Coverage of politics and economic policy from the prospective of an Austrian classical liberal. All pieces by Zachary Woodman, student of Economics at Hillsdale College.
|Posted on October 19, 2013 at 2:50 PM||comments (0)|
Image courtesy of CNN.
The result of the latest debt ceiling deal and government shutdown was not the cathartic release of years of budget disagreements, political stagnation, and gridlock many had hoped for. Rather, it was more of an anticlimactic, fizzling deus ex machina after a month-long dramatic crescendo. The deal which came out of the standoff is like a cacophonic symphony that ended with one flute playing a note that does not quite resolve. Thus far, the coda to our shutdown symphony has been mere echoes of the same dissonant melodies as politicians just repeat the same fallacious talking points they had before the deal, as if nothing changed.
That is probably because very little has changed as a result of this deal. The so-called shutdown in which only 17% of spending was cut is over so now people can go visit museums in Washington DC again when the President signed the deal Wednesday night. It extends the debt ceiling until February 7, funds the government until January 15; no spending cuts, no moves on ObamaCare, no tax hikes, and virtually no significant policy changes.
The only real effective results of the debt ceiling are merely parliamentary changes which effectively kick the barrel of massive budget negotiations down the road. It requires the establishment of a budget committee to resolve a replacement for sequestration by 2017 and institutes a measure known as the “McConnell Mechanism.” Ezra Klein of the Washington Post explains:
McConnell's idea was to restructure the question so most legislators could vote "no" and the president would be the one to take all the blame. It's not the most profile-in-courage solution one could imagine, but given the circumstances, it's actually kind of genius.
The way it works is that the president gets the power to raise the debt ceiling and then Congress gets an opportunity to take a vote of "disapproval." If that vote passes Congress, then the president can veto the disapproval rule. If Congress can muster the two-thirds majority to overturn the veto, then the president's debt-ceiling increase is rejected.
In other words, the debt ceiling vote goes from a vote where a majority of Congress needs to vote in favor of it to a vote where up to two-thirds of Congress can vote against it.
The result is that, for February, there is effectively no debt ceiling. Politically, it makes sense for both parties as they do not want another contentious deal that threatens investor stability so close to the midterm elections. Additionally, neither party wants to raise the debt ceiling, however they know they must and overwhelmingly vote for it every time; this forces them to raise it while allowing for the façade that they are fighting it. However, since it expires in February, it changes nothing in the long-term.
The true problem with the bill is that it did not accomplish the alleged ends which these type of contentious stand-offs are intended to resolve. For the Tea Party and other fiscal austerians, the point of pushing a debt ceiling bill is to try and push austerity that otherwise would not be accepted by pro-government factions. However, because the Tea Party made the unfortunate and foolish decision to have the narrative revolve around solely ObamaCare and refused to make any compromise, the result was absolutely no change in policies that the Tea Party sought, and that the country needs. To this end, the Tea Party (led by the politically immature likes of Ted Cruz) miserably failed.
Helderlman, Rosalind S. and Lori Montgomery. "Obama signs bill to raise debt limit, reopen government." Washington Post.com. Washington Post: 17 October 2013. Web. 19 October 2013. <http://www.washingtonpost.com/politics/house-effort-to-end-fiscal-crisis-collapses-leaving-senate-to-forge-last-minute-solution/2013/10/16/1e8bb150-364d-11e3-be86-6aeaa439845b_story.html>
Klein, Ezra. “No, we didn’t get rid of the debt ceiling forever.” WashingtonPost.com. Washington Post: 17 October 2013. Web. 19 October 2013. <http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/17/no-we-didnt-get-rid-of-the-debt-ceiling-forever/>
|Posted on October 16, 2013 at 7:25 PM||comments (0)|
Image Courtesy of Policy Mic.
Anti-austerity economic simpletons have been pushing the phrase “Austerity is dead” for months now. In America, these claims usually follow along the lines that the deficit has fallen therefore austerity is not necessary, a claim I debunked earlier this month. In Europe, meanwhile, the claim usually follows that austerity is killing their economy. However, the question that is ignored is that those in opposition to austerity are painting the term with a broad brush—they are not looking at the kind of austerity that is being imposed. For a case study, let us take a look at Spain.
