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“The Debt Ceiling Matters”: House Republicans Are Threatening To Unambiguously Violate The Constitution

The word we keep hearing is “catastrophe.”

“A U.S. Default Seen as Catastrophe, Dwarfing Lehman’s Fall,” screams the headline in Bloomberg Businessweek. “A default would be unprecedented and has the potential to be catastrophic,” says a Treasury Department report issued on Thursday — two weeks before the government is expected to begin running out of cash.

But what does “catastrophic” actually mean in this context? In the summer of 2011, when Republicans refused to raise the debt ceiling unless President Obama caved to their extortionist demands, the same word was bandied about. It scared the political class enough that they kicked the can and avoided a default.

This time around, the need to raise the debt ceiling doesn’t seem to be generating nearly the same concern. Indeed, Tea Party Republicans seem to be almost rooting for the government to default, as if that would somehow bring about the smaller government they so yearn for.

But this is incredibly wrongheaded. A failure to raise the debt ceiling, should it come to that, would likely inflict a different kind of pain than sequestration or even a shutdown of the federal government. It won’t make the government smaller. But it does have the potential to diminish the value of one of America’s greatest assets — the backing of its debt — while throwing the world economy into chaos.

The first point worth making is that the 14th Amendment to the Constitution, which declares that “the validity of the public debt of the United States . . . shall not be questioned,” was added precisely to avoid what is happening now: a faction of Congress using the debt ceiling as a bargaining chip. That basic truth, as Fortune’s Roger Parloff noted in a recent blog post, “ought to weigh very heavily in the minds — and on the consciences — of the House Republican faction that is now unambiguously violating its letter and spirit.”

The second point worth making is that U.S. government debt is the only risk-free asset in the world. That debt undergirds the entire world financial system — precisely because the whole world has such faith in it. There is always demand for U.S. government debt. Almost every other asset you can think of is in some way measured against it. A default would destabilize the market for Treasuries. And that, in turn, would likely destabilize every other asset.

The stock market would fall. Interest rates would rise — meaning, for instance, mortgages would become more expensive just as the housing market is starting to revive. Treasuries themselves would likely have to pay higher interest to investors, which would create a rather sad irony: a default would exacerbate the country’s long-term debt (the very problem the Republicans claim to care about).

Let’s move to the havoc a destabilized Treasury debt would have on the banking system. “The plumbing of the global financial system depends on Treasuries,” says Karen Petrou, a banking expert at Federal Financial Analytics. Remember what happened to Lehman Brothers? As the market lost faith in the company’s ability to meet its obligations, Lehman lost access to the “repo” market, which is the way banks are funded on a short-term basis. Treasuries make up a great deal of the collateral in the repo market. If a default were to cause the repo market to freeze, the entire banking system would find itself in crisis. Meanwhile — more shades of Lehman Brothers — the ratings agencies would likely downgrade Treasuries, forcing money market funds to start dumping government debt.

Painful choices would have to be made. Right now, the Treasury Department says it does not have the authority to pick and choose which creditors to pay. But, in the event of a default, it is hard to imagine that the government wouldn’t make some tough decisions about who should get paid in the short term — and who would have to wait. And, though this would infuriate millions of Americans, bondholders in China would likely get their money ahead of, say, Social Security recipients.

“From a purely cost-benefit analysis,” says Mark Zandi of Moody’s Analytics, “not paying bondholders would wind up costing the U.S. much more than not paying Social Security recipients” — because if bondholders lost faith in Treasuries, it would cost the government billions more in interest payments each year.

During the 2011 debt-ceiling crisis, consumer confidence dropped by 22 percent. When consumer confidence falls, people are less willing to spend and businesses are less willing to hire. That’s how recessions — or depressions — begin, and that may be the most important consequence of all.

For as long as anyone can remember, the ability of the United States government to pay its bills on time has given the rest of world tremendous confidence. At the same time, to have the one asset everyone in the world trusts has given America great advantages.

Why on earth would we ever risk that? Why?

