The Lesser Crisis & the Greater

For most of the last two weeks my cell phone and my kindle were cut off. We did have an internet connection on the ship, but it was annoyingly slow and expensive. As I reconnected with the grid today I find out that a deal has been achieved on raising the debt limit. I note that, if anything, the Canadians were a lot more worried about this than most of their neighbors to the south. Here is my take.

The two parties make for four factions. The Democrats are divided between those who are exclusively concerned to avoid any cuts in federal spending and those who are largely if not exclusively concerned with winning the next election. Perhaps I need to say that the Administration falls squarely in the latter category.

The Republicans are divided between those who insist, apparently at all costs, on reductions in federal spending and those who think that the next election is the more immediate concern.

In the House vote, the Democrats divided right down the middle (95 yea/95 nay). The Republicans went three to one in favor of the deal (174 yea/66 nay). Here's the deal: the debt limit will be raised by $2.1 trillion and maybe more depending on Congressional action. The deficit will be reduced by a similar amount. All this depends on a questionable mechanism. A joint committee (6 R, 6 D) will be formed to produce a bill that will include the necessary cuts. If that effort fails, the bill passed today will trigger automatic across the board cuts in such programs as Medicare and cuts in defense amount to half the military budget.

Well. It is hard for me to imagine that this is real, but the punditry is obsessed with the question of who won. At first glance, it clearly looks like the day belongs to Orange John Boehner. He got a bill that apparently reduces the deficit by over two trillion smackers without any tax increase. Of course, the joint committee may recommend tax increases. I think it should if it comes with sensible tax reform. Assuming that the automatic cuts are avoided (they aren't going to happen), we are surely looking at real cuts in federal spending. That is a big defeat for the Democratic wing of the Democratic Party.

On the other hand, a two or even three trillion cut in the deficit over ten years doesn't look that impressive when you consider that we have been running deficits of a trillion and a half per year. Keith Hennessey has the best analysis of the bill and the fiscal crisis in general. He makes the important distinction between a cash flow crisis, which is what the debt limit issue amounts to, and the solvency crisis. The former has diverted our attention from the latter and from the continuous string of bad news about jobs and the economy.

Congress is not yet seriously addressing the solvency crisis, which is the real threat to our economic security. We are still paying off debt year after year by borrowing more trillions. That can't go on much longer.

The Congress will have to do the job, for the White House is providing no leadership. The President whines and makes demands, but as usual he takes little part in the action. Those who think a parliamentary system would be better than the one we have should thank Barack Obama. He has virtually transformed John Boehner into a Prime Minister. His only concern seems to be to make sure that no real issues are addressed before November of next year. He wants to keep his job. If he has any idea what his job is, he has kept it a secret.

Comments

[Lynn]

I think former mayor Koch of New York City should run. He is/was a Dem but states he will vote for any GOP candidate instead of Obama.

[SeriousLee]

I've finally figured out why the left keeps blaming Bush for everything. They must think that because there is no leader in the White House, that Bush must still be President.

[Lynn]

Love it, SeriousLee!!

[Stan Gibilisco]

In my opinion, Barack Obama believes that he has a calling: Fundamentally transform the United States into a social democratic republic such as Germany or Sweden.

[Donald Pay]

Yeah, he's transforming the US into the Weimar Republic by not standing up to the totalitarian hooligans who are trying to destroy democracy.

[Ken Blanchard]

Donald: did you get a lobotomy while I was gone? "Totalitarian hooligans"? What the Hell is that?

Stan: I am dubious regarding any agenda that Obama may have. He is what the room around him is.

[SeriousLee]

A lobotomy could only improve the frothing vitriol he spews here.

[duggersd]

Can you tell me what exactly has been cut? I heard and read that if we actually FROZE the budget and not spent anything more than what we do today, that would be called a $9 trillion cut. This is very troubling.

[Jimi]

Duggersd,

My understading is the problem is baseline spending. The United States will continue the baseline spending of an increase of 8% a year. That washes out to somewhere between $1.1 and $1.8 Trillion deficits as far as the eye can see depending on the strength of the economy.

The latest piece of debt ceiling legilsation only cuts $7 Billion from the 2012 Budget and creates a supercommittee of six Republicans and six Democrats that will look for an additional $1.5 trillion over ten years in savings. If they cannot agree — the key argument will be whether to include revenue increases — then automatic across-the-board cuts of $1.2 trillion will be triggered in early 2013.

