Why The Debt Ceiling Debate Matters Now
If Congress doesn’t act soon, interest rates could spike–maybe for a long time. Then you’ll care.
The White House and Republican congressional leaders insist the debt ceiling will be raised well before the United States has to default, which would cause massive economic disruption. But a resolution seems less than assured. In the last few days, Republican presidential candidates Michele Bachmann and Tim Pawlentyhave joined a growing conservative chorus loudly denouncing a deal, and antagonism among the various parties appears to be growing, not diminishing.
Still, nobody in Washington or on Wall Street seems very alarmed. The Treasury says it can hold out until Aug. 2. But a look at the current politics and the recent history of debt-ceiling showdowns suggests that alarm might soon become warranted.
There are two reasons why. The first has to do with how difficult it will be to settle on something that can get through Congress in time to stave off any damage. This struggle has been largely misportrayed and crudely simplified as a tug-of-war between Republicans set on spending cuts and Democrats who want tax increases to accompany them. It’s actually a three-way struggle, because Republicans themselves don’t agree on their ransom demands to permit a larger debt.
House Republicans want to cut $2 trillion without raising any taxes or closing any loopholes. They’re focused strictly on spending. But Mitch McConnell, the Republican Senate leader, wants any deal to include Medicare reform. He’s focused on politics. McConnell worries that the House Republican budget passed in April, which takes the deeply unpopular step of privatizing Medicare, presents a mortal threat to Republican candidates in next fall’s elections. A debt-limit deal on Medicare that drew the support of President Obama and Democrats would inoculate the GOP against this danger.
The trouble is, House Republicans don’t share McConnell’s concern, so an agreement among Republicans seems nearly as remote as one between Republicans and Democrats.
That gets to the second reason for alarm: the United States need not default on its debt in order to incur costly and potentially lasting damage. A February report by the Government Accountability Officeexamining the recent history of “debt-ceiling events” — none nearly so serious as the current one — showed that government borrowing costs began to rise well in advance of default. Call it a taxpayer premium for congressional squabbling: the disruption of Treasury auctions and the threatened loss of liquidity among Treasury notes and bills caused billions in additional borrowing costs in the form of higher interest rates.
One reason why the debt showdown isn’t causing more alarm is that interest rates have been falling. But that’s due mostly to declining economic forecasts in the United States and fear of a Greek default — currently more powerful influences, but also ones that would mask worries about a US default.
At some point, perhaps as soon as in a few weeks, the fight in Congress could eclipse those factors and drive interest rates higher. That’s been the historical pattern, and it is already causing worry about what might trigger such a rise. “The nervousness on our end is that the markets will misperceive what’s going on,” an aide to a conservative House Republican told me. “If something fails on the House floor, people might react as if all life is about to end — just like they did when the TARP vote failed.”
That could cost taxpayers dearly, even if a default is ultimately avoided. One reason why US borrowing costs are so low is the universal belief that the government will always make good on its debts in a timely manner. But if that faith is shaken — and a good scare could do the trick — investors might decide that government debt is a riskier investment than they had imagined and demand a better return.
That will hurt. The Office of Management and Budget determined that a mere 1 percent rise in interest rates would cost taxpayers $973 billion over the next decade [pdf, pg. 23]. So a fight purportedly about cutting the deficit could actually cause it to grow much larger. That’s worth worrying about now — especially as Republicans threaten a default and claim there’s no cause for alarm.
By: Joshua Green, Senior Editor, The Atlantic, June 30, 2011
Eric Cantor’s Glaring Conflict Of Interest
When Eric Cantor shut down debt ceiling negotiations last week, it did more than just rekindle fears that the U.S. government might soon default on its debt obligations — it also brought him closer to reaping a small financial windfall from his investment in a mutual fund whose performance is directly affected by debt ceiling brinkmanship.
Last year the Wall Street Journal reported that Cantor, the No. 2 Republican in the House, had between $1,000 and $15,000 invested in ProShares Trust Ultrashort 20+ Year Treasury EFT. The fund aggressively “shorts” long-term U.S. Treasury bonds, meaning that it performs well when U.S. debt is undesirable. (A short is when the trader hopes to profit from the decline in the value of an asset.)
According to his latest financial disclosure statement, which covers the year 2010 and has been publicly available since this spring, Cantor still has up to $15,000 in the same fund. Contacted by Salon this week, Cantor’s office gave no indication that the Virginia Republican, who has played a leading role in the debt ceiling negotiations, has divested himself of these holdings since his last filing. Unless an agreement can be reached, the U.S. could begin defaulting on its debt payments on Aug. 2. If that happens and Cantor is still invested in the fund, the value of his holdings would skyrocket.
“If the debt ceiling isn’t raised, investors would start fleeing U.S. Treasuries,” said Matt Koppenheffer, who writes for the investment website the Motley Fool. “Yields would rise, prices would fall, and the Proshares ETF should do very well. It would spike.”