By: Joe Nocera, Op-Ed Columnist, The New York Times, October 8, 2013

October 9, 2013 Posted by | Debt Ceiling, Default | , , , , , , , | Leave a comment

“What We Need Now”: A National Economic Strategy For Better Jobs

Jobs are returning with depressing slowness, and most of the new jobs pay less than the jobs that were lost in the Great Recession.

Economic determinists — fatalists, really — assume that globalization and technological change must now condemn a large portion of the American workforce to under-unemployment and stagnant wages, while rewarding those with the best eductions and connections with ever higher wages and wealth. And therefore that the only way to get good jobs back and avoid widening inequality is to withdraw from the global economy and become neo-Luddites, destroying the new labor-saving technologies.

That’s dead wrong. Economic isolationism and neo-Ludditism would reduce everyone’s living standards. Most importantly, there are many ways to create good jobs and reduce inequality.

Other nations are doing it. Germany was generating higher real median wages until recently, before it was dragged down by austerity it imposed the European Union. Singapore and South Korea continue to do so. Chinese workers have been on a rapidly-rising tide of higher real wages for several decades. These nations are implementing national economic strategies to build good jobs and widespread prosperity. The United States is not.

Any why not? Both because we don’t have the political will to implement them, and we’re trapped in an ideological straightjacket that refuses to acknowledge the importance of such a strategy. The irony is we already have a national economic strategy but it’s been dictated largely by powerful global corporations and Wall Street. And, not surprisingly, rather than increase the jobs and wages of most Americans, that strategy has been increasing the global profits and stock prices of these giant corporations and Wall Street banks.

If we had a strategy designed to increase jobs and wages, what would it look like? For starters, it would focus on raising the productivity of all Americans through better education — including early-childhood education and near-free higher education. That would require a revolution in how we finance public education. It’s insane that half of K-12 budgets still come from local property taxes, for example, especially given that we’re segregating geographically by income. And it makes no sense to pay for the higher education of young people from middle and lower-income families through student debt; that’s resulted in a mountain of debt that can’t or won’t be paid off, and it assumes that higher education is a private investment rather than a public good.

It would also require greater accountability by all schools and universities for better outcomes — but not just better test results. The only sure thing standardized tests measure is the ability to take standardized tests. Yet the new economy demands problem-solving and original thinking, not standardized answers.

Better education would just be a start. We would also unionize low-wage service workers in order to give them bargaining power to get better wages. Such workers — mostly in big-box retailers, fast-food chains, hospitals, and hotel chains — aren’t exposed to global competition or endangered by labor-substituting technologies, yet their wages and working conditions are among the worst in the nation. And they represent among the fastest-growing of all job categories.

We would raise the minimum wage to half the median wage and expand the Earned Income Tax Credit. We’d also eliminate payroll taxes on the first $15,000 of income, making up the shortfall in Social Security by raising the cap on income subject to the payroll tax.

We’d also restructure the relationships between management and labor. We would require, for example, that companies give their workers shares of stock, and more voice in corporate decision making. And that companies spend at least 2% of their earnings upgrading the skills of their lower-wage workers.

We’d also condition government largesse to corporations on their agreement to help create more and better jobs. For example, we’d require that companies receiving government R&D funding do their R&D in the U.S.

We would prohibit companies from deducting the cost of executive compensation in excess of more than 100 times the median compensation of their employees or the employees of their contractors. And bar them from providing tax-free benefits to executives without providing such benefits to all their employees.

And we would turn the financial system back into a means for investing the nation’s savings rather than a casino for placing huge and risky bets that, when they go wrong, impose huge costs on everyone else.

There’s no magic bullet for regaining good jobs and no precise contours to what such a national economic strategy might be, but at the very least we should be having a robust discussion about it. Instead, economic determinists seem to have joined up with the free-market ideologues in preventing such a conversation from even beginning.

