Civil dialogue on policy, politics, budget, deficit, jobs & the economy

Go Long!

President Obama says he wants to jettison the short-term focus that has guided recent budget negotiations in favor of a more comprehensive fiscal sustainability plan. This initiative could be the beginning of a major new phase in negotiations between the administration and congressional leaders. On the other hand, it could prove to be just another false start, designed for “positioning” rather than results. It will take more than one or two meetings to know the difference.

In any event, we seem to have come full cycle. This is where negotiations should have started several months ago when the President presented his original budget. But even if precious time has been wasted, the right goal is finally in view.

Our fiscal challenges demand an ambitious approach. Ratings agencies Moody’s, Standard and Poor’s, and Fitch have all warned the United States that its coveted Aaa credit rating will be reevaluated if swift and comprehensive action is not taken to get its fiscal house in order. Political gridlock featured prominently in these warnings. As Moody’s puts it, “…the degree of entrenchment into conflicting positions has exceeded expectations.”

It has become clear that the essential compromises that must be made for any plan to be politically viable are not any easier whether the goal is a short-term debt limit increase or a more ambitious multi-year plan. Since negotiations on short-term objectives have gained little traction, a football analogy is apt: go long.

To be sure there are risks with this approach, most notably the lack of time to negotiate, draft and enact major legislation before the debt limit hits. But if progress can be made on a larger agreement, raising the debt limit to accommodate the time needed to complete the process should not be a problem.
My pitch to the negotiators would be:

Begin by agreeing that the debt limit must be raised to avoid a default in one form or another. It is not in the nation’s best interests to flirt with default in any form. Pretending that the markets won’t notice if we “prioritize” our bills (i.e., refuse to pay them all) is self-delusional. As Fitch warned, this process “would damage perceptions of US sovereign creditworthiness and signal growing financial distress.”
Attach conditions to the debt limit increase designed to improve the long-term fiscal outlook. Instant austerity is not required, and would not be helpful to the economy. What is crucial, however, is to immediately enact a substantive, credible, plan to demonstrate that we are serious about getting our fiscal house in order.
Subject all parts of the budget to scrutiny. This includes entitlements, discretionary spending, including defense, and revenues. Preconditions set by one side will simply encourage preconditions by the other side. Neither side will fully engage unless it thinks the other is willing to bend.
A credible enforcement mechanism with targets and triggers should be enacted to ensure that assumed savings actually occur. A good model for this is the Bipartisan Policy Center’s Save-As-You-Go plan (SAVEGO).

Tags: debt, deficit

Comment by Bob Schmidt on July 7, 2011 at 10:57pm: While the good intentions of this article are obvious, the article presumes several things as fact that aren't. Consider this.

1. The Feds are collecting more revenue than ever before in history. They are and will continue at the current tax rates to collect far more revenue than is needed to service the interest on the existing debt.

2. The only reason and need to increase the debt limit and go furrther into debt is if we continue the uncontrolled, low priority and wasteful increases in spending.

3. If the debt limit is not raised, the debt service will be paid. The government (Obama, Congress, both, whomever) will have to make hard choices as to who will not be paid... defense contractors? the 200,000 new federal employees? grants and matching grants to a myriad of agencies and projects? Medicaid? Medicare? Social Security? foreign aid? Ag subsidies? Green subsidies? tranportation subsidies? Welfare to the rich? Welfare to the poor?

4. All the rhetoric about default is baloney. It is WallStreet posturing for their own self interest. It is exactly the same as the politician who threatens that the spending for the children will be cut first; or, if Obama were clever, he'd threaten that spending for border control would be the first to be cut in an attempt to split off the anti-illegal faction from the economic TeaPartiers.

5. We have a long term crisis. But we do not have a short term crisis. What we have is a short term opportunity to set our priorities; keep spending in the black and not increase the debt beyond what it currently is.

