Debt Ceiling 201

This is the follow-up on the short post about why reaching the debt ceiling wasn't the rosy picture painted by some Tea Party wishful thinkers. I said that there was 1) no legal framework for prioritizing government payments (and thereby avoiding default on debt service) and 2) no practical mechanism to do it at this time.

No Legal Framework

The US government hasn't intentionally defaulted since FDR's presidency. Even then, that was a planned default, which is not what the Tea Partyers want. They want prioritized payments of US obligations to avoid default and do the least harm to the country.

No such prioritization has been established, so this is new territory. There aren't laws laying out how to do this. In the absence of such laws, who will decide what the priority should be? That's a huge constitutional question. Does the president unilaterally decide since he's the executive? Does the Congress decide? Can Congress impeach the president for making unilateral decisions? Can Congress impeach the president for refusing to prioritize payments? Will the Tea Partyers who want the prioritization of payments guarantee that they won't call for Obama's impeachment over the decisions he makes in this regard? I sure haven't heard anyone making such a promise.

Will Congress quickly pass the legal framework required? HAHAHAHAHA.

No Practical Mechanism

All the accounting programs, sign-offs, clearances, etc. that it takes for the government to send money to the correct people are probably much more complex than anyone's monthly disbursements. How readily can that all be changed to send out prioritized payments? Not readily, I'd bet. There would need to be an entire design/implementation cycle with the requisite planning, programming, testing, bug-fixing, and retesting.

Political Motivation (1)

Now that the practical considerations are out of the way, let's consider the motivations of the parties regarding prioritized payments. For Tea Partyers, the motivation is to prevent default, incur no new debt, and pay the most important government expenses. However, there isn't strong agreement on what the most important government expenses are. That's one reason not to leave the decision-making unilaterally to the president, just in case he's a scum-sucking, pinko, socialist bastard.

So those who support prioritized payments will probably also want a big say in determining the priorities. But again, there is no legal framework at this time for that. Congress would need to follow the usual law-making procedures--but the chance that the House, Senate, and president will pass one prioritization plan is so close to zero, it is effectively zero. So there will be no prioritization in established law.

I've never heard any proponent of prioritization discuss this wrinkle in their plan. I'm guessing that they gloss over that impediment, and imagine that their priorities are so obvious that they'll be followed. Then, reaching the debt ceiling is equivalent to immediately going to a balanced budget. By refusing to raise the debt ceiling, they achieve one of their biggest policy goals. And they didn't even have to pass a balanced budget law or amendment. Hooray! No wonder they gloss over so many details.

So if priorities could be established, Tea Partyers have another way to achieve a major goal--just don't ever increase the debt ceiling. That's a lot of added leverage for them in any budget negotiation.

Political Motivation (2)

What is the political motivation of the Democrats, including the president? They aren't for an immediate balancing of the budget. They aren't for establishing spending priorities at a much lower budget target point. They don't want the Tea Party to have greater leverage in budget talks. Their motivation is to make the debt ceiling as painful as possible, so that the GOP will always back down.

In this, they have history on their side because the debt ceiling has always been increased. Neither Congress nor the president has ever stepped over that line, because it would be too catastrophic a move to make. The US government would go into default, which would destabilize the world economy and probably cause a worldwide depression.

The Democrats have no reason to make the debt ceiling less scary. That hands leverage to those who want severe budget cuts, which are not the Dems. So there's no way that the Dems will pass any legislation that prioritizes payments in the event of reaching the debt ceiling.

Wonderland Scenario

Maybe the next time the GOP controls the House, Senate, and presidency, they can pass the legislation and build the accounting mechanisms to implement prioritized payments. That will be somewhere on their list of must-have legislation including the repeal of Obamacare, rolling back regulation, closing the EPA, block-granting Medicaid or just getting rid of it, outlawing abortion, and ushering in the permanent GOP majority.

