Kevin Drum - July 2011

Why the Debt Ceiling Deal Sucks

| Sun Jul. 31, 2011 8:31 PM PDT
Clockwise from top left: House Speaker John Boehner, President Barack Obama, Senate Majority Leader Harry Reid, and Senate Minority Leader Mitch McConnell.

Marian and I have now been married for 20 years (yay us!), so we went up to LA yesterday to see a show and then stayed over today to have lunch with Mark Kleiman and then watch world No. 84 Ernests Gulbis beat Mardy Fish in the finals of the Farmers Classic at UCLA. Which reminds me—or rather, Mark reminded me: He has a new book out called Drugs and Drug Policy: What Everyone Needs to Know. It's basically a FAQ about drug policy, and it'll only set you back a little over 10 bucks on Amazon. If you're interested in a good primer on the subject, you probably can't do much better.

All of which is a fairly long-winded way of saying that I've been blissfully unaware of the latest idiocy regarding the debt ceiling fight over the past couple of days. But now I'm back, and CNN tells me that we've all agreed on a deal. Hooray. Roughly speaking, it's built around $1 trillion in cuts now and $1.5 trillion in cuts later. The "later" cuts will be negotiated by a super duper congressional committee, and there's a sword of Damocles hanging over their heads to ensure they don't deadlock and end up punting on a deal. It's not yet 100 percent clear what that sword is, but apparently if they don't come to an agreement, or if they do but Congress fails to pass their deal, automatic cuts will take place in the discretionary budget, split 50-50 between domestic cuts and defense cuts. Supposedly, the fact that the automatic cuts affect both domestic and defense spending will be so horrifying to conservatives and liberals alike that they'll support the Super-Duper Congressional Committee's deal. Color me skeptical. There are three possible alternatives here:

  • Compared to the autocuts, the SDCC deal is weighted more heavily toward domestic cuts. In that case, Democrats won't support it. They'll just let the automatic cuts happen instead.
  • The SDCC deal is weighted more heavily toward defense cuts. I wouldn't advise placing any bets on this outcome.
  • The SDCC deal is part cuts and part tax hikes. In that case, Republicans won't support it. They won't trade tax hikes for a bigger Pentagon budget.

Now, sure, maybe they'll cobble something together that looks a little different. But once the dust is cleared away, what other alternatives are there? Compared to the automatic cuts, the SDCC deal will either cut more from domestic spending or else close the deficit partly with cuts and partly with tax increases. That makes it dead on arrival.

It's a shit sandwich no matter how you look at it. And it's a shit sandwich in at least two very specific ways: (1) It means we'll continue to live in a fantasyland that says we don't need any tax increases even though our population is aging and we're plainly going to need higher revenues to support this demographic reality; and (2) we'll continue to live in a fantasyland that says our problems are primarily caused by discretionary spending. This is, of course, exactly the opposite of reality, which means we're going to screw the poor and do nothing serious about the long-term deficit. Nice work, adults.

But hey—this is all very dismal stuff. So here's your reward for reading all the way to the bottom: a fun question to discuss. There are a few liberal pundits out there who believe that a cuts-only deal like this one isn't all that bad. Jon Chait is one of the leading proponents of this theory, and it goes like this: Maybe an all-cuts deal is bad, but by leaving taxes off the table completely it opens the door to letting all the Bush tax cuts expire at the end of next year. Basically, Obama just needs to keep insisting that he'll only sign a bill that extends the middle-class tax cuts1 but allows the tax cuts for the rich to expire. Republicans will flatly refuse to send him such a bill, and as a result all the tax cuts will expire without Obama having to break any promises.

So here's the question: Do you think this is how things will play out? Or alternatively, will Republicans cave in at the 11th hour and send Obama a bill he can sign? Or will Obama cave and end up agreeing to extend all the cuts? My guess is that Obama will stick to his guns on this and Republicans will eventually cave, which means that the middle-class cuts will get extended permanently. Prof. Kleiman, like Chait, thinks Republicans will never, ever agree to throw rich people under the bus and will never send Obama a bill that extends only the middle-class cuts. Thus, the whole Bush package will expire. You can vote in comments on how you think this will play out.2

1Actually, even this set of tax cuts mostly benefits the well-off. But everyone calls them the middle-class cuts, so that's what I'm calling them here.

2This assumes, of course, that Obama wins reelection. If a Republican wins, and Obama lets the Bush tax cuts expire in the final hours of his administration, I assume that the new president will simply pass new tax cuts via reconciliation sometime after inauguration day.