In 2011, with Spain’s deficit exceeding 8.5% of GDP and a debt-to-GDP ratio of nearly 70%, the European Commission demanded huge austerity measures to be implemented. Thus, Spanish President Mariano Rajoy instituted spending cuts of $33.3 billion and tax hikes of $35 billion. However, despite the austerity measures, Spain’s debt-to-GDP ratio has risen to 84.2% and Spain’s GDP has contracted by an average of .64% per quarter over the last five quarters while unemployment has soared. The question becomes, then, which is causing the contraction: the tax hikes or the spending cuts? By analyzing economic literature and the raw data, it becomes clear that it is the tax hikes; and thus the problem with the Spanish economy is not austerity in general, but austerity done wrong.
First one may use fiscal multipliers to estimate their magnitude relative to Spanish GDP. Obviously, fiscal multipliers are a fundamentally flawed methodology of predicting the future, as I argued earlier this week, however they may be helpful in estimating the magnitude of a policy.
Christina Romer, formerly on President Obama’s Council of Economic Advisers and professor of economics at UCLA, authored a paper in 2007 which found that for a 1% per GDP hike in taxes, there is a 3% drop in GDP growth over twelve quarters. For the spending side, this may be contrasted with a Federal Reserve paper which found a decrease in government spending has a multiplier effect of only .6—meaning that for a $1 million cut in government spending, GDP may decrease by $600 billion. Other research from the IMF found has found the fiscal multiplier to be even lower than that and even zero in instances where debt is high, such as Spain. However for the sake of argument I’ll use the Federal Reserve’s standard number.
According to the multiplier from the Federal Reserve, the magnitude of the spending cuts on GDP would be $20 billion, while the magnitude of tax hikes would be $107.5 billion, meaning it appears from the multipliers that the tax hikes are having a far more perverse effect on GDP growth than the spending cuts.
However, as I mentioned, these fiscal multipliers are not a very accurate tool for predicting the impact of a policy. In fact, the numbers used in the fiscal multipliers on the magnitude of tax hikes and tax cuts are estimates in themselves. For example, despite the intention of increasing tax revenues by 4.3% in 2012, by August they had actually dropped by 3.5%; meanwhile, spending cuts failed as government receipts in summer of 2012 surged by 12% due to increasing interest payments. Thus fiscal multipliers are making potentially fallacious presuppositions in the multiplier itself and rested on potentially fallacious projections of effective changes in magnitude on spending and taxes. Thus it is better to use fiscal multipliers merely to analyze historical data, not to empirically predict the future.
Thus, one must analyze other historical data pertaining to Spain’s recent experience with so-called austerity. The fact is that the negative impact of the tax hikes is far more apparent than the relative impact of spending. Their magnitude first of all was far greater; the VAT tax, for example, was increased from 18% to 21%, reducing disposable income for Spanish citizens by about €700. The tax hikes as a whole moved Spain’s tax burden to one of the highest in the Eurozone, meaning businesses could easily seek alternatives. To contrast, the biggest impact of the spending cuts was a 1% drop in government spending as a percentage of GDP. As a result of higher taxes, businesses began fleeing Spain’s economy, as Bloomberg reported in June 2012:
Increasing taxes may encourage tax evasion in Spain, which already has the lowest tax-to-gross domestic product ratio in the euro region, Pampillon said. Industry lobbies for businesses from hotels to bakers have protested the VAT increase.
In a study released by Madrid’s Universidad Pontificia Comillas on July 5, 78 percent of 220 companies interviewed said tax rules are unstable and 73 percent said this hampers investment decisions.
One direct negative implication of taxes can be observed is that, since the VAT Taxes were raised there was a 7.2% drop in supermarket sales. The contraction of businesses and trade as a result of the tax hikes is also why GDP plummeted and unemployment increased.