Here is a summary of the deal:

-Cut spending by more than the increase in the debt limit. In the first phase, $917 billion would be cut over 10 years in exchange for increasing the debt ceiling by $900 billion.

-Pell grant funding was increased by $17 billion.

-Cuts to graduate student loans.

-Establishes a joint committee of Congress to reduce the spending by November 23, 2011. The goals of this committee would be to cut at least $1.5 trillion in deficit over the next 10 years and get the legislation passed by December 23, 2011. This committee will have 6 members from each party. The NYT has a great infographic on how the debt plan works if you are interested.

-If Congress fails to produce a deficit reduction bill, Congress would increase the debt ceiling by $1.2 trillion by trigerring across the board cuts. There are a few exemptions to this across the board cuts – Social security, Medicaid, military employee pay to name a few.

-The debt ceiling may be increased an additional $1.5 trillion if either one of the following two conditions are met:

1.)A balanced budget amendment is sent to the states

2.)The joint committee cuts spending by a greater amount than the requested debt ceiling increase.

[Jimi]

Duggersd,

In other words the Democrats won big time. They got everything they could ever want except the tax increase, which they will surely get thru the "Super Commitee", because they will be able to bypass normal legislative rules, and the Republicans as usual will put RINO's on the committee.

The media is trying to sell this to the public as "The House Republican won the debate, but we were saved from defalut because Democrats were forced to compromise their principles," but it is flat out not true. The whole point being, that Democrats plan on pinning the entire problem on Republican for the next election, and if republicans win, they will be handed huge economic problems. Which surely will hand the House, Senate and maybe even the Exective Brach back to the Democrats in 2016.

The baseline spending increases spending every year already at 8%, unless an act of God turns the economy and unemployment around within the next year or so, the deficit will surely be increased.

So if you are lost in the numbers here is what we can expect coming in the near future.

By 2020:

We will have $25 Trillion debt

We will have $500 Billion a year interest payments on the debt, but considering after we are downgraded and interest rates don't jump to high, we can expect a $1 Trillion interest payments.

We will probably experience a similar situaiton to Japan's "lost decade" which could leave us at 300-400% Debt to GDP ratio

We could expect $2 Trillion deficits or more

We could expect massive Tax Increases. Across the board, and the wealthy will have the least rise in their rates......expect a VAT.

[The Dude]

Very insightful Dr. Blanchard. I enjoy your writing. Glad you had a great trip and didn't have to listen to the debt ceiling show put on by politicians.

[Bill Fleming]

I think my friend on another forum has this pegged about right. I'll just paste what he said here, since I couldn't have written it any better:

The biggest structural problems are 1.) offshore tax havens 2.) an unregulated financial market that makes it easier to make money in fake financial instruments than real infrastructure improvements 3.) ridiculously low real corporate tax rates (if you had to spend profits on employees or new products or get taxed for sitting on them, you’d invest in your company), and then a couple of large, industry-specific problems, like a tax rate on income of hedge-fund managers half that of what normal people pay on income.

Obama isn’t meaningfully taking on any of these, and of all of them, he’s only barely taking on the offshore tax haven and completely ignoring the rest. On top of that, he’s going to start making things worse with austerity measures like the one he just signed (the EPI estimates 1.2 million job losses), more job-sucking trade deals with Panama, Columbia and S. Korea, and several other moves that baffle the imagination.

[Stan Gibilisco]

Jimi says:

"We could expect massive Tax Increases. Across the board, and the wealthy will have the least rise in their rates......expect a VAT."

I say, Jimi, you are absolutely right. The public will hate the VAT, but less than they hate the alternatives, which, by 2020, will be horrendous indeed.

[Jimi]

Bill,

Those are not the biggest problems. You can't find lost money, or take enough money already moving through the economy to fix anything. The biggest problem is the size and strength of the economy....or in others words....Democratic Economic Policy.

Democrats created the Financial & Service Based Economy. Granted, if you closed every loop hole, and forced corporations to claim all income here in the U.S. instead of another country you would gain $100 Billion a year....and that's great. The problem is, and Democrats always refuse to acknowledge this, is that we are part of a Global economy, and it is a two way street. So if you do it for American Companies, then you have to do it for Foreign Companies, and three things will happend. 1.) More American Companies will leave 2.) Foreign companies will not invest here 3.) American companies that stay become that much more uncompetitive.