Maybe, like Rip Van Winkle, I'll go to sleep for two decades, and then wake up to a US where all this has happened. Somehow, I doubt it, but we'll see. Nighty-night!

Come on, it's simple.

Image: archiscene.net

Short: Tax increases for everyone!

Here's a good article outlining why the GOP should let the country go over the fiscal cliff. This is the reason in one sentence:

"Republicans will never be able to build a political case for less spending if most Americans are insulated from the cost of that spending."

That's a very "tough love" approach, and maybe it's the right one. I've been thinking about political gamesmanship and leverage, but this is first principles. If people want it, they should pay for it.

Of course the article makes it sound like Obama invented deficit spending. It doesn't mention Bush cooking the books, keeping wars off-budget, or anything like that. However, the article points out that extending the Bush tax cuts was a terrible thing to do in 2010, and maybe it handed the election to Obama.

Perhaps I should check whether the author, Avik Roy, told Romney that extending the Bush tax cuts is a terrible idea. Hold on a minute...

Well, no, he didn't suggest this until  Dec. 22. In fact, during the GOP convention, Roy wrote that the GOP wasn't wrong to resist tax increases, but deserves "a meaningful proportion of the blame for the fiscal situation that Obama inherited and then made worse."

This is another lesson that everyone wants tax cuts on their watch, and no one wants to be the grinch or deliver the bill. However, it also makes me want to go over the fiscal cliff in order to find out if people are really willing to pay the full cost of government. I want to know that!

How much government do I really want?

Image: mollygalbraith.com

Postscript. Of course, there may be some important reasons not to go over the cliff, like we really don't need to push our economy into another recession quite yet. Let's think about the greater good, not just partisan advantage, OK? Do I know the best course. Uh... no. So maybe it's best to be cautious. A bit of a cliff now, and more later this year if we don't have a tummy ache recession.

Spending and the danger in a positive-feedback loop

I don't know where I read this idea originally, perhaps The Economist. There is a major problem in spending financed by borrowing. In most spending, you have to work hard for the money, so you balance the pleasure of spending with the pain of earning. But with borrowed money, the connection to the pain or hard labor is lost, so you spend more freely.

With governments, the pleasure is giving constituents what they want without the constituents paying directly. But the pain comes in the form of taxes. With borrowing, the pain of taxes is reduced, so the pleasure of government spending is left without enough balance. Because the pain is artificially reduced, the demand for government spending swells.  With swelling demand, the government tries to borrow even more. That again reduces the pain of taxes to support the spending, the people get their pleasure (services) without the full pain, and they want even more.

This is a positive feedback loop, which is an extremely dangerous thing in nature. It's at the heart of the atomic bomb, the mood disorder of mania, and financial bubbles. It is inherently unstable because ramping up during iteration after iteration causes the system to use up its resources very fast.

 Positive Feedback Loop = Unrestrained Demand = Bubble

Most of nature runs on negative feedback loops, which keep systems stable. Spending with the necessity of earning or taxing is in this category. We've been in a positive feedback loop in our government spending for too long. We need to get back to the more natural and more sustainable situation where we have equal part pain for our governmental pleasures.

Negative Feedback Loop = Balanced = Stable

Substitute "taxes" for "energy prices."

For "slower growth," think "slower growth of government spending."

Tax Week Finale: My budget proposal

** Warning - Depressing Assessment Ahead. You may not want to read this. **

I have a straightforward goal: I want a balanced federal budget. So I looked at our current horribly unbalanced budget (where we collect $2.2 trillion and spend $3.5 trillion) and I crunched a lot of numbers. The news is very bad, as you can expect when you are overdrawn $1.3 trillion dollars.

 Revenue

Using a baseline of no income growth since 2009, I want to increase revenue to about $2.44 trillion. Due to job losses, payroll taxes will go down. We'll need to raise $1.25 trillion in income taxes, and I'd like to do it with a flat tax. As I wrote before, I think we should tax all types of income in the same way--no special rates for different kinds of income, like the bogus 15% rate on capital gains. I decided that on principle earlier, and now it saves me a shitload of number-crunching. My numbers are based on IRS statistics for 2009. By the way, personal income taxes totaled $953 billion in 2009.