As a result of the negative macroeconomic growth stemming from the tax cuts, revenues also fell. By July 2012, as I mentioned, revenues actually fell 3.5%. In the first five months, despite the massive hike in VAT, VAT revenue fell by 10%. Why does increasing taxes fail to spur revenue? It is indicative of what economists call Hauser’s Law—the law discovered by economist Kurt Hauser that despite continuing changes in tax rates since World War Two, tax revenue as a percentage of GDP has remained almost constant, as indicated by the below chart from Hauser’s research. That means that tax revenue grows with the economy, not directly with changes in policy—which means the best policy if one wants to increase revenue is that which allows the economy to grow. Which, as Romers’ aforementioned study suggests, is anything but increasing taxes.
Hauser's Law. Image Courtesy of Hauser, 1996.
The case study of Spain reflects what is shown by other literature in economic academia: that the best austerity measures depend not on tax hikes, but rather on spending cuts. This is reflected by a 2009 paper from Alberto F. Alensia and Silvia Ardagna. That paper found, by analyzing multiple countries in the post-war era, that those incidents of fiscal austerity that they considered “successful” and reduced debt-to-GDP by at least 4.5%, actually included .51% of GDP cut in revenue and a .52% cut in government wage expenditures; in other words, more successful debt reduction has been accomplished by cutting taxes and spending. Unsuccessful measures, by contrast, tried to rely solely on tax hikes with a 1.41% increase in taxes and a .32% decline in government expenditures. Those that expanded economic growth (were in the seventy-fifth percentile of austerity measures in GDP growth) also relied more on tax cuts with 3% reductions in revenue as a percentage of GDP.
In lieu of the full facts, it is clear that the problem with Spain—and other Eurozone countries who have implemented austerity and recent history—is not the implementation of austerity in and of itself, however the wrong kind of austerity. Thus all these claims that “austerity is dead” because of recent experience in the Eurozone fall short of the purpose; the so-called Spanish
“austerity measures” fulfill the ends of austerity so poorly that it is unclear why they are even called austerity. For countries gazing at the Eurozone, they are not to be lessons about the alleged evils of austerity—rather examples of what happens when debt spirals out of control.
Where is Spain to go from here? Prudence dictates that they ought to implement effective, sane austerity. To the contrary, it appears they are rather continuing with more of the same policies of tax hikes that have failed in the past few years as the IMF is recommending Spain increase the VAT Tax further. From Spanish newspaper Libre Mercado:
The International Monetary Fund (IMF) said Wednesday that Spain has room "to better raise taxes" and increase the scope of VAT in order to increase revenue. Michael Keen, director of IMF fiscal affairs, said during the presentation of the Fund's fiscal report that Spain "has not used too much VAT tax" to increase income and has the potential to improve the "composition" of the excise tax.
Alesina, Alberto and Veronique de Rugy. “Austerity: the relative effects of tax increases versus spending Cuts.” Mercatus.org. George Mason University: 7 March 2013. Web. 16 October 2013. <http://mercatus.org/sites/default/files/deRugy_RelativeEffects_v1.pdf>
Benoit, Angeline. “Spain Braces For Renewed Austerity As Tax Take Hemorrhages.” Bloomberg.com. Bloomberg, LP: 9 July 2012. Web. 16 October 2013. <http://www.bloomberg.com/news/2012-07-08/spain-braces-for-renewed-rajoy-austerity-as-tax-take-hemorrhages.html>
Blanchard, Oliver and Daniel Leigh. “Growth Forecast Errors and Fiscal Multipliers.” IMF.org. International Monetary Fund: 2013 January 3. Web. 16 October 2013. <http://www.imf.org/external/pubs/cat/longres.aspx?sk=40200.0>
Fidler, Steven. “Spain Moves To Top of Tax Table.” WSJ.com. Dow Jones & Company, Inc: 29 February 2012. Web. 16 October 2013. <http://blogs.wsj.com/brussels/2012/02/29/spain-moves-to-top-of-tax-table>