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The Economy in 50 Words or Less

| Sat Jul. 30, 2011 8:42 AM PDT

Every quarter, the Kauffman Foundation surveys a set of economics bloggers about the state of the economy. The full report for the third quarter is here. The summary is below. It seems about right to me.

Friday Cat Blogging - 29 July 2011

| Fri Jul. 29, 2011 12:00 PM PDT

We got Inkblot a new area rug to tear to shreds this week, this time in bright olive green. Sets him off well, don't you think.1 (Naturally we do all our interior decorating with cat complementing in mind.) On the right we have — what? Let's call it experimental catblogging. Domino has a sound she makes that means, "Get down on the floor and play with me." She made it this morning, so I got down on the floor and played with her. This time, however, I had my camera, so I stretched out my arms and took some pictures of her playing with my head. This is one of her favorite activities. Pretty lucky for me, no?

1And very presidential too. He's thinking of using this color for the Oval Office carpet after he wins election next year.

Advice for John Boehner

| Fri Jul. 29, 2011 11:35 AM PDT

Chad Orzel talks to his daughter about the process of creating art:

She went on to explain that the car had been inside the marker, but then she took the top off the marker, and put it on the paper, and the car came out. Which is pretty impressive. She's just about to turn three, and she's already got the Artist-as-conduit-for-something-external line of patter down. I look forward to the next time we get out the Play-Doh, when she'll explain how she looks at a blob of it and then takes away all the bits that aren't an elephant.

Perhaps she could give John Boehner some pointers on how to write a debt ceiling bill. I envision two alternatives:

  • "The debt ceiling bill is inside your pen. Just take off the top and put it on the paper and the debt ceiling increase will come out."
  • "Get a big pile of words and then take away all the words that aren't a debt ceiling increase. Done!"

Either one of those would be better — and more family friendly — than my advice.

Inflating Away the Debt

| Fri Jul. 29, 2011 9:51 AM PDT

Tyler Cowen points today to John Hussman saying something that's been in the back of my mind for a long time but never quite made it onto the blog:

Here in the U.S., [debt held by the public] amounts to about 60% of GDP and rising, due to recent budget deficits of about 10% of GDP annually. This is presently manageable since so much of that debt is of short-maturity and is being financed at very low interest rates.

....Still, it's precisely that short average maturity that makes the debt problematic from a long-run perspective, because it can't be inflated away easily. In the event of sustained inflation, the debt would have to be constantly refinanced at higher and higher yields. Contrary to the assertion that the U.S. can easily inflate its debts away, it is clear that sustained inflation would create enormous risks to our long-run fiscal condition by driving interest costs to an intolerable share of revenues. At that point, any shortfall in GDP growth or government revenues would result in a rapid spike in debt-to-GDP (as Greece and other peripheral European nations are experiencing now). Prior to embarking on an inflationary course, the first thing a government would want to do is dramatically lengthen the maturity of its debts.

This is true, isn't it? I keep hearing repeatedly, from tea partiers and assorted tea party leaners, that the real danger we're running isn't that the United States will literally default on its debt in the future, but that it will try to inflate away its debt. Sort of a soft default, if you will.

But that's not even possible, is it? The vast bulk of U.S. debt matures in three years or less, which means that a bout of inflation would simply raise the cost of borrowing. Virtually all debt holders would roll over their holdings long before inflation had any serious effect on them and the government would gain nothing. On an inflation-adjusted basis, the new debt issued would be about as expensive as the old debt.

So where does this whole "inflating away the debt" meme come from? Is it just the gold bugs, or is it coming from somewhere else too? What's the deal?

Economy Update: Still Sucking

| Fri Jul. 29, 2011 8:54 AM PDT

GDP grew last quarter at a rate of 1.3%. That's pretty sluggish. What's worse, as Matt Yglesias points out, GDP for the previous three years was revised substantially downward at the same time. So to summarize:

  • The Great Recession was worse than we thought.
  • The recovery was slower than we thought.
  • And the economy continues to sputter badly.

To address this, our current plan is to shut down the government and produce economic chaos for no reason whatsoever. Thanks, tea party!

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Why Is Obama Such a Wimp?

| Fri Jul. 29, 2011 7:48 AM PDT

There's a fair amount of armchair psychoanalyzing here, but Bruce Bartlett has an interesting theory today about why President Obama continually thinks that pre-emptive compromise will bring Republicans to the table: it's because he never had the pleasure of negotiating with either the Soviet Union or Big Labor, a pair of opponents who could very quickly disabuse presidents of the idea that nice guys finish first:

Consequently, Obama has really been caught flat-footed by the Tea Party era Republican Party. He believed it would respond positively if he offered it half a loaf on just about every issue.

