Debt talks need a dose of “honest math”
By Norman Leahy | Thursday, July 7th, 2011 | Policy, PoliticsCato’s Dan Mitchell says he is willing to agree to the President’s spending cut/tax hike mixture on the federal budget, but only if all sides agree to use what Dan calls “honest math“:
What I mean by this is that I don’t want politicians to approve a budget that results in more spending, but then claim that they “cut spending” because the budget didn’t grow even faster. I want a spending cut to mean less spending (gee, what a novel idea).
And when they talk about new revenue, I want to see how much revenue the IRS is collecting this year, and measure revenue increases against that number. After all, the crowd in Washington should be happy to get more money, even if it is the result of benign factors such as more jobs being created, companies earning higher profits, and people getting more pay.
In other words, drop the baseline budgeting gimmick and make real cuts and don’t fudge the tax receipts.
Dan projects such an approach could lead to a balanced budget in five years and generate enough revenue to make the Bush tax cuts permanent, and even allow for additional cuts.
It sounds deceptively simple. Could basing federal income and outgo on the principles folks use in their personal budgeting really make such a rapid, and enormous, difference?
Possibly. Then again, that possibility runs so counter to DC’s bipartisan spending culture that it is unlikely to be embraced outside the think tank walls. And as we are dealing with political creatures whose long-term vision makes Mr. Magoo look like Nostradamus, any deal they craft will owe far more to avoiding blame for missing the August 2nd deadline than actually solving the debt problem.
Nassim Taleb said it best:
“This is not an insoluble problem,” he said of the U.S. debt crisis. “You can fix it with some fiddling here and there. But you need the will to do it. And you need consciousness about the importance of debt. I don’t see that. Politicians are good at getting elected, not at solving problems like this.”
If by “fiddling” he means something like Mitchell’s “honest math,” then we really could get closer to a solution, and rather fast. But given the existing political class, we are likely to remain stuck in neutral.
Or we could end up in reverse, particularly if U.S. interest rates rise to historical norms. As Larry Lindsey wrote in the Wall Street Journal:
, a normalization of interest rates would upend any budgetary deal if and when one should occur. At present, the average cost of Treasury borrowing is 2.5%. The average over the last two decades was 5.7%. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020.
The 10-year rise in interest expense would be $4.9 trillion higher under “normalized” rates than under the current cost of borrowing. Compare that to the $2 trillion estimate of what the current talks about long-term deficit reduction may produce, and it becomes obvious that the gains from the current deficit-reduction efforts could be wiped out by normalization in the bond market.
Lindsey offers a few caveats, saying the the Federal Reserve could try to intervene in the market to slow rate increases. But this could upset the government’s lenders (including, but not limited to, China).
But these are projections, based upon historical data. Even if they are correct, they are irrelevant to the overwhelming political imperative to avoid blame for missing a deadline that may or may not be real, but has been repeated so often that it has become a certainty.
Politicians like certainty. It allows for tidy press releases and pithy sound bytes. It could also result in a deal that does nothing.
(Cross-posted at Score Radio Network)
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About the author
Norm Leahy has written about Virginia and national politics online since 2002, beginning with One Man's Trash (OMT), and continuing through Bacon's Rebellion (both the blog and the e-zine), Sic Semper Tyrannis, NBC12's Decision Virginia, Richmond.com and Tertium Quids. He is the chief blogger at "The Score" and a producer of "The Score" radio show as well as being a Washington Examiner contributor.
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16 Responses to "Debt talks need a dose of “honest math”"
Most of the Commissions that have studied the issue of getting back ot balance of the federal budget are not advocating overall cuts, just decreases in the rate of spending. Why? Because whether republicans like to admit it or not, government spending is part of the reason private businesses are so successful. One goes with the other, and no less an advocate than Warren Buffet in his recent interviews has warned that weaning off stimulus too quickly will plunge our economy back into deep recession, and that is not good for business nor good for the nation. So if republicans don’t really represent what is best for business anymore, and they want to plunge our economy back into recession so they can win the next election, and they want the middle and lower classes to suffer the cuts while the top 2% get lower taxes, who would vote for guys like Boehner/Cantor and Rigell ever again?