The fund hasn’t significantly spiked yet because many investors believe Congress will eventually raise the debt ceiling. However, since Cantor abruptly called off debt ceiling negotiations last Thursday, the fund is up 3.3 percent. Even if an agreement is ultimately reached before Aug. 2, the fund could continue to benefit between now and then from the uncertainty. (One tactic some speculators are using is to “trade the debt ceiling debate” — that is, to place short-term bets on prices as they fluctuate with the news out of Washington.)
Salon’s Andrew Leonard calls the debt ceiling negotiations “Washington’s titanic game of chicken,” and the longer the game goes on, the more skittish the bond markets will become.
“Cantor’s involvement in the fund and negotiations is not ideal,” Koppenheffer said. “I don’t think someone negotiating the debt ceiling should be invested in this kind of an ultra-short. We can only guess how much he understands what’s in his portfolio, but you’d think a politician would know better. It looks pretty bad.”
Cantor spokesman Brad Dayspring noted that U.S. Treasury bonds make up a large portion of the congressman’s pension, and said investment in ProShares ETF serves to balance that investment and to diversify his portfolio. Disclosure forms indicate that Cantor has considerable personal assets, including real estate in Virginia worth up to $1 million, and a number of six- and seven-figure loans to private entities and limited liability companies. So his investment in ProShares ETF represents only a small portion of his overall portfolio — but that share could grow a little larger just over a month from now.
By: Jonathan Easley, Editorial Fellow, Salo, June 27, 2011
Debt Ceiling Charade: Why Are Republicans Voting Against America’s Interests?
There isn’t much credibility left in Congress, perhaps none at all. In fact, the ceaseless C-SPAN sitcom we call government has offered plot lines from titillating tweets to illegitimate children, foreign lovers to shady cover-ups. But even their writers sometimes run out of ideas. Last week, when they thought you weren’t watching, they stooped to acting out their actual jobs: faking a vote on the debt ceiling.
A group of Republicans and Democrats alongside them turned sacred duty into dramedy. Pretending they would favor something they actually don’t endorse, they voted against their own beliefs and our national interests.
Of course, they first sold their banker buddies the good seats. Along with popcorn and reassurance that they weren’t actually planning a default on our debt, they were just pretending to do so in order to exact concessions.
These “leaders” admit that not raising the debt limit is untenable. Defaulting on our loans, we’re told, has the potential to wreck our economy. In fact, we’re supposed to be very concerned about this economy. It’s not “healthy”; it’s in “free-fall”; it’s “crumbling into ruin”.
But this belies the true damage these members of Congress seem intent to bring upon us. The economy is nothing besides the people that work, buy, save and invest within it. The collateral damage here isn’t to some numerical abstraction; it’s a serious and even fatal blow to Americans. We talk so much about the economy suffering; it’s easy to forget it’s actual people who stand to be hurt badly, over and again.
Even Republicans know raising the debt ceiling is not really negotiable. This issue is at core about whether or not we do what we say, whether or not America can be trusted. And raising the debt ceiling without precondition is about whether we make good on our promises not just to our creditors, but to each other. For all Republicans talk about not being able to afford things, it seems to apply only to food, health care, housing and electricity for their constituents. We’re flush when it comes to not collecting taxes from corporations, giving more to millionaires, subsidizing polluters and bombing other countries.
Without raising the debt ceiling free of conditions, we cannot honor our commitments to our grandparents who need to see their doctors and purchase their meds, to our children who need trained teachers and classrooms with heat and to our neighbors who need help when jobs are scarce and earnings don’t cover what life costs. Further gutting social spending will hurt those least equipped to sustain further injury. The jobless, the homeless, the young and the old will be the ones maimed.
With all this at stake, those of us without Goldman-sized bonuses to cover the cost of a heads-up beforehand are left watching in horror from the nose bleed section. This is a scripted show mocking not only we the people but the very exercise of elected office.
If voting among the masses is democracy in action – the votes of those we’ve voted for should be even more important. This is the logic behind representative democracy as our beloved Constitution has enabled it. This is the belief that has served us as a nation and as a people.
We all like to have occasional fun at the office. Some facebook checking, coffee drinking, office gossiping stress relief help the hours tick by. Republican House Members and some Democrats have turned workplace tricks into a dangerous practical joke on us, and we’re not laughing. This is the scariest kind of reality television. No more theatrics about our security and prosperity. Our elected leaders need to stop playing at their jobs and step up to do them.
By: Anat Shenker, AlterNet, June 12, 2011
“Stalwart” Ronald Reagan: Why Raising The Debt Ceiling Is Necessary
Let’s get real. What person in their right mind would really want the United States to default? Of course, nobody, yet over the years many members of Congress have voted against raising the debt ceiling.
Barack Obama did it and now rejects his own action. It is always a symbolic gesture that both Democrats and Republicans use, and use irresponsibly.
Yet now we seem to have the Tea Party, and a larger group of Republicans, clamoring for some kind of show down at the OK Corral. Not a symbolic gesture to some but a real threat. Not smart.
For those who like to cite Ronald Reagan in his 100th year as a stalwart, antidebt, no-tax-hike, no nonsense conservative, they have the wrong guy. Aside from his major tax increases as governor of California and as president here is a little history on the debt ceiling.
