Archives for January 16, 2013

We Only Need $1.4 Trillion in Deficit Reduction Before 2022

CBPP says just $1.4 trillion more in tax increases or spending cuts will stabilize the debt. There is no need to do more:

With the “fiscal cliff” deal in place, President Obama and Congress are now expected to seek more deficit reduction to replace the automatic spending cuts (“sequestration”) that are scheduled to take effect on March 1. Policymakers can stabilize the public debt over the coming decade, ensuring that it doesn’t grow faster than the economy and risk eventual economic problems, with $1.4 trillion in additional deficit savings over the next decade (see Box 2). Policymakers can achieve the $1.4 trillion with $1.2 trillion in policy savings — tax increases and spending cuts — because that would generate almost $200 billion in savings in interest payments. That $1.4 trillion in deficit savings would stabilize the debt at about 73 percent of Gross Domestic Product (GDP) over the latter part of the decade (see Figure 1).[1]

That $1.4 trillion — and not a larger amount — would stabilize the debt is due primarily to the deficit-reduction policies that the President and Congress have enacted over the last two years. First came $1.5 trillion in appropriations cuts (and another $200 billion in associated interest savings), primarily through the annual caps in the 2011 Budget Control Act (BCA).[2] Second came the tax increases in the fiscal cliff deal, officially called the American Taxpayer Relief Act (ATRA).

Wall Street Laughs At Pat Toomey’s Debt Ceiling Plan

Ezra Klein says Wall Street is not buying Pat Toomey’s claim that markets won’t mind if we breach the debt ceiling, so long as we keep making our coupon payments:

Would the markets really be so calm in the face of the United States government doing something it has never done before and purposefully breaching the debt ceiling? The investors I asked pretty much laughed in my face.

Mark Spindel, chief investment officer for Potomac River Capital, didn’t mince words. Over e-mail, I asked him whether we could breach the debt ceiling but keep paying off bondholders without causing markets to flip out. “Ezra,” he wrote back. “This is insane.

“If Congress (and to a lesser extent the President) continue to appear as dysfunctional as they do, then the markets will be bothered.”[…]

Thomas Gallagher, a principal at the Scowcroft Group, also focused on the effect on the economy. “Running the government on a cash basis would have a bigger impact that the cliff,” he wrote in an e-mail. “The cliff was almost 5% of GDP, and keeping the debt ceiling where it is would produce a drag of about 7%.” That is to say, the economic damage of breaching the debt ceiling, even if all went well, is about 40 percent more than going over the fiscal cliff, and that’s before you factor in the reaction from the financial markets.

Lee Sachs, a Wall Street veteran, was assistant Treasury secretary for financial markets from 1999 to 2001 and a counsel to Treasury Secretary Timothy F. Geithner from 2009 to 2010. As such, he’s a guy who has actually had to deal with the financial markets when Washington began terrorizing them. His e-mail response to my question could best be described as bemused. “As long as we are through the looking glass ” he began.

“The analogy I would use is if you were considering lending money to or buying the bonds of a company that was paying interest on outstanding debt, but wasn’t paying its employees or suppliers in an effort to save cash, would you make the loan or buy the bond without some sort of substantial yield premium?” He asked. That’s a particularly important point when it comes to government debt as we have to “roll over” hundreds of billions of dollars in debt over the course of each month. The idea that the market will treat those auctions as normal is optimistic, to say the least.

Brad Osborne Senses That The Tea People Have Worn Out Their Welcome…

Colin McEvoy on the Green Future Fund grants foolishness from the Lehigh County Tea People:

Osborne also noted that the commissioners’ general services committee previously recommended unanimous approval of these grants, and he feels the full board should not walk away from their own recommendation.

“We must do this so the public doesn’t lose confidence and trust in this board,” Osborne said. “If the board loses that trust from the public, we may never gain it back.”

He’s right on the merits of course, but he’s going to get a Republican primary, and so he should. He’s way off message!