Hauser, Kurt W. Taxation and Economic Performance. Board of Trustees of the Leland Stanford Junior University: 1996. eBook. 3 October 2013. <http://books.google.com/books?id=X7zLmIK1HgEC&lpg=PA13&source=bl&ots=Gwf7fTg5vT&sig=0KkZ3ImfLCEDnGSp70Fh50Xhoak&hl=en&ei=AYPzS8bAKoOdlgf1ocT8DA&sa=X&oi=book_result&ct=result&output=reader&pg=GBS.PA13#v=onepage&q&f=false>
Ilzetzki, Leigh, Enrique G. Mendoza, and Carlos A. Vegh. “How Big (Small?) are Fiscal Multipliers?” IMF.org. International Monetary Fund: 2011 March. Web. 16 October 2013. <http://www.imf.org/external/pubs/ft/wp/2011/wp1152.pdf>
Owyang, Michael T., Valery A. Ramey, and Sarah Zubairy. “Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data.” Research.StLouisFed.org. St. Louis Federal Reserve: 2013 January. Web. 16 October 2013. <http://research.stlouisfed.org/wp/2013/2013-004.pdf>
Political Calculations. “Austerity Done Wrong.” PoliticalCalculations.Blogspot.com. Political Calculations: 17 May 2013. Web. 16 October 2013. <http://politicalcalculations.blogspot.com/2013/05/austerity-done-wrong.html>
Romer, Christina D. and David H. Romer. “The Macroeconomic Effects of Tax Changes Estimates Based on a New Measure of Fiscal Shocks.” NBER.org. National Bureau of Economic Research: July 2007. Web. 16 October 2013. <http://www.nber.org/papers/w13264>
Shedlock, Mike. “Spain Predicts 4.3% Increase in Tax Revenues, Actual Results are 3.5% Drop; Proposed "Solution" is More Tax Hikes.” GlobalEconomicAnalysis.Blogspot.com. Mike Shedlock: 2013 October 16. Web. 16 October 2013..
—.“Spain VAT Hike Largest In History; Stunning Ineptitude Will Make History Books.” GlobalEconomicAnalysis.Blogspot.com. Mike Shedlock: 2012 September 5. Web. 16 October 2013. <http://globaleconomicanalysis.blogspot.com/2012/08/spain-predicts-43-increase-in-tax.html>
—. “VAT Increase Backfires in Spain, Supermarket Sales Plunge 7.2%.” GlobalEconomicAnalysis.Blogspot.com. Mike Shedlock: 2013 October 16. Web. 16 October 2013. <http://globaleconomicanalysis.blogspot.com/2013/10/vat-increase-backfires-in-spain.html>
World Bank. “General government final consumption expenditure (% of GDP).” Data.Worldbank.org. The World Bank Group: 2013. Web. 16 October 2013. <http://data.worldbank.org/indicator/NE.CON.GOVT.ZS>
|Posted on October 14, 2013 at 4:35 PM||comments (0)|
Image courtesy of the Huffington Post.
A few weeks ago, I wrote about the fact that the possibility of default is highly unlikely even in the event that congress does not reach a debt ceiling deal. Still, however, President Obama, apt to play the superficial blame-game and put political pressure on republicans, is still upsetting markets and stability by spreading the complete fallacy that default is very likely without a debt ceiling deal. From the Associated Press:
President Barack Obama says that if Republicans can't resolve the standoff over the debt ceiling and the partial government shutdown, quote, "we stand a good chance of defaulting."
Obama was at a Washington D.C. charity that has been highlighting the effects of the partial government shutdown by inviting furloughed workers to volunteer. The agency, Martha's Table, is also offering assistance to federal employees who are not being paid and need emergency aid.
The visit comes on the 14th day of the shutdown and just three days before the Treasury says Congress must increase the nation's borrowing limit or risk a government default.
The reality is that there is more than enough revenue in order to make debt payments and stave off default. As Brad Plummer of the Washington Post says:
There are big legal and technical challenges, but the numbers might work out. Between Oct. 18 and Nov. 15 the government will bring in roughly $222 billion in taxes and owe roughly $328 billion. But it will only need about $35 billion on hand to make interest payments over that time.
This is why Moody’s has said that it is very unlikely the US will default even if we hit the debt ceiling, as they stated in an October 7 memo:
We believe the government would continue to pay interest and principal on its debt even in the event that the debt limit is not raised, leaving its creditworthiness intact. A debt limit restricts government expenditures to the amount of its incoming revenues; it does not prohibit the government from servicing its debt. There is no direct connection between the debt limit and a default.