 

By: Robert Reich, The Robert Reich Blog, June 11, 2013

June 15, 2013 Posted by | Economic Recovery, Jobs | , , , , , , , | Leave a comment

“Catastrophically Dangerous”: What Happens If The GOP Shoots The Hostage?

Sen. Saxby Chambliss (R) of Georgia raised an interesting point this morning about the Republican debt-ceiling hostage crisis.

To translate this a bit, Chambliss is embracing the hostage strategy with both arms. From 1939 to 2010, the debt ceiling was raised without preconditions by both parties 89 times, but in 2013, Chambliss and his cohorts are demanding a ransom: painful-but-unspecified cuts to Social Security and Medicare.

And if the president refuses to meet the Republicans’ demands, and GOP policymakers follow through on their threats, Chambliss thinks it’s Obama who’ll “suffer the consequences.”

Except, whether he understands the issue or not, Chambliss is mistaken. If Republicans refuse to allow the nation to pay for the money it’s already spent, and in the process push the nation into default by trashing the full faith and credit of the United States, it’s not the president who’ll “suffer the consequences”; it’s the rest of us.

Obama will be fine. Chances are, Saxby Chambliss will get by, too. But if Republicans refuse to do their duty, conditions for the national and global economy will get “very bad, very fast,” including “financial-market chaos.”

“Think about what we’re talking about here,” Steve Bell, director of economic policy at the BPC, told Ezra Klein yesterday. “We’re talking about the reserve currency of the world. We’re talking about the deepest and most liquid markets in the world. And we’re sitting here wondering if we’ll cover our obligations?”

The consequences would be brutal and long-lasting. America’s reputation, global standing, and stability would very likely never — ever — be the same.

So, Sen. Chambliss should probably take five minutes to understand that the fire he’s playing with is catastrophically dangerous. Because at this point, the Republican senator isn’t just threatening to hurt America on purpose, he’s under the misguided impression that Obama’s the one who’ll suffer.

 

By: Steve Benen, The Maddow Blog, January 7, 2013

January 9, 2013 Posted by | Debt Ceiling | , , , , , , , , | 2 Comments

“Reasonable Defense And Adaptive Security”: Yes, We Have A Defense Spending Problem

Last year, in 2012, the U.S. government spent about $841 billion on security—a figure that includes defense, intelligence, war appropriations, and foreign aid. At the same time, the government collected about $1.1 trillion in individual income taxes. (And about $2.4 trillion in revenues overall if you include payroll, corporate, estate, and excise taxes.)

In other words, about 80 cents of every dollar collected in traditional federal income taxes went for security.

That’s an astonishing statistic, and it captures the most underappreciated aspect of today’s fiscal challenges: We have a security spending problem. Such spending is significantly higher than all non-defense discretionary domestic spending.

Worse yet, almost nobody in Washington seems interested in seriously curtailing defense spending that is greater in real terms than what the U.S. spent in the Cold War—despite the fact that the U.S. will be officially at peace when we withdraw from Aghanistan next year and the U.S. faces no major global adversaries.

While the Simpson-Bowles Commission advocated over a trillion dollars in defense cuts, President Obama’s budget would only reduce spending modestly, and even that’s a hard sell on Capitol Hill. Both parties happily suspended planned defense cuts under sequestration as part of the fiscal cliff deal.

Given all this, it was great to read a new report by the Project on Defense Alternatives entitled “Reasonable Defense: A Sustainable Approach to Securing the Nation” and written by Carl Conetta. PDA has long been a leading voice for responsible defense spending. But today, with the fiscal heat on, their work is more timely and important than ever.

The new report sets the defense challenge in it’s proper context: Which is that the United States is operating in a much more competitive global economy and needs to rethink its ideas of national strength, along with its budgetary priorities:

Today, the challenge that will most affect America’s future prospects lies in the economic sphere, not the military one. In this respect the current era is distinct from the period of the Second World War and the Cold War. How America handles current fiscal challenges and reorders government priorities should reflect this fact. . . . In all areas of policy, new economic realities compel national leaders to adopt a longer view, set clearer priorities, seek new efficiencies, and attend more closely to the ratio of costs, risks, and benefits when allocating resources.

