligated to pay back through entitlement spending, money that it doesn’t have. To get it they must either raise more revenue or borrow more money … on the open market. There the key factor is how soon they have to do so, which is affected by the payout levels of the associated entitlement programs. Which is subject to politics.

    What I would expect is a last-minute grand-standing “temporary” deal on the debt ceiling. They’re playing chicken on the Hill, but in the end everyone knows that a default is not really in the cards. As the old joke goes, we know what they are, they’re just haggling over the price.

    I would not be in the least surprised to see the “entitlement cuts” and/or “new revenues” at least partially take the form of means-testing on SS and MCR. Which anyone not in the upper brackets should cheer.

  24. kranky kritter Says:

    From Marketwatch:
    Dollar steadily losing popularity as reserve currency

    Data released by the International Monetary Fund showed the percentage of dollars held by central banks in their reserves is still declining year on year. And a UBS survey of investment institutions with $8 trillion under management showed a majority no longer think the dollar will be the reserve currency in 25 years time….

    …The figures make it clear enough that the dollar is not the force it once was. The proportion of dollars held by central banks around the world had fallen to 60.7% by the end of the first quarter of this year. That compares with 61.8% at the same point last year. That may not sound much, but as Stephen Lewis of London-based Monument Securities points out, that amounts to $58 billion fewer dollars held than if the percentages had stayed the same. Not exactly loose change, even among central bankers.

    Measured over a decade, the trend is clear enough. Go back to 2001, and the proportion of central bank reserves held in dollars was 71%. It only goes down a bit every year. But over time, that starts to add up. Once the dollar drops below 50% of central bank holdings, we can officially declare that its days as the reserve currency are done. It looks like that will happen some time between 2015 and 2020 — but it could well be sooner.

    This is one example of exactly what “lenders losing trust in American creditworthiness” looks like.

    You want to call that “no immediate problem,” that’s your mileage. Not worth debating. The point is, every time we kick the can down the road, the less time and maneuvering space we have to deal with it in anon-crisis environment. That’s the thing that bothers me, the folks who say “it’s not a crisis” or something like that as a way to argue against addressing it head on. That sort of thinking tends to guarantee the onset of a crisis.

  25. WHQ Says:

    Hmmm, reserve currency, huh? Maybe the decline in percentages held in dollars has something to do with the introduction of the Euro. (Considering what’s going on in Europe, that trend might reverse soon enough, for a time.) In any case, a shift to another, recently introduced currency that happens to be the currency of almost all of Europe is mostly indicative of the introduction of a new currency used my almost all of Europe.

    And reserve currency does not equal bonds. Yes, there’s a relationship, but they aren’t the same. Lenders, not mentioned in your link, losing confidence looks like high interest rates – not a slow decline in percentages of reserve held in our currency. Whether or not the dollar is the reserve currency in 25 years or not has little bearing on confidence in our debt instruments in the near term and whether or not we should be making big spending cuts while were still in a major recession.

    I expect the dollar will continue to decline on a percentage basis as a reserve currency because China’s economy is growing and will likely become the world’s largest economy (as is also mentioned in your link). That doesn’t mean that our economy will have shrunk or that we have become unable to pay our debts. Our first priority should be ensuring our own long-term, stable economic growth.

  26. WHQ Says:

    moderated – shocking…

  27. WHQ Says:

    Check this out, regarding the dollar being the world’s reserve currency:

    http://en.wikipedia.org/wiki/Triffin_dilemma

  28. WHQ Says:

    In my currently moderated comment, I should say that our first priority should be the well-being of our citizens. Long-term, stable economic growth is important to the extent that it supports our well-being.

  29. kranky kritter Says:

    Thanks, WHQ. Interesting stuff. I’ll have to tackle special drawing rights sometime soon. From wiki:

    The merits, difficulties and effectiveness of establishing a multi-currency reserve system are weighed against that of the SDRs, or “basket currency” strategy, and those of establishing this new “global reserve currency.” A new multilateral framework and ‘multi-polar system’ for managing capital flows and national debts is also called for, but the IMF cautions that it prefers a gradual shift to this new framework, rather than a sudden change.

    Emphasis mine. Sure, authorities prefer a gradual shift. Does that mean it’s possible or likely in a global environment jammed with self-interested actors? I can’t help but analogize to the phased withdrawal of military troops from an occupation. Once you’re in retreat instead of advance or occupation, the dynamic has fundamentally changed, no matter how much leaders stress stability and management and calm.

    Lenders, not mentioned in your link, losing confidence looks like high interest rates – not a slow decline in percentages of reserve held in our currency.

    That presumes better, more credit-worthy options. You’re right that declines in reserve currency don’t indicate a loss of confidence by bond investors. But it DOES indicate a loss of confidence in the dollar by banks.

    We both understand the merits of being diversified and hedged, so you can conceivably try to explain away this trend as simply a series of smart actions over time by savvy international bankers incorporating the euro into their capital strategies. But it’s not “simply” that. It is that, but it’s also evidence of a decline in international regard for the dollar in comparison to other currencies.