However, if one were to listen solely to what President Obama has been saying in his quest to justify his refusal to negotiate at all with republicans, one would think default were certain. As he said last week, “We're not going to pay a ransom for America paying its bills."
It is a completely fallacious and harmful equivocation for President Obama to equate the debt ceiling with the ability to pay bills. It is only at the expense of economic stability and basic honesty for the President to continue to demagogue the language of default so unnecessarily—and the only reason he is doing this is to justify the weeks of harmful dithering to even sit down with republican leaders. He ought to be honest and stop this grandstanding rhetoric.
That said, President Obama does have one card he could rhetorically President Obama that would be honest; a debt default risks delaying Social Security, veteran’s benefits, military pay and other mandatory payments even if default is avoided. According to the Bipartisan Policy Center, this is what those delays could look like:
That said, at least some of these delays could be avoided. In total, those delays amount to a total of $122 billion in spending, while the US government in that time would collect $222 billion in revenue. Thus it is still theoretically possible to make all the payments, the problem comes in timing and the legality and technical difficulties of the treasury’s computer systems.
Still, if Senate Democrats, Republicans, and President Obama truly care at all about avoiding default, they could pass the Full Faith and Credit Act which would “[r]equires the Secretary of the Treasury, in addition to any other authority provided by law, to issue obligations to pay with legal tender…the principal and interest on U.S. obligations held by the public, or held by [Social Security Funds]” if a deal is not made. It is interesting that despite the shallow emotional appeals regarding default and social security checks from the President, it has only been passed in the Republican-controlled house and not even discussed by the President.
Others are still making doomsday predictions about macroeconomic growth in the event of a failure of a debt ceiling deal even without a default. For example, Paul Krugman of the New York Times claims that the reduction could be 10% of GDP:
[B]ecause the Federal government would be forced into huge spending cuts (Social Security checks and Medicare payments would surely take a hit, because there isn’t that much else). We’re looking at something like 4 percent of GDP, which given fairly standard multipliers would imply an eventual contraction by 6 percent.
Except that standard multipliers are wrong — it would be much, much worse. I haven’t seen anyone making this point, but it’s very important.
Standard estimates of the effects of cuts in government spending take into account the role of the federal government as an automatic stabilizer: the deficit rises as the economy shrinks, mainly because tax receipts go down but also because safety-net spending goes up.
(The actual minimum amount necessary to cut is 1.7%, not 4% of GDP according to Goldman Sachs, but who’s counting?) Thus, Krugmans’ argument follows, spending falls in order to meet revenue, which reduces GDP growth and with it revenue rendering further spending cuts necessary. That necessarily results in a decline in GDP as government spending is a definitional component of GDP growth; the equivocation that comes in these debates is whether those spending cuts impact private growth, which rest on how big the fiscal multiplier is. The truth is, beyond the plain arithmetic difference in spending, economists do not know how much cuts will impact GDP growth; in fact, there is ample evidence to suggest it is much smaller than even than even the standard multipliers are—and possibly even non-existent or contractionary (meaning cutting spending is good for GDP growth) in the US. As Krugmans’ doomsday prediction rests essentially on a faulty premise, it falls apart.
Regardless of all the hypotheticals and demagoguery, the fact remains that a deal is still most likely to be reached by Thursday—which only lends further into the question of why President Obama is continuing the default demagoguery.