A centerpiece of the report’s strategic framework is the idea of Adaptive Security. This approach focuses:

America’s armed forces on deterring and containing current threats, while working principally by other means to reduce future conflict potentials and strengthen the foundation for cooperative action. This would move America toward a future in which threat potentials are lower and security cooperation greater. While the United States uses its military power to check real and present threats of violence, it would employ non-military instruments to impede the emergence of new threats and reduce future conflict potentials.

This strategy makes a whole lot of sense in a world where America’s real enemies, like Iran and Al-Qaeda, are quite weak while our main potential enemy, China, is very strong.

While many in the Pentagon—with their worst-case mindsets—may be inclined to maintain a military that could deal with all potential enemies, the Adaptive Security formula suggests that the U.S. focus other kinds of resources on making sure such enemies never materialize. If money were limitless, one could argue the merits of either approach. But in today’s fiscal climate, Adaptive Security is the only affordable path.

In any case, the rise of China in particular underscores how economic challenges are the biggest challenges facing the United States, as Conetta argues. If we’re really worried about being dominated by China, we should be focused on training more engineers not more fighter pilots.

Beyond its big picture contributions, “Reasonable Defense” makes many smart points about how to create a more cost-efficient defense sector and a leaner military—and reduce defense spending by a half trillion over the next decade.

Let’s hope this report gets widely read in Washington.

 

By: David Callahan, The American Prospect, January 7, 2013

January 8, 2013 Posted by | National Security, Politics | , , , , , , , | 1 Comment

“A Terminally Angry Man”: John McCain’s Dark Quest For Relevancy Has Turned Him Into A Comic Book Villain

It’s a story as old as literature and as modern as a current edition of a Marvel comic book.

A once young and talented protagonist sets out on the road to glory, intent on using his special abilities for the good of mankind in his noble quest to become a hero of mythic proportion.

Along the way, life deals our hero a catastrophic blow—one that turns our protagonist away from the road of righteousness and onto the very different and destructive path of the antagonist. Suddenly, his clarity altered by the indignities, disappointments and tragedies life has unexpectedly visited upon him, our hero resolves to prove to the world the terrible mistake they made when casting him aside—no matter what it takes to do so.

You see, in our character’s mind, he is not the evil one. It is the world that is to blame for failing to accept the greatness our once heroic figure so generously offered to us, something the world will finally understand when our protagonist—now the antagonist—forces us to acknowledge his worthiness, even if it means using dark and dastardly methods to make us appreciate the terrible error the world or, in this case, his country has made in rejecting him.

Earlier this week, as I watched Senator John McCain threaten, during a CNN interview with Wolf Blitzer, to lead an effort to take the world’s economies hostage by refusing to raise the debt ceiling until he accomplishes the spending cuts he desires, I could not help but be reminded of this classic, “hero to villain” literary scenario just as I could not help but feel profound sadness for the transformation that has taken place in this man I once respected—a transformation that can be traced directly to the disappointment McCain suffered when losing his life’s objective, the presidency of the United States.

If you doubt the impact of McCain’s threat, you need only consider the words of Mark Zandi, Chief Economist at Moody’s Analytics and one-time senior economic advisor to John McCain’s presidential campaign:

The cornerstone of the global financial system is that the United States will make good on its debt payments. If we don’t, we’ve just knocked out the cornerstone and the system will collapse in turmoil.”

This is, indeed, very serious business.

And yet, the 2013 version of John McCain was giddy with joy as he filled the television screen with his warnings of the havoc he plans to rain down upon the American and world economies via the hostage drama the Senator and his accomplices are cooking up, a drama that could aptly be billed as “Debt Ceiling II- Revenge Of The Republicans.”

I have no objection to Senator McCain having his position on spending reduction, although I think he would be far more credible on the subject if he was willing to, at the least, choose to consider spending cuts in all government programs— including his beloved defense budget—rather than looking solely to entitlements as the object of his chainsaw’s desires.