Flat Tax Scenario.  Exempting income under $25,000 (adjusted for family size), we'd need a flat tax of 25% on everything above $25,000. That's so steep that it may triple income taxes on people making around $40,000, so I won't go there.

Take Two -- Mostly Flat.  My second attempt is 18% on income between $25,000 and $100,000, then 28% on income over $100,000. And all those extra deductions that help you lower your taxable income--gone except for exemptions based on family size and disability. Under this plan, my own income tax would double. I, like everyone else, will have to take the medicine.

If you think we should raise taxes much higher on upper-income folks, perhaps to 40 or 50%, please consider that many can move out of the country, and may choose that option to escape such a high rate.

These tax increases are harsh after the marshmallow-soft taxes of Bush, but my plans for spending are even more drastic. They have to be, or taxes are going up even more. I really don't want to triple my income taxes or yours.

Spending

We have to downsize our federal spending by 30%, or $1 trillion a year. That means cuts everywhere. Let's see, cut:

• Defense by 40%.............................................$275B
• Social Security (must do it) by 15%................$105B
• Medicare/Medicaid by 20%...........................$159B
• Interest on the national debt ...........................$    0B    (Can't cut)
• Mandatory by 40% .......................................$166B    (Mandatory?)
• Discretionary by 45%.....................................$295B

• Total............................................................$1000B

Note that these are yearly amounts, not the 10-year totals that make a plan look better than it is.

Implementation

I don't know whether budget contractions and tax increases of this magnitude will send us into a depression. It's certainly a scary prospect. But barring economic cataclysm, I would do the cuts over 4-6 years, and all the taxes increases in the first year. Why? To make a bigger dent in the deficit sooner, while stretching out the job losses due to the spending cuts.
 

Lessons Learned Thus Far

Blame game.  The government, which ran up our debt so much (yes, George W. Bush, I mean you), fucked us up royally. They piled on debt and sent our economy into a tailspin, necessitating even more deficit spending. All the presidents since and including Reagan deserve a fair amount of blame, but Bush deserves the king's portion. Not to exempt Congress (which deserves equal blame with whatever president), Wall Street, businesses, lobbyists, taxpayers, and the electorate.

Burden-shifting.  I'd love to borrow good ideas for increased business tax revenue that can be implemented right away. These savings can somewhat reduce the personal income tax rates. Every $50 billion more in taxes on business (by closing egregious loop holes) gives our households approximately a 1% lower tax rate. Obama's plan has some suggestions. This is real incentive to find others.

Brackets.  The second tax bracket is at $100,000 instead of the usual $200,000 because of the $1.3 trillion pot of taxable income between $100K and $200K. Our deficit is so big that we have to capture considerable extra revenue, and it has to be done there. It's not personal, it's just mathematics.

Net worth. I don't know if this plan is politically feasible (ha ha) or economically sound. I will not be offering any kind of money-back guarantee. It may be a big mistake to come up with this plan, publish this plan, and be so painfully honest about it. If this is necessary to balance our budget, we might prefer default. But even with default, we probably can't avoid changes of this magnitude. I think I should research Argentina and find out how they handled their fiscal crisis.

Obama's plan is more optimistic about how much money can be raised by limiting deductions. His plan shows $70 billion a year, or 42% of what I aim for. I hope he's right, because that would make everything else less painful. One reason to be hopeful is that he has trained monkeys economists working on his plan. But it doesn't have a money-back guarantee either. Sorry folks.

And yes, I know this plan wouldn't have a prayer in Congress. Nothing sensible will, so why should this plan fare any better?

Update: 10/1/11. If you think this post was a waste, please read my defense. Then try doing a budget yourself and put it in the comments. I'd like to see how yours stacks up to mine.