Associated Press. “Obama: Without deal 'good chance of default'.” News.Yahoo.com. Associated Press: 14 October 2013. Web. 14 October 2013. <http://news.yahoo.com/obama-without-deal-good-chance-default-164628182--finance.html>
Bump, Phillip. “Obama: 'I Apologize' for Constant Crises, but We Can't 'Make Extortion Routine'.” AtlanticWire.com. The Atlantic Group: 8 October 2013. Web. 14 October 2013. <http://www.theatlanticwire.com/politics/2013/10/watch-live-obama-addresses-government-shutdown/70310/>
Krugman, Paul. “Automatic Destabilizers.” NYTimes.com. New York Times: 10 October 2013. Web. 14 October 2013. <http://krugman.blogs.nytimes.com/2013/10/10/automatic-destabilizers/?>
Montgomery, Lori. “Moody's offers different view on debt limit.” WashingtonPost.com. Washington Post: 7 October 2013. Web. 14 October 2013. <http://www.washingtonpost.com/blogs/post-politics-live/liveblog/live-updates-the-shutdown-4/?hpid=z2#c1e3ada3-dc00-41d8-92cb-327c5c814d82>
Pumbler, Brad. “Hitting the debt ceiling would be terrible even if we didn’t default.” WashingtonPost.com. Washington Post: 14 October 2013. <http://www.washingtonpost.com/blogs/wonkblog/wp/2013/10/14/hitting-the-debt-ceiling-would-be-a-disaster-even-if-we-didnt-default/>
Ro, Sam. “GOLDMAN: If The Debt Ceiling Isn't Raised And The Treasury Runs Out Of Cash, Then Say Goodbye To 4.2% Of GDP.” BusinessInsider.com. Business Insider, Inc.: 6 October 2013. Web. 14 October 2013. <http://www.businessinsider.com/goldman-sachs-on-failure-to-raise-the-debt-ceiling-2013-10>
|Posted on October 12, 2013 at 7:00 PM||comments (0)|
Image courtesy of Pareto Logic.
Much attention has been written about the delays, glitches, rate hikes, and general cacophonic disaster that has been the rollout of the Affordable Care Act. However, possibly the most harmful failure of the rollout thus far (besides possibly the rate hikes) was recently highlighted the Inspector General of the Health and Human Services department: that delays in privacy protections may result in the government accidently exposing Americans’ private health and financial information to hackers and frauds.
According to Gloria Jarmon, the Deputy Inspector General of the HHS, “several critical tasks remain to be completed in a short period of time…If there are additional delays in completing the security authorization.” In fact, Jarmon says that the Centers for Medicaid and Medicare Services (CMS) did not put up “security controls needed for the security authorization decision” when exchanges were launched on October 1.
The controls and authorization from the CMS would ensure that the exchanges were acting within the Privacy Act of 1974, which prohibited government officials from sharing any private information of American citizens, as mandated under the Federal Information and Security Act of 2002 (FISMA) which requires the executive branch to put up safety guards to protect Americans’ information from security breaches and misuse. ObamaCare allows for such instances by allowing seven agencies—the IRS, HHS, Department of Homeland Security, Veterans Health Administration, Peace Corps and Office of Personnel Management and Department of Defense—to have access to a massive “data hub” from the exchanges. FISMA requires the CMS to put in the security guards before the exchanges can even legally operate.
However, as Jarmon says, the CMS did not implement those security guards. In fact, the CMS delayed their Security Authorization Decision by twenty-six days. In March they predicted it would take fifty-one days in order to review all policies to implement the authorizations necessary to authorize the decision; they now plan on doing the reviews in only ten. The delay of the decision comes despite the fact that almost every other report necessary to make the authorization have been delayed by as men as seventy days.
The result could be a massive leak of Americans’ private healthcare and financial information, exposing sensitive information to hackers, frauds, identity thieves, and criminals, which would be a complete disaster for basic civil liberties and basic financial security of the American people. It also means that the exchanges are operating in violation of the law.
We will preserve the privacy of personal records and protect confidential or privileged information in full accordance with federal and State law. We will not sell your information to others. Any information that you provide to us in your application will be used only to carry out the functions of Maryland Health Connection. The only exception to this policy is that we may share information provided in your application with the appropriate authorities for law enforcement and audit activities.
The policy also says any email correspondence with the exchange becomes a matter of public record, and may be shared with the public:
If you send us an e-mail, we use the information you send us to respond to your inquiry. E-mail correspondence may become a public record. As a public record, your correspondence could be disclosed to other parties upon their request in accordance with Maryland’s Public Information Act.