In a letter to then-Majority Leader Howard Baker on November 16, 1983, President Reagan asked “for your help and support, and that of your colleagues, in the passage of an increase in the limit on the public debt.”
Reagan went on:
…the United states could be forced to default on its obligations for the first time in its history.
This country now possesses the strongest credit in the world. The full consequence of a default–or even the serious prospect of default–by the United States are impossible to predict and awesome to contemplate….The risks, the costs, the disruptions, and the incalculable damage lead me to but one conclusion: the Senate must pass this legislation before the Congress adjourns.
The point is that Republicans should shelve using the debt ceiling vote as a means of negotiation. This is not a negotiable item. Should they take this right up until the 11th hour and refuse to fund the government, not only will Reagan’s admonitions come true but the Republicans will seal their fate as an irresponsible, minority party–a pariah for years to come.
Bad policy, bad politics.
By: Peter Fenn, U. S. News and World Report, May 19, 2011
John Boehner’s Unreality Check On The Deficit
The news out of House Speaker John Boehner’s speech to the New York Economic Club was his demand for “cuts of trillions, not just billions” before the debt ceiling can be raised. Not just broad deficit-reduction targets, the Ohio Republican insisted, but “actual cuts and program reforms.”
That’s alarming enough. It is all but impossible to get this done in the available time. It certainly can’t be accomplished on Boehner’s unbending, no-new-taxes terms. And if the speaker truly believes that it would be “more irresponsible” to raise the debt ceiling without instituting deficit-reduction measures than not to raise it at all, we’re in a heap of trouble.
Even more alarming, because it has consequences beyond the debt-ceiling debate, is the incoherent, impervious-to-facts economic philosophy undergirding Boehner’s remarks.
Reporters naturally tend to ignore this boilerplate. Journalistically, that makes sense. Boehner’s economic comments were nothing particularly new. Indeed, they reflect what has become the mainstream thinking of the Republican Party. But that’s exactly the point. We become so inured to hearing this thinking that we neglect to point out how wrong it is.
My argument with Boehner is not that he believes in a more limited role for government than I do, not that he is more skeptical of government intervention and regulation, and not that he is more worried about the economically stifling implications of tax increases. Those are legitimate ideological differences. American politics is better off for them.
I’m talking about statements that are simply false.
“The recent stimulus spending binge hurt our economy and hampered private-sector job creation in America.”
Reasonable economists can disagree about the effectiveness of the stimulus spending and whether it was worth the drag of the additional debt, but no reasonable economist argues that it hurt the economy in the short term.
The Congressional Budget Office estimates the stimulus added, on average, about one percentage point annually to economic growth and reduced the unemployment rate by half a point between 2009 and 2011. And that’s the low-end estimate. The high-end numbers show the stimulus spending adding more than 2 percentage points annually to economic growth and cutting the unemployment rate by more than 1 percentage point.
The CBO is not alone. Economists Alan Blinder and Mark Zandi estimated in a July 2010 paper that without the stimulus spending, the unemployment rate would be 1.5 percentage points higher.
“The massive borrowing and spending by the Treasury Department crowded out private investment by American businesses of all sizes.”
Crowding out occurs when government spending drives up interest rates and makes borrowing unattractive to the private sector. As economist Joseph Minarik of the Committee for Economic Development explains, “When interest rates are on the floor, you can’t say federal government borrowing is crowding out business investment.” The lackluster investment climate reflects low consumer demand and underutilized capacity. You can’t be crowded out of a room you’re not trying to enter.
“The truth is we will never balance the budget and rid our children of debt unless we cut spending and have real economic growth. And we will never have real economic growth if we raise taxes on those in America who create jobs.”
Never? Under President Clinton, taxes were raised, primarily on the wealthy. During the eight years of his administration, the economy grew by an average of close to 4 percent.
“I ran for Congress in 1990, the year our nation’s leaders struck a so-called bargain that raised taxes as part of a bipartisan plan to balance the budget. The result of that so-called bargain was the recession of the early 1990s. It wasn’t until the economy picked back up toward the end of that decade that we achieved a balanced budget.”
Boehner blames the budget deal for tanking the economy, but the recession actually started in July 1990, two months before the agreement was reached. And that revived economy? It came despite the supposed dead weight of the Clinton tax increase.
“A tax hike would wreak havoc not only on our economy’s ability to create private-sector jobs, but also on our ability to tackle the national debt.”
During the early 1980s, taxes were cut and public debt ballooned, from 26 percent of GDP in 1980 to 40 percent by 1986. In 1993, taxes were increased (and spending cut); debt as a share of the economy fell, from 49 percent to 33 percent. In 2001 and 2003, taxes were cut. By the time President Obama took office, debt had climbed to 40 percent of GDP.
Listening to Boehner, I began to think the country suffers from two deficits: the gap between spending and revenue, and the one between reality and ideology. The first cannot be solved unless we find some way of at least narrowing the second.
By: Ruth Marcus, Opinion Writer, The Washington Post, May 10, 2011
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