For example, some 40 percent of the 2009 stimulus legislation consisted of tax cuts even though his economic advisers knew that they would have almost no stimulative effect....Obama offered Republicans another half-loaf by putting forward a health reform plan almost identical to those that they and conservative groups such as the Heritage Foundation had proposed in the 1990s....Last December, he caved in to Republicans by supporting extension of the Bush tax cuts even though there is no evidence that they have done anything other than increase the deficit....Foreseeing that Obama lacked leverage in the debt negotiations that everyone knew were coming, I tried to give him some by explaining why the 14th amendment to the Constitution gave him the authority to disregard the debt limit if the Treasury runs out of cash, as it will next week....But on July 7, the Treasury Department publicly ruled out the idea.

....I think if Obama had the sort of experience that Cold War presidents had in dealing with the Soviet Union or that corporate executives and union leaders had in negotiating labor contracts he wouldn’t have been so naïve about the Republicans, who have never hidden the fact that their only objective is defeating him next year regardless of the cost. It’s not too late for Obama to play hardball, but I fear that it is just not in his nature.

Maybe there's something to this — though I'd note that neither Bill Clinton nor George W. Bush had any experience with communists or union leaders either. My biggest objection, though, is that I'm not sure it would have mattered. If Obama had negotiated with nerves of steel, would he have gotten better deals throughout his presidency? I don't think so. Unlike labor bosses and Soviet bosses, who could be pressured because there were things they wanted that a president could provide, Republicans — and especially tea party Republicans — want nothing that Obama can feasibly give them. If Obama had been tough as nails, they would have followed a path of total obstruction and nihilism anyway. Maybe some details here and there would have changed, but on the whole it just wouldn't have made any difference.

So I guess I'm open to this idea, but not sold on it. Tougher negotiation with centrists in his own party might have moved the needle a bit, but I doubt that Obama ever had any real leverage over Republicans. So, since banging his shoe on the lectern wouldn't have worked, he decided to give compromise a try. It didn't work, but I'm not sure he really lost anything by it.1

1And electorally, it might still be a winner. Obama believes that his reelection depends on votes from independents, and he further believes that independents react well to a conspicuous display of reasonableness. He might be right.

What Republicans Want

| Fri Jul. 29, 2011 2:55 AM PDT
Rep. John Boehner (R-Ohio), the Speaker of the House, addresses the nation about the debt ceiling crisis on Monday, July 25.

It's no surprise that political partisans tend not to like each other. Generally, though—with obvious and famous exceptions aside—the level of personal hostility on Capitol Hill has usually been kept down to manageable levels.

Until now. To a degree rarely seen in the past, Republican policymaking lately seems to have been driven at least as much by pure political venom as it has by ideology or interest-group pressure. House Speaker John Boehner certainly gets this. When he was trying to whip his troops into line to vote for his debt ceiling bill on Wednesday, his pitch was simple: "President Obama hates it. Harry Reid hates it. Nancy Pelosi hates it. Why would Republicans want to be on the side of President Obama, Harry Reid, and Nancy Pelosi is beyond me." That was enough for conservative firebrand Rep. Allen West (R-Fla.). Boehner's plan wasn't perfect, he said in a Facebook post, but "the fact Pelosi, Reid and Obama hate it doggone makes it perfect enough."

And it's not just the debt ceiling. Take cap-and-trade legislation to reduce carbon emissions. As recently as 2008, plenty of Republican leaders were for it. John McCain backed cap-and-trade, and so did Tim Pawlenty. Newt Gingrich even cut a commercial with Nancy Pelosi where he declared to the world that "our country must take action to address climate change."

But then Democrats introduced an actual cap-and-trade bill, and in the blink of an eye it got tarred as "cap-and-tax" and opposition became practically a litmus test for movement conservatives. Republicans couldn't run away fast enough. Gingrich's recent attempt to disown his own words was almost poignant, while Pawlenty's groveling has been all but cringe-inducing. "I just admitted it," he said. "I don’t try to duck it, bob it, weave it, explain it away. I’m just telling you, I made a mistake."

In recent months this has metastasized into all-out war as House Republicans have bombarded a pending appropriations bill with amendments to roll back environmental rules:

Although inserting policy changes into appropriations bills is a common strategy when government is divided as it is now, no one can remember such an aggressive use of the tactic against natural resources.…The unusual breadth of the attack, explained Rep. Mike Simpson (R-Idaho), is a measure of his party’s intense frustration over cumbersome environmental rules.