    Whether or not the dollar is the reserve currency in 25 years or not has little bearing on confidence in our debt instruments in the near term and whether or not we should be making big spending cuts while were still in a major recession.

    Look, it’s either another reason to be worried, another negative trend, or it isn’t. I haven’t brought this up as any sort of conclusive proof for particular policy actions. It’s only indicative.

    I agree with you in the abstract that big spending cuts during a recession could cause a lot of pain, that it may be an inadvisable path, all other things being equal. But all other things aren’t equal. The economy dial isn’t the only one we need to worry about. The solvency dial is another, and international confidence in America is yet another. The government has overspent by an amount that is huge in scope and length given the pre-existing debt.

    I’m delighted that so far we appear to have largely gotten away with the ludicrous levels of overspending that started with the last Bush Budget. No one knows how long that’s sustainable, and the only way to find out for sure is to keep doing it until there’s a spectacular failure. I am not a proponent of that kind of discovery.

  30. kranky kritter Says:

    moderated 3x

  31. WHQ Says:

    kk, still? Gee, whiz…

  32. WHQ Says:

    I hate agreeing with hedge fund managers:

    http://finance.yahoo.com/news/Best-Currency-Forecasters-Say-bloomberg-764136974.html;_ylt=Al0.5W7AHO1AZJ9iNBUBH8K7YWsA;_ylu=X3oDMTE1dHNzbXQ0BHBvcwM4BHNlYwN0b3BTdG9yaWVzBHNsawNiZXN0Y3VycmVuY3k-?x=0&sec=topStories&pos=5&asset=&ccode=

  33. cranky critter Says:

    Yup. Still.

    It would seem that our mileage varies when it comes to judging just how much consolation to take from the strength of the american dollar in comparison to sh!tty currencies in worse shape than ours. I put more stock in the dollar value against say the australian dollar, and against gold and other tangible commodities: oil, etc. For virtually all everyday Americans, there’s really only part of “the value of the dollar” that matters: how much can I buy with one?

    Of course since fiat currencies are part imaginary (or faith-based, if you prefer) and to a large extent really ARE comparative, I’m not inconsolable about the matter. Hope I didn’t give that impression. And if Obama and congress can agree on beginning to trim trimming the deficit by substantial amounts starting now, I’ll be a bit happier as it relates to avoiding a crisis and further damaging inflation. Given that imaginary component of value, perception matters. So if we start to substantially curb our recent debt habits. that signal will matter to people trading currencies.

    Free my post!

  34. cranky critter Says:

    Moderated 4x.

  35. WHQ Says:

    I’m just going to assume that we’re having a heated debate and that I’m winning handily. ;)

  36. cranky critter Says:

    Me too. :-)

  37. WHQ Says:

    It seems that you’re trying to have relative measures both ways: if the dollar is held in smaller proportion relative to another currency that is doing well (and that’s new!), that’s bad, but if the dollar is held in larger proportion relative to another currency that isn’t doing so well, that’s not good. To wit:

    It is that, but it’s also evidence of a decline in international regard for the dollar in comparison to other currencies.

    It would seem that our mileage varies when it comes to judging just how much consolation to take from the strength of the american dollar in comparison to sh!tty currencies in worse shape than ours.

  38. cranky critter Says:

    I’m not seeing any contradiction here.

    If the dollar’s held in smaller proportion relative to a “good” currency, that means we’re less well regarded than other currencies, and for the longtime global currency of choice that’s a “bad” trend.

    If the dollar is held in higher proportion than a “bad” currency, it means that some (many!) other currencies are viewed with higher distrust. For the longtime global currency of choice, how consoling should that be?

    For an average middling currency regarded neither especially well or very poorly, that wouldn’t be alarming, particularly if that position had seemed fairly stable over a long term.

    I don’t see any trends in the dollar worth cheering. If you want to “cheered” that it doesn’t seem to be in danger of immediate collapse even though its decline is demonstrable, then as I stated before, that’s your mileage. I choose to be more concerned than you, without claiming that this means that you are unconcerned. Feel me?

  39. WHQ Says:

    For the longtime global currency of choice, how consoling should that be?

    If you think the percentage of worldwide reserves held in that currency going up is a good thing, it should be as consoling as it is troubling that that percentage went down before. I mean, the very reason it had gone down was the introduction of the Euro. If that’s a problem, then the reversal of that trend should be a good thing in proportion to the extent that that is happening.

    I don’t particularly buy into these relative measures of reserve currencies as being anything but relative measures (and?). But if you think the relative measures matter, then an increase in such is as good as a decrease in such is bad, relatively speaking.

    How was it bad for the dollar that Europe was doing well? And how good is it, really, for a given currency to be held as a significant majority of worldwide reserves? How much should that matter relative to interest rates with regard to debt?

  40. WHQ Says:

    moderated for 24 hrs now

  41. WHQ Says:

    or 23 – time zone confusion…

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