Given the long history of privacy abuses from the NSA, it seems doubtful that our private information can be protect under these exchanges. Illegal sharing of Americans’ private information seems almost certain. Thus the question becomes why are the exchanges going public when they clearly are not able to protect basic privacy rights of Americans’ sensitive information as they are legally obligated to? The answer is as simple as it is ridiculous: the Obama Administration knew that there would be far more politically perverse reactions to a delay of the exchanges if they had. Thus they decided it would be better to allow Americans’ information to be possibly shared with frauds and identity thieves then ensure the exchanges are actually within the scope of the law.
On the merits of policy, if Americans’ rights to privacy are valued at all, Obama should be willing to delay the exchanges at least until the CMS can issue an honest authorization decision. However, once again this administration is placing their political interests above the basic rights of the American people.
Beir, Jeryl. “Obamacare Marketplace: Personal Data Can Be Used For ‘Law Enforcement and Audit Activities’.” WeeklyStandard.com. Weekly Standard, LLC: 8 October 2013. Web. 12 October 2013. <http://www.weeklystandard.com/blogs/obamacare-marketplace-personal-data-can-be-used-law-enforcement-and-audit-activities_762237.html>
Roy, Avik. “HHS Inspector General: Obamacare Privacy Protections Way Behind Schedule; Rampant Violations Of Law Possible.” Forbes.com. Forbes, LLC: 7 October 2013. Web. 12 October 2013. <http://www.forbes.com/sites/theapothecary/2013/08/07/hhs-inspector-general-obamacare-privacy-protections-way-behind-schedule-rampant-violations-of-law-possible/>
|Posted on October 4, 2013 at 6:40 PM||comments (0)|
Department of Treasury. Image courtesy of the University of North Carolina.
With the government shutdown, political theatrics in this nation are at their worst. However, the shutdown itself is not the only event full of demagoguery in the realm of political theater, superficial political hacks are also completely overdramatizing what will happen if we hit the Debt Ceiling, which is expected to happen on October 17. Many have claimed that hitting the debt ceiling will inevitably result in default, which would result in extreme economic calamity. Out of this comes the superficial blame-game wherein they claim that republicans are being reckless children by playing with the “full faith and credit” of the US.
Key Payments Necessary to avoid Default. Image Courtesy of the Bipartisan Policy Center.
Meanwhile in reality (a universe separate from the superficial, intellectually impoverished realm of the political circus), not having a deal on October 17 would not necessarily result in default. The answer which defies the conventional sophistry which is unfortunately called wisdom is simple: the US, even without borrowing, has plenty of cash from tax receipts alone. According to the Bureau of Fiscal Services, the US paid $420 billion in total debt payments in fiscal year 2013, about $35 billion per months. Meanwhile, total revenues per month, according to the Department of Treasury, is about $250 billion. The US could make interest payments based off incoming tax revenue on hand alone, as the image below shows.
Monthly Revenue always outpaces monthly debt payments, showing US could hit debt ceiling without necessarily defaulting. Data from the Department of Treasury.
Most analysts do not believe there will be a default. For example, Ajay Rajadhyaksha, Co-Head of FICC Research at Barclays, says “Our position remains that the debt ceiling will be raised in time. But clients have now started asking ‘what-if’ questions as October 17 nears.” He points out that between when the US hits the debt ceiling on October 17 and the first payment on October 31, the US will have $100 billion on hand from tax revenues while the payment is only $6 billion. If it does come to that, then the Treasury Department will institute delayed payments, meaning they will make no payments in a day until they have the cash on hand. Debt payments can be prioritized, according to the Bipartisan Policy Center, in the Treasury’s computer systems. This means that if a deal is not made in time, it will be on the administration’s hands as to whether they make debt payments a priority; a default would happen if and only if President Obama refuses to make those payments.
One may ask why there is even talk of shutdown in the first place since we can even hit the debt ceiling and avoid default. The answer relates back to the superficial demagoguery of political theatrics; President Obama and Senate Democrats want to dramatize the effects of a delay to put pressure on Republicans to compromise. If they can tell the lie that a lack of debt ceiling deal will inevitably lead to default enough, it will politically be perceived as true and then the ball is pushed into the Republicans’ court.