Comment by Joe Minarik on July 8, 2011 at 9:14am: Bob Bixby’s post makes one central point (with which I agree wholeheartedly): We need to achieve long-term budget sustainability. In fact, were it not so sad, one would have to laugh at the notion that the state of our budget is so dire that the notion of short-term sustainability would have any meaning. The very term is worthy of Woody Allen.

But Bob’s post raises a second point, which is less obvious and less fundamental, but which I believe is important. It relates to our standards of political behavior going forward.

Most people agree that it would be irresponsible, unthinkable – choose your own term – for the United States to collide with the debt ceiling, drain itself of cash, and default on any of the financial commitments which it has legally undertaken.

What is troubling today is how many people, having made such a seemingly categorical statement, then continue with the word, “But…”

The extreme members of the “But” crowd have come to the functional equivalent of taking the American people hostage. All of the “Butters” have heard that default by the United States of America could tank the financial markets, quake the economy, crush the retirement security of most Americans, and shutter many small businesses that are financed by loans with variable interest rates. But these “Butters” are willing to run the risk to achieve their own particular political agendas.

Other “Butters” claim purer motives. The argument goes something like this: Default would be irresponsible. But failing to use the debt ceiling as a political weapon would be a dangerous lost opportunity. In other words, taking hostages is wrong. But given that this passerby happened to wander into my hammerlock, why should I let her go without extracting what I want as a price? Why let a perfectly good hostage go to waste?

The truth is that we have plenty of opportunities to right our nation’s fiscal policy. We have that opportunity every time the sun rises. The only thing special about this opportunity is that we have a hostage. And the most dangerous thing about losing this one opportunity is that the hostage might be harmed. That danger should be chilling to everyone knowledgeable about the economy, and about how our political process can blunder into outcomes sought and contemplated by no one.

The ambiguity about this issue is that the concern of the “Butters” – not necessarily the policy agenda, but the concern – is valid. The nation cannot long go on with a public debt that is growing faster than the economy out of which that debt must be serviced. So how – politically, not substantively – can we address that concern without rewarding the hostage taking?

In my opinion, this is not an idle concern. Even a successful budget negotiation this month will not close the book on the debt limit. Remember that we have a limit on gross debt – including trust fund holdings of non-marketable Treasury securities. So even with a balanced unified budget, but rising balances in the trust funds, debt subject to limit will increase, and eventually will hit any new statutory limit. Given its lack of political appeal, every debt-limit vote becomes an occasion of legislative deal-making, extracting prices both economic and non-economic. What will the “Butters” demand as their price the next time, if we reward hostage taking now? And how close will we come to another shock to the financial markets, with all of the painful consequences?

I do not have a good solution to this problem. Eliminating the debt limit itself would be the best one. If our elected representatives do their jobs, they would contemplate the public debt with every vote they take, and they thus would never let the debt become a problem in the first place. R

Comment by Bob Schmidt on July 9, 2011 at 3:45pm: We need to achieve long-term budget sustainability

A long journey begins with that first step in the correct direction. It is absurd to say that we will take a long journey to a balanced budget with all the spending cuts in 10 or 20 years in the future.

We obviously can balance the budget in the current year. There is no factual need to increase the debt. The only reason to increase the debt is to continue the wild, wasteful and low priority spending.

So on the journey,

Step 1. Obama should agree to cut domestic spending if the TeaParty agrees to cut defense spending IN 2011current year as we speak AND 2012. That is a first step. It alone will not solve all problems. But that is the obvious first step on the long journey.

Step 2. Entitlement eligibility and Entitlement fraud should be fixed. No immigrant (legal or illegal) should come to the USA to collect any entitlement or welfare. Entitlement rules should be re-written to prevent people from gaming the system. Many rich and near rich transfer their wealth to their kids (or hide it) and then claim poverty and eligibility for means tested entitlements. That should be fixed. The rules should be re-written to encourage people to be self-reliant; not to game the system. And, of course, there is outright fraud... claiming entitlement to people who don't exist, or are now dead; claiming entitlement to payment for medical procedures never performed or unneeded.

Go Long!

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