I also recognize that a majority of Americans likely share the GOP’s belief that spending cuts are required if we are to get the nation on a more realistic and sustainable financial footing. And while the timing of such cuts remains a critical question—lest we bring our economic recovery to a screeching halt by cutting too deeply and too quickly—getting things on the right track will no doubt involve changes to our entitlement programs just as we will need to alter our defense spending habits.

However, using the threat of destroying the world’s economies to accomplish the direction preferred by McCain, and those who share his objectives, is a plot line far better suited to an old James Bond movie than it is to a rational policy discussion among the leaders of the world’s largest economic power, the United States of America.

Certainly, no American should be willing to stand for anyone who would adopt the tactics of fictional villains as the means to accomplish their wants and desires—even if they believe that their desires are in the best interests of the nation. There is no shortage of leverage points available to Senator McCain in pursuing his agenda—none of which involve taking our nation, and by extension, the nations of the word, hostage by threatening to do unspeakable damage in order to get his way.

You have to ask yourself whether—prior to suffering the loss of the presidency—the one-time “Maverick of the Senate” would have so much as considered blackmail as an acceptable tactic in pursuing a policy direction he believed to be in the nation’s interest.

I truly do not think so.

McCain of old would have hit the television talk show circuit and done his best to sell his countrymen on the merits of his position—not hold a gun to the nation’s head until we cried ‘uncle’. The McCain of old would have campaigned for his point of view with the self-effacing charm and reasonableness we came to expect of him, maybe even dropping by “Saturday Night Live”—the comedy program he used to regularly appear on for a quick cameo—in an effort to bring us around to his point of view.

But that John McCain has disappeared, replaced by a terminally angry man who would now be completely out of place in any environment designed to remind us that it is precisely because he did not take himself too seriously that we should take him all the more seriously.

I have no doubt that Senator McCain believes he is acting in the best interest of the nation. Isn’t that always the way of the ‘hero turned villain’ who believes that imposing his will on the world—by doing whatever it takes—is what is required of him? Don’t these characters always persuade themselves that, while the medicine they are forcing down our throats may be painful, illegal or immoral, we will all thank them for it in the end when we’ve finally seen with our own eyes just how right they are?

It’s tragic that this is the path that John McCain has chosen to pursue. However, it is not a path that we, as a nation, can tolerate from McCain or anyone else.

No matter how much you may agree with Senator McCain’s cost-cutting objectives…no matter how strong your belief that extreme cuts to any particular government program is essential to our financial survival… our national survival cannot be accomplished by giving in to those who would threaten to take us down if we fail to give in to their blackmail.

If Senator McCain— and those who share his point of view— wish to hold up every bit of legislation or appointment offered up by the President or the Democratic leadership in Congress, or utilize any of the many legitimate levers of power that come with the roles they have been granted by way of their being elected to office, that is their right.

It will then be up to the American people to determine whether or not the behavior of those willing to legally obstruct government in furtherance of their conscious was appropriate and in the best interest of the nation—an opinion that will be expressed by the voters during the 2014 election cycle and beyond.

However, threats to create an economic cataclysm as a means to accomplish a political or policy goal is not such a permissible tactic as such are the tactics of thugs and blackmailers. They are the tactics best left to the characters of comic literature and the movies—not the elected officials of a great democracy.

The President is right when he says he will not have a debate nor negotiate with those who seek to blackmail the nation into doing things their way. And whether you support this president or not, every Americans should stand up and reject this profoundly disturbing behavior on the part of Senator McCain and his cohorts. In America, we don’t negotiate with anyone who would threaten to destroy our country, no matter how much they have convinced themselves that it is, in some sick way, in the nation’s best interest to do so.

 

By: Rick Ungar, Op-Ed Contributor, Forbes, January 2, 2013

 

January 4, 2013 Posted by | Politics | , , , , , , , , | 2 Comments

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