As we approach another faux money crisis, this time over the debt ceiling, a few thoughts to help people understand what’s going on … and what isn’t going on:
1. Every year, the United States raises X amount of dollars through taxes and other means. At the same time, it places orders for goods and services, ranging from tanks to office supplies to Medicare payments, for Y amount of dollars. If X and Y are equal, the budget is balanced. If X is larger than Y, the budget is in surplus. If Y is larger than X, the budget is in deficit.
2. If the budget is in deficit, the US government has four choices in how to proceed. It can cut its orders (it can buy fewer tanks, office supplies, Medicare payments, etc.). It can raise its taxes to meet its orders. It can borrow money to cover the difference between tax receipts and orders. Or it can do some combination of all four. That’s it.
3. For most of the last 30 years, the budget has been in deficit. For most of that time, the United States has chosen to borrow money to cover the gap between taxes and orders, rather than raising taxes or cutting orders or both.
4. Notably, the United States buys much of what it buys (Y) on what amounts to credit: vendors provide office products and other goods and services to the United States today in return for a US promise to pay for those goods later.
5. The constant borrowing of money year after year after year has left the United States with an accumulated debt of $16+ trillion. Which is a lot of money.
6. Some years ago, in an effort to shame itself into not borrowing money forever and ever amen, Congress passed a law creating something called the “debt ceiling.” This is the maximum amount of money the United States is to be allowed to borrow. The idea was that if the Congress had to explicitly vote to raise the debt ceiling, it would be embarrassed and would choose to cut spending or raise taxes or both in order to bring the United States’ budget into balance.
7. This attempted shaming into good economic behavior has never really worked, regardless of whether Democrats or Republicans are in charge. This is mostly because the programs the US spends its money on are actually pretty popular (for the most part), and so people don’t really want them cut even as they refuse to pay higher taxes to pay for these goods. As a reminder, the United States spends almost 80% of its entire budget on seven (7) things: defense (20%), Social Security (20%), Medicare (13%), Medicaid (7%), “welfare” (12%), retirement benefits for federal workers (5%), and interest on the debt (5%). Everything else—roads, schools, the FAA, the FDA, the National Parks, college loans, everything—comes out of the remainder. Chopping those programs is somewhere between hard and impossible. Rather than raise taxes or cut spending or both, the United States has generally just kept on borrowing and raising the debt ceiling as needed.
8. Recently, Republicans in Congress have decided that the vote to raise the debt ceiling affords them a chance to force the United States to reduce its spending. Essentially, they are refusing to allow the United State to borrow more money (which requires raising the debt ceiling) unless the United States reduces its purchases of goods and services.
9. One problem with this Republican demand is that, per point 4, much of what the United States buys it buys on credit. Accordingly, vendors have already provided various goods and services to the United States and are awaiting payment … payment which will come only if the United States borrows money (and thus necessitates raising the debt ceiling). In other words, the United States has already received the good or service. The question is: will it pay for it? If the US fails to borrow money to pay for goods and services it has already received, no one will provide the US with any goods or services (or loans) on credit … which, given that we borrow 40% of the money we spend these days, means that we’d have to cut 40% of our budget instantly.
10. Another problem with this Republican demand relates to point 7: the programs that would be cut are quite popular, at least for the most part. While everyone imagines someone else’s program will be cut while theirs will be saved, as a practical matter that can’t happen if cutbacks happen in the 40% range.
11. On the other hand, nothing else has worked to force political leaders and all the rest of us to accept that we either have to want less, or pay more taxes, or both.
See? It’s easy. Just square the circle and solve all of America’s budget problems.
Have fun. And if you figure it out, please do let the rest of us know!
What’s in the fiscal cliff deal? From The National Journal:
- Higher taxes on individuals earning $400,000 and on families making $450,000 or more. Under that threshold, the Bush-era tax cuts will be permanent for all but the wealthiest households. The $450,000 threshold for families is a significant increase from Democrats’ initial proposal to raise taxes on Americans making $250,000 or more, but it is lower than Republicans’ earlier proposal to raise taxes on households making $1 million or more.
- Higher tax rates on capital gains and dividends for wealthier households. Taxes on capital gains and dividends will be held at their current levels of 15 percent for individuals making less than $400,000 and households with income of less than $450,000. They will rise to 20 percent for individual taxpayers and for households above those thresholds.
- Automatic spending cuts delayed for two months. The “sequester,” which would impose steep, across-the-board cuts to domestic and defense programs, will be delayed for two months.
- One-year extension to unemployment insurance. Emergency unemployment benefits will be extended for a year. The extension was a priority for President Obama and congressional Democrats.
- One-year “doc fix.” The measure will put off scheduled cuts in physician payments under Medicare. In the absence of an agreement, the payments were going to be reduced by 27 percent in January.
- Nine-month farm bill extension. Breakfast lovers, rejoice: A much-feared spike in milk prices, dubbed the “dairy cliff” because it was also set to kick in abruptly on Jan. 1, will be averted through a nine-month extension of certain portions of the farm bill.
- Personal exemptions phased out for individuals making over $250,000. Personal exemptions will be phased out and itemized deductions will be limited for taxpayers making over $250,000 and families earning more than $300,000.