The only reason there would be a default would be if President Obama believes he can pin enough of the blame on the Republicans by controlling the narrative, which he is far better at then Republicans putting him at an advantage. That said, a default would be horrendous; as banks such as JP Morgan and Bank of America are bondholders, the shock would hit Wall Street causing a panic and bank run that would make the crash in 2008 look like an informal rehearsal and international markets would lose faith in the US dollar resulting in a global economic panic; therefore, it is very unlikely Obama would pull the lever.
A lack of deal by October 17 would still be a negative outcome; the US runs monthly deficits of around $150 billion, which is why borrowing is necessary. Therefore, serious cuts in discretionary spending would be necessary if it came to no deal which would be politically unpalatable for both sides. From the perspective of the Republicans, as President Obama has a greater authority at controlling the political narrative, it is of absolute political necessity to get a deal; for Democrats, who have no ideological interest in cutting spending, they want one as well. Thus it is fairly certain a deal will be reached.
However, Republicans still want some degree of austerity in that bill because, as I laid out last week, austerity is necessary for long-term growth. That is why this shutdown is actually optimal given the political reality, it makes Democrats more likely to accept a deal with substantive austerity, and Republicans more likely to hitting the debt ceiling. In a political atmosphere where one party refuses to face economic reality and cut spending and the other refuses to face political reality and stop trying to force every aspect of their agenda through everything they do, it forces them to actually make a deal.
There is one thing congress can do in an attempt to force President Obama to avoid default; pass the “Full Faith and Credit Act,” HR 807. According to the Library of Congress summary, the bill “[r]equires the Secretary of the Treasury, in addition to any other authority provided by law, to issue obligations to pay with legal tender…the principal and interest on U.S. obligations held by the public, or held by [Social Security Funds]” if a deal is not hit. It is not only economically possible, but necessary for this bill to pass; in Fiscal Year 2013 funding for the Social Security Administration and Debt Payments were $1.28 trillion compared to $2.7 trillion in receipts. HR 807 passed the house last May, putting pressure on Harry Reid and the Senate to pass it to ensure no default.
Even though default is almost certain not to happen, the talk of it is still generating uncertainty in markets. For example, Bank of America strategists pointed out that Treasury Bill yields are rising already thanks to fears of default, as made evident by this chart:
Image courtesy of Market Watch.
That uncertainty is harmful to the economy, and it originates thanks to the demagoguery from the political theatre. Therefore, that drudgery needs to stop; the Senate needs to pass the Full Faith and Credit Act and Obama needs to announce now that he will prioritize debt limits and stop his harmful demagoguery and threats of default to reduce uncertainty. Most importantly, Republicans need to stop pushing every aspect of their agenda in every deal and Democrats need to recognize the reality that the government needs to be cut. Default is not a necessary result of a lack of debt ceiling deal; however, uncertainty is a necessary result of the misinformation and superficial political theatrics of the White House.
Bipartisan Policy Center. “Debt Limit Analysis.” BipartisanPolicyCenter.org. Bipartisan Policy Center: September 2013. Web. 4 October 2013.<http://bipartisanpolicy.org/sites/default/files/Debt%20Limit%20Analysis%20Sept%202013.pdf>
Bureau of Fiscal Service. “Monthly Treasury Statement.” FMS.Treas.gov. US Department of Treasury: 31 August 2013. Web. 4 October 2013. <http://www.fms.treas.gov/mts/mts0813.pdf>
Bureau of Public Debt. “Interest Expense on the Debt Outstanding.” TreasuryDirect.gov. US Department of Treasury: 4 October 2013. Web. 4 October 2013. <http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm>
Eisen, Ben. “Fears the debt ceiling won’t get raised start appearing in bond markets.” MarketWatch.com. MarketWatch, Inc.: 2 October 2013. Web. 4 October 2013. <http://blogs.marketwatch.com/thetell/2013/10/02/fears-the-debt-ceiling-wont-get-raised-start-appearing-in-bond-markets/>
US House. “Full Faith and Credit Act.” Thomas.LOC.gov. Library of Congress: 13 May 2013. Web. 4 October 2013. <http://thomas.loc.gov/cgi-bin/bdquery/z?d113:HR00807:@@@L&summ2=m&>