"ridiculously low real corporate tax rates"

This is just flat out incorrect! The United States is tied for the highest Corporate Tax Rates in the world at 35%. The effective tax rate, for which I'm sure your friend is refering to, is still higher than any of our competitors. Why is it do you think they try to hide the money somewhere else. Besides, companies don't pay tax, the consumer does. So the bigger the burden the more expensive things are and the less job are created, or the more uncompetitive the company becomes. If you taht concerned about what the company is making for it's investors, then why not just push for a Consumption Tax, that comapnies are free of worrying about future burdens, and releaved of all the law and administrative costs that go along with the Tax Code. The investors will make more, the government gets their money based on consuption, and jobs will be created because it will free up the corporations.

"like a tax rate on income of hedge-fund managers half that of what normal people pay on income."

He is comparing the Effective Tax rate of the Wealthy compared to the Marginal Tax Rate of a "normal person." That's just straight up propoganda. A Hedge Fund is just like any other buisness, just because they leave the money tied up in the company doesn't mean they are getting any special deal on taxes.

"1.2 million job losses"

And where will the majority of those job loses come from? Federal and State Government! And I'm quite happy about that!

[Bill Fleming]

Thanks for proving my point, Jimi.
I said I couldn't say it any better than my friend,
and now you have demonstrated for us
that you can't either.

[duggersd]

Thanks for expanding Jimi. My question was mostly rhetorical, but you say things extremely well. Much better than most any other posts, including ones that are best said by other posters in other forums.

[Bill Fleming]

The wars and other adventurism in the middle east should be ended immediately. There should be means testing for medicare, and medicare should be extended to all via a single pay system. Hospitals, docs and pharmaceutical companies need to take a haircut. The health insurance industry should become supplemental, as opposed to primary. Day traders should be charged sales tax, short-selling outlawed, debd default swaps limited to those directly involved in the primary transaction. Financials should not be allowed to gamble with taxpayer money, nor should they be allowed to benefit from the nations economic failure. Companies moving their operations off should should lose their tax deduction for same. We should create an infrastructure program to develop and install alternative, efficient clean energy technology.

Obama should remember what his veto pen is for.

[Bill Fleming]

"credit default swaps"... sorry above.

[duggersd]

"The wars and other adventurism in the middle east should be ended immediately." I know you were against the war in Iraq from the start, but what about Afghanistan? That one at least had the Taliban hiding Bin Ladin. Do you believe we have accomplished what we went for and should now leave? And what was it we accomplished? Iraq is more or less won and should be winding down. Some time, Iraq is going to have to learn to govern and defend themselves. And then there is Libya in which the President is apparently acting outside of the War Powers Act. Is this an impeachable offense?
I cannot argue with the means testing idea. I would be for that. The Big Three really need some trimming.
I do not understand what you mean about taking a hair cut. I really do not care what my doctor's hair looks like. If you mean get paid less, you should justify how you think you should be able to tell them what they should make. As for health insurance becoming supplemental rather than primary, what should be primary? If you are thinking Obamacare, that is already proving to be a LOT more expensive than what the liars who voted for us told us it would.
Day traders charged sales tax? Why? They are not purchasing a product to be used. They are purchasing a stock. Just because you might not like how someone earns a living, does not give you the right to tax them to oblivion.
Companies who move move because they are being chased from these shores with over regulation and taxes. As pointed by Jimi above and me in previous posts, corporations do not pay taxes.
How do you propose to stop a company from benefiting from a country's economic failure? What are companies doing now that you would like to see stopped?

[Bill Fleming]

http://www.portfolio.com/views/blogs/capital/2011/04/14/yes-america-corporations-do-pay-taxes/

[Bill Fleming]

Whatever you and Jimi have been smoking, DuggerSD, may I suggest you change brands?

[duggersd]

Bill,
I am not smoking anything. When we say corporations do not pay taxes, it is not in the sense they do not send a check to Uncle Sam. It is in the sense that taxes come out of one or more things that ultimately would go to the consumers. Taxes are paid on profits, right? If the government did not take part of the profit, then that profit could go to dividends. Or the corporation finds it does not need to tack on an excess price to cover the taxes, saving the consumer money. One of the problems with liberals is they do not recognize where the taxes come from. Now, you can go back to your weed and go to bed for the evening.