“Many of us think that the overregulation from EPA is at the heart of our stalled economy,” Mr. Simpson said, referring to the Environmental Protection Agency.

Simpson's suggestion that the EPA is responsible for our parlous economic condition could hardly have been suggested seriously. It's just filler, the kind of thing that gurgles up from the recesses of a politician's mind because they have to say something when a reporter asks what's going on. Grist writer David Roberts gets closer to the truth when he points out that Republicans are even going after a Bush-era regulation that prevents the Defense Department from using fossil fuels that are dirtier than petroleum. The catch? Even the Pentagon doesn't want this rule repealed. "Repeal or exemption could hamper the department's efforts to provide better energy options to our warfighters," wrote Elizabeth King, assistant secretary of defense for legislative affairs.

No matter. Republicans want it repealed anyway. Why? Ideology is probably part of it, as is fealty to coal interests. But that's not the whole story. Repealing it just because it's something Democrats like seems to be part of it too. Welcome to the modern Republican Party.

Gut Check Time for John Boehner

| Thu Jul. 28, 2011 9:29 PM PDT

The big news tonight is that John Boehner has shelved plans to vote on his debt ceiling proposal. Why? Because he couldn't round up enough Republicans to vote for it. A hardcore rump of tea party nihilists is now treating him the same way that he's treated President Obama for the past few months: rejecting every deal offered, regardless of how good it is or how much harm rejection will do to the country.

It would be easy to shed crocodile tears about this, but there's really nothing here to gloat about. It's just undiluted bad news if Congress refuses to raise the debt ceiling. Whether D-Day comes on August 2nd or — thanks to better-than-expected tax receipts — a few days after that, hardly matters. We're not only headed for unprecedented fiscal chaos when it comes, but we're taking a real risk of throwing the country back into recession too. Granted, that's the Armageddon scenario, and things might not turn out that badly in the end. But I'd just as soon not take the chance. Our economy is just too fragile to risk it.

But it's possible — barely — that there's some good news here. If Boehner can't get the tea partiers in the House to support his proposal, and if Harry Reid can't find 60 votes in the Senate for his, then pretty shortly they'll figure out that there's only one way to pass something: forge a compromise that can get substantial support from both Democrats and non-tea-party Republicans. Such a compromise is almost certainly available, and all it takes to get there is for Boehner to be willing to admit the obvious: the tea partiers just aren't willing to deal, period. They want to burn the house down so they can build something better from the ashes. They're insane.

So walk away from the tea partiers. Instead, strike a deal that a hundred non-insane House Republicans and 20 or 30 non-insane Senate Republicans can support. Add that to a majority of the Democratic caucus and you're done. You've saved the country.

It won't be as a good a deal as Republicans could have gotten a month ago. What's more, it would take some guts from Boehner, who might very well be jeopardizing his speakership if he does this. But it will save the country. Surely that's still worth something?

The Cost of Healthcare Reform

| Thu Jul. 28, 2011 2:46 PM PDT

CMS is a government agency that has long offended my OCD sensibilities because it stands for Centers for Medicare & Medicaid Services and really ought to be called CMMS. But today I'll link to them anyway. They've completed a new projection for total national health expenditures through 2020, and it's shown in the chart on the right. The green line shows the old projection and the red line shows the new projection after passage of the 2009 healthcare reform act. Basically, they expect a one-year spike in spending growth in 2014, when most of the law takes effect, followed by slightly lower growth for most of the rest of the decade.

So how does that work out? For the decade as a whole, CMS projected an annual growth rate of 5.7% pre-reform compared to 5.8% post-reform. To put that into dollars, it means that in 2020 our total spending on healthcare will be about $40 billion higher than it would have been without healthcare reform. So what do we get for that money?

In 2014, the Affordable Care Act will greatly expand access to insurance coverage, mainly through Medicaid and new state health insurance exchanges which will facilitate the purchase of insurance. The result will be an estimated 22.9 million newly insured people.

....Out-of-pocket spending is projected to decline by 1.3 percent as the number of people with insurance coverage increases and many services formerly paid for out of pocket are now covered by insurance....The newly insured are expected to consume more prescriptions because of substantially lower out-of-pocket requirements for prescription drugs.

Not bad for only $40 billion! 23 million more people will be covered, out-of-pocket spending will decline, and prescription drugs will be more widely available. All for less than $2,000 per person, which is a considerable bargain.

The White House, of course, thinks that ACA will reduce costs more than CMS suggests. You can read their argument here. But even if it doesn't, CMS is projecting a mighty small price for something that's going to benefit so many.