- 40 percent estate tax. The estate tax will rise to 40 percent from its current 35 percent level, with the first $5 million in assets exempted. Democrats had earlier sought a higher increase to 45 percent and a lower exemption of $3.5 million.
- Permanent fix to the Alternative Minimum Tax. The alternative minimum tax was levied to ensure the wealthiest Americans paid a fair share of taxes. It was not indexed for inflation but is usually “patched” annually to prevent an increasingly large swath of middle-class Americans from being caught in its net. As part of the fiscal deal, the AMT will be permanently indexed to inflation.
- Tax breaks for working families. The deal includes five-year extensions of the American Opportunity Tax Credit, which can be claimed for college-related expenses; the Child Tax Credit; and the Earned Income Tax Credit, which is a refundable income-tax credit for low- to moderate income working Americans.
- Business tax breaks. The Senate Finance Committee passed a package in August that tackled a variety of routinely expiring tax provisions known as extenders. These popular tax provisions include breaks for research and development. That package passed as part of the broader cliff deal.
- Congressional pay freeze. President Obama recently authorized a congressional pay raise in a move that angered many congressional Republicans. Under the New Year’s cliff measure, members of Congress won’t see their pay increase.
By the way, this pretty much all proves no one’s really serious about “fixing” the debt … and why would they be? “Fixing” the debt means cutting benefits to real people (i.e., voters) TODAY. It means raising taxes on real people (i.e., voters) TODAY. All in return for a “fix” that may or may not happen a LONG TIME FROM NOW.
Does anyone take massive pain today in order to potentially gain something well in the future, especially when the pain you suffer today may well be fatal (to your political career)? At least, does any sane person do this?
Of course they don’t.
This deal almost certainly guarantees increases in the deficit going forward, not paying it off. The Bush tax cuts were, like so much of the Bush presidency, a disaster for America, and the fetishization of them today is moronic. But that didn’t stop lots of people from calling for making them “permanent” (whatever that means in DC) in this deal, did it?
See you at the next crisis (over the debt ceiling) in two months. Not a damn thing got settled with this deal … nor was there any intent to settle anything. The game continues.
- -6 Obama’s net favorability, as of this month
- -7 The Democratic Party’s favorability
- -25 The Republican Party’s favorability source
» Why no love for the GOP? Over the last six months, everybody—Obama, Democrats, and Republicans—has seen a net drop in their approval ratings, but Republicans are clearly the most hated of the bunch. This is probably due to a combination of factors: Paul Ryan’s budget proposal, Scott Walker’s anti-union antics in Wisconsin, and the GOP’s handling of the debt ceiling debate were all high-profile issues that attracted (mostly) negative attention to the GOP. Whatever the cause, there’s one thing we can glean from these results: Democrats seem to be out-messaging Republicans in 2011. Whether or not this can carry Obama to reelection amidst a horrible economy remains to be seen.
– We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.
– We have also removed both the short- and long-term ratings from CreditWatch negative.
– The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.
– More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
– Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.
– The outlook on the long-term rating is negative. We could lower the long-term rating to ‘AA’ within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
Members of both political parties should read that fifth para and lose fucking sleep over it until they’re out of fucking office.
Or they can stop dicking the fuck around and fix this fucking shit.
Republicans aren’t just radicalized, aren’t just pursuing an extreme agenda, and aren’t just allergic to compromise. The congressional GOP is also changing the very nature of governing in ways with no modern precedent.
Welcome to the normalization of extortion politics…
Republicans effectively tell the administration, over and over again, that the normal system of American governance can continue … just as soon as Democrats agree to policy changes the GOP can’t otherwise pass.
The traditional American model would tell Republicans to win an election. If that doesn’t work, Republicans should work with rivals to pass legislation that moves them closer to their goal. In 2011, the GOP has decided these old-school norms are of no value. Why bother with them when Republicans can force through policy changes a series of hostage strategies? Why should the legislative branch use its powers through legislative action when extortion is more effective?
And then there are the reported terms of the deal, which amount to an abject surrender on the part of the president. First, there will be big spending cuts, with no increase in revenue. Then a panel will make recommendations for further deficit reduction — and if these recommendations aren’t accepted, there will be more spending cuts.
Republicans will supposedly have an incentive to make concessions the next time around, because defense spending will be among the areas cut. But the G.O.P. has just demonstrated its willingness to risk financial collapse unless it gets everything its most extreme members want. Why expect it to be more reasonable in the next round?
In fact, Republicans will surely be emboldened by the way Mr. Obama keeps folding in the face of their threats. He surrendered last December, extending all the Bush tax cuts; he surrendered in the spring when they threatened to shut down the government; and he has now surrendered on a grand scale to raw extortion over the debt ceiling. Maybe it’s just me, but I see a pattern here.
Did the president have any alternative this time around? Yes.
Paul Krugman, The President Surrenders - NYTimes
“Huge win for Obama: Across the board spending cuts in trigger would not take effect until 2013 — when Bush tax cuts expire.” - @StevenTDennis
Krugman writes that Obama “surrendered last December.” But as I wrote here, Obama was the clear winner during that lame duck session. And it took some time for that to become the consensus. Steven Dennis’ tweet might be an early indication that the negative reaction to Obama’s seeming capitulation could be overstated. It might be a good idea to wait a day, week or probably much longer to lay judgment.