[Jimi]

Duggersd,

Don't forget the employees. Corporations can increase productivity, reduce employment, cut pay, increase prices, find alternative tax shelters, and reduce benefits.

The left keeps going on and on about how the big evil corporatons are not paying their fair share, even though we have some of the highest Effective Tax Rates on the planet....but they can never seem to understand, that is not where the money is:

Here is the revenue breakdown for 2008:

#1.) Individual Income Taxes-45%
#2.) Payroll Taxes-----------36%
#3.) Corporate Income Tax----12%
#4.) Excise Taxes------------3%
#5.) Fines, and all others---4%

The individual income tax has been the largest single source of federal revenue since 1950, averaging just over 8 percent of GDP.

Payroll taxes-Taxes for Medicare, combined with periodic increases in Social Security taxes- grew from 1.6 percent of GDP in 1950 to more than 6 percent since 1990.

The obvious soluton to maximizing tax revenue is increase employment. Well...how do we do that? A good place to start is to make it as easy as possible for small and large buisness to grow and expand. Well.....how do we do that?

Wait for It........

Wait for It........[everybody prepare for the Heads on the Left to explode]

CUTS TAXES AND DEREGULATE!

[Ken Blanchard]

Great thread all! And thanks, Dude.

Bill: corporate taxes are too high. They encourage corporations to move production abroad. It's fun to talk about closing tax havens, but we can't tax production in Ireland.

I have frequently conceded what most Republicans will not: taxes will have to be raised. Right now, federal taxes as a share of the GDP are historically low. It is true, however, that taxes probably can't be raised much above their historical norms. If you try that, you will get diminishing returns. So you will also have to reduce the big engines of spending. The great social programs will have to be reformed. Sorry. Even with that, all discretionary spending and, I am afraid, defense spending, will be squeezed. I know you don't like "foreign adventures", but the world sometimes has a way of coming around. Google Pearl Harbor.

For all of my life government has grown steadily. This was the most sacred purpose of the left. Government isn't going to keep growing any more, except in so far as the debt and the payments on it grow. I don't like this a lot more than you do, except for the cold comfort of being proved right.

[Ken Blanchard]

I note one more thing. The economic crisis is general over the developed and developing world. The U.S. alone seems to have no executive branch. What is coming out of the White House? Nothing. No plan. Only whimpering and scolding. Does the President have a plan for anything other than his coming campaign?

[Jimi]

Ken,

"have frequently conceded what most Republicans will not: taxes will have to be raised."

Raise Taxes on what and who?

Taxes should be cut for small and large business, but taxes should be raised on Individuals....especially those on the bottom end that are not paying any, and those that get money from the federal government for generating no income.

Here is the List of Taxes:

Accounts Receivable Tax
Building Permit Tax
CDL license Tax
Cigarette Tax
Corporate Income Tax
Dog License Tax
Excise Taxes
Federal Income Tax
Federal Unemployment Tax
Fishing License Tax
Food License Tax
Fuel Permit Tax
Gasoline Tax (44.75 cents per gallon)
Gross Receipts Tax
Hunting License Tax
Inheritance Tax
Inventory Tax
IRS Interest Charges IRS Penalties (tax on top of tax)
Liquor Tax
Luxury Taxes
Marriage License Tax
Medicare Tax
Personal Property Tax
Property Tax
Real Estate Tax
Service Charge Tax
Social Security Tax
Road Usage Tax
Sales Tax
Recreational Vehicle Tax
School Tax
State Income Tax
State Unemployment Tax
Telephone Federal Excise Tax
Telephone Federal Universal Service Fee Tax
Telephone Federal, State and Local Surcharge Taxes
Telephone Minimum Usage Surcharge Tax
Telephone Recurring and Non-recurring Charges Tax
Telephone State and Local Tax
Telephone Usage Charge Tax
Utility Taxes
Vehicle License Registration Tax
Vehicle Sales Tax
Watercraft Registration Tax
Well Permit Tax
Workers Compensation Tax

[duggersd]

Bill, I thought you might find this interesting.
http://www.mcclatchydc.com/2011/08/03/119358/iraq-agrees-to-start-talks-on.html
It seems the guy with the veto pen is busy pressuring the Iraqis to request an extended visit. BTW, about Libya, I missed you response. Is President Obama in violation of the War Powers Act and if so, is that an impeachable offense?