Norman,
Honest math? What is going to happen to the interest rates we are going to have to pay to just refinance existing debt once the bonds mature after we fail to increase the debt limit?
The quote you provided from Larry Lindsey about normalization of expected future interest rates will expose him as too extremely conservative with his crystal ball because interest rates will go through the roof.
Grover Norquist will be pleased, because he will have gotten what he wanted by destroying our nation. He will have cut the arms and legs off the baby before he threw it in the bath tub to drown.
Grover Norquist might be celebrating but voters are going to be upset once they see the results.
Honest Math? How about most of the stimulus money didn’t even stay in America? Think the voters will be upset when they find that out?
Google This. “How Would Shifting to a Chained CPI Affect the Federal Budget?” to see the manipulation behind the compromise.
Pollytician says, “Remember, when you are in a bind, Redefine.”
Higher Price = Less Buying = Lower Inflation = No COLA and Increased Taxes.
I am completely disagreeing with the notion that the best we can do is ‘five years’.
That presumes that my dear GUMmet does not waste.
That presumes that my dear GUMmet needs every penny they extract from you and me.
That presumes that during AND after said ‘five years’ my dear GUMmet will not reach out that grubby mit …again.
Take my suggestion and indiscriminately cut (except Defense for now) in half. They will be alright. I promise. They would have to do with less. Well shawks. Some in private industry have BEEN doing that for years.
Cut GUMmet in half. NOW!
Warren Buffet is being a little disingenuous when he warns Congress about not raising the debt ceiling. He’s right, of course, that defaulting on the national debt would be a complete catastrophe, but that isn’t the whole story and he knows that. If creditors holding Treasury bonds are so concerned about the U.S. government defaulting, why aren’t they selling bonds in anticipation of a collapse like they are for Greece ? The obvious answer is … drum roll please .. because they know there is no way in HELL that the U.S. is going to default on its debt service. In fact, Treasuries are selling better now than they were just a few months ago, why ? Because bond holders would love to see spending cuts in the United States, they would be thrilled to hear that the deficit was not going to grow at a trillion plus a year, they dream of the day that the federal government balances its budget.
It may have been true years ago that the policy of increasing the debt would just be another routine vote to do so, no matter which party was in charge. Now, with the republican party moving dramatically to the right, so that only no tax republicans remain in the party, that is not the case. Apparently, the threat of default is real, if for no other reason than to satisfy the increasingly radical right base of the party. I think the threat of default is real, but worse, the effect of the cuts advocated by the far right, if enacted immediately as proposed, would be just as bad. Frankly, the biggest drain on our economy right now is the cuts in government jobs which have decimated many communities and put millions of workers on the public dole.
Temporary,
Perhaps US Treasury bond holders are reassured by the 4th clause of the 14th amendment, which includes that:
“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”
Seems to me that as long as the federal government continues to collect revenue, the first hog to the trough will be the holders of debt instruments will need to be paid. It is in the Constitution.
That means after these debt obligations are paid, only then can we decide who is next in line.
Yes, and course when you pay the debt holders, and don’t have money to pay your obligations, who gets short shrift? Paychecks for our troops and employees? Medicare recipients, social security payments, welfare and food stamps, courts and federal prisons. With no money, and little hope, how far behind can insurrection be? If default occurs, it will not be business as usual, and of course, that is why most bet it won’t. But the need to feed red meat to the increasingly radical conservatives in this nation may trump doing what is right for America.
Mike Barret,
Seems to me that Social Security recipients will be second in the line. Our troops might fall behind them if we honor the Constitution. Social Security recipients have trillions in US Treasury bonds in the Social Security Trust Fund to back their claims that the troops do not.
This could get really interesting. After we get done paying the all the bond holders in full, how much money is going to be left to pay all the other interested parties? Do Republicans really see a winning hand in this?
Well apparently they do. They are simply following Norquist’s mantra to cut the arms and legs off government so the body can be drowned in the bathtub. They have made the normally routine increase in the debt limit their bathtub, and it is full of water waiting for the execution. What is surprising to me is the glee so many of them find in this form of brinkmanship. Frankly, as a pragmatic businessman, I find no glee in this at all. Perhaps a mob of seniors who have not received their checks will use their umbrellas to beat some sense into them.
So now the truth has been revealed for all to see; the republican leadership in the House could care less about the deficit. Their only focus is on further reducing taxes on their rich corporate contributors and the 2% of Americans at the top of the income brackets. And Virginians can be further astounded that Eric Cantor appears to be behind the shifting sands that have toppled the Speaker in making a bold move for America. Frankly, I don’t see how the republican position can now be sustained as they plunge the Nation into default and depression. In just one dramatic move, they have been revealed themselves for what they truly are; elitists and protectionists for just the wealthy. Grover Norquist must be smiling and breaking out the champagne.
In other news, Italy falls off cliff.
The rope around America’s neck grew a little tighter Friday as yet another European slipped over the financial edge. As Congressional deal makers met over the weekend to find ways of maintaining their fingertip grasp as the leader of a failing global economy, their counterparts in the EU held emergency talks to determine the breaking point of the ill advised Basel safety line that binds us all together. While Germany once again suggested using a sharp knife to free themselves from the free hanging southern freeloaders, other less realist bureaucrats plan on having America loosen its grip and using more stimulus money hand outs to pull Italy to a safe ledge, while hoping the other hand doesn’t become overburdened and tossing everyone into the abyss. In Asia, Chinese officials have proposed renovating the Colliseum and swapping American bonds for Vatican Gold.
So then there is general agreement among the Dems and Repubs here that the solution to a debt problem is more debt?
That is just what I expected. Call me later and tell me how that works out for ya.
Regarding default: believe it or not, before deciding whether or not to default, we would first have to define the word.
Does it mean “not paying back a debt as agreed?” We would have to further define “as agreed.” Technically at least, paying back a debt with newly-printed money is not default, since the lender knowingly assumed the risk embedded in all sovereign debt, that of currency debasement.
But it must be pointed out that the U.S. has de facto defaulted twice in the past 100 years. First was in 1933 when Comrade Roosevelt recalled gold money, paid holders in paper, and then devalued the paper dollar by 70% against the government-confiscated gold. Talk about theft from savers! Talk about stiffing creditors! An instantaneous 70% loss of purchasing power. How do you like your coupon payments now, suckers?!
Then again, in 1971, when tricky dick Nixon ended gold convertibility and stiffed foreign creditors, some time after the collapse of the London Gold Pool. Central banking just hasn’t been the same since, has it? Paper currencies all, unbacked except by their host governments’ willingness to forcibly extract value from their serfs.
But whooopsie, the Swiss are considering instituting a parallel gold-backed Swiss Franc (bet you guys didn’t know about that). It is expected that the gold franc will be used for…savings. You know, capital accumulation, like in the old days. You can’t have an honest economic system without honest money.
See, this economics stuff isn’t so hard after all.
The President, by accepting the challenge from the Speaker for $4 trillion of debt reduction, now claims the high ground as Boehner comes back from his caucus a defeated man. Further, any illusion that the republican House actually cares one wit about the deficit has been dispelled, and now clearly, for all to see, is simply acting to protect their rich, wealthy corporations and individuals who support their election campaigns from paying their fair share of taxes. The fact that they care not one bit about 98% of us, but only the 2% who are beneficiaries of the flattened tax code, ought to embolden independents and moderates to see them for what they actually are: shameless shills for corporate power.
Honest Math
2012 United States federal budget (proposed) $3.7 trillion
2011 United States federal budget $3.8 trillion
2010 United States federal budget $3.6 trillion
2009 United States federal budget $3.1 trillion
2008 United States federal budget $2.9 trillion
2007 United States federal budget $2.8 trillion
2006 United States federal budget $2.7 trillion
2005 United States federal budget $2.4 trillion
2004 United States federal budget $2.3 trillion
2003 United States federal budget $2.2 trillion
2002 United States federal budget $2.0 trillion
2001 United States federal budget $1.9 trillion
2000 United States federal budget $1.8 trillion
1999 United States federal budget $1.7 trillion
1998 United States federal budget $1.7 trillion
1997 United States federal budget $1.6 trillion
1996 United States federal budget $1.6 trillion
Believe federal taxes will raise about $2.2 trillion in 2012.
So how much should the federal government spend in 2012??
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