Saturday, July 16, 2011

What happens Aug, 2 with a sudden 44% cut in the federal budget?

Last night, while at the Town DC, I peeked at the headlines on my cell phone – the debt negotiations were supposed to be going on somewhere, at a secret place – maybe the Town, for all I knew, or the 930. I saw this “screenplay treatment” by Jeff Greenfield documenting how the two party system could fall apart and we could have a third party president (Jesse Ventura?) in 2013.  It’s called “What Happens to American Politics if We Default?  Hello, Third Party”. The Washington Post link, not so obvious in print, is here

 His “film” would play well at Washington’s West End.

There is some confusion about what the Tea Party wants (or maybe there isn't -- below).  It is written that about 40 members of the House will not vote for debt extension unless Congress passes (with 2/3 majorities) a Balanced Budget Amendment (as part of the so-called Cut, Cap and Balance Act).  But others are reported as unwilling to vote for debt extension under any circumstances (apparently this includes Michele Bachmann). And at least one wants the debt extension limit reduced. “It’s morally wrong” was the comment. A typical story is in the National Journal July 14, here. But I can remember “balanced budgets” as being proposed for platforms, even with Democrats, as far back as 1980.

The demand for immediate cuts and balancing have a result that is much more draconian than Obama’s grand plan of $4 trillion cuts over 10 years, a benchmark proposed by the rating agencies (especially Standard and Poor’s). 

It’s apparent to me that a rule that ties debt extension limits to specific cuts in the future is a good thing. That’s what investors want.  (So that’s what Boehner’s GOP should want.)  And it should be written into law (getting it into the Constitution is much more difficult – and remember that in 1997 I wrote a book proposing major constitutional amendments; I’ve been there before). 

But an immediate cut, effective Aug. 2, of 44% of the federal budget (that’s what the numbers say) is entirely a different matter.   Technically, the Treasury Secretary might forestall formal default for a while by not paying many federal workers but by paying bond interest.  Eventually, default would occur, sooner rather than later.  And there is the economic and psychological effect of a first-ever default, and a failure to protect US creditworthiness.  Moody’s and S&P both have said that they regard failure to pay anyone (including social security obligations and federal workers) as a default.

Do Tea Party Republicans really get this?  There are reams online about how “trust” works in credit markets (see Ezra Klein, also in the Washington Post today, as well as the Post’s own “unnecessary” editorial), but the effects would be long lasting and obviously affect many or most Americans (and voters) personally. Real sacrifices would have to be made that are just unheard of how.   Possibly the Social Security Trust Fund would be shielded by a federal court (the AARP would certainly sue to do so). Many federal workers would not be paid, many essential services (like air traffic control, border control) would be compromised, and national security would be at risk. (Would soldiers get paid? Veterans probably wouldn’t).   The US would become much more vulnerable to another 9-11 attack.  I don’t think that even Michele Bachmann wants that.
In view of this, the Obama DOJ could try to get a federal court to rule that the 14th Amendment bans default, and get a defacto extension. That sort of logic may underlie the proposals from Mitch McConnell.  It’s hard to say if a federal judge would go along with this reasoning.

So, Dr. Phil should ask the Tea Party freshmen, “What were you thinking?”  (Maybe Suze Orman will give them all smackdowns.)  I think I can guess, and it isn’t good.

There's a story on CNN by Shannon Travis, July 15, that is revealing, "Tea Party to GOP: We could make 'examples' of you over debt ceiling", link here. This sounds like something playground or sandbox bullies would say. Social and political power is more important than truth. But incredibly, Mo Brooks as saying in another Post story ("GOP dissent complicates resolving debt crisis) July 14 by David A. Fahrenthold, link here, "There should be no default on August 2.  In fact, our credit rating should be improved by not raising the debt ceiling."  Just plain wrong. Listen to Moody's and S&P. 

Some of their muddy perceptions may come from lack of intellect, or their belief that they have to give their constituents, who may sometimes not be well educated, what they “want”.  (One comment to me complained " What gives you the right to the idea that you are intellectually above the' cretins 'of the world?")  One Tea Party member wrote that it was “arrogant” to impose his own “reasoning” on his constituents! Some do not really get how credit markets work. But what’s worse is that some cannot do simple Algebra I “story problems” like those in middle school.  Figuring out who to pay in August is basically an eighth grade algebra test problem.  Geithner will simply have to solve for some “unknowns”.  There is not enough money.

But what’s scarier is that some TP ("toilet paper") members may really want to see a “purification”.  Impose misery on this generation, make it suffer and pay for living beyond its means, let some poor and elderly perish.   Particularly, target the “undeserving” or the “losers” or the “parasites”.  The “next generation” will do well.   History has plenty of examples of governments that have done this, sometimes with catastrophic outcomes.  Look at Germany in the 1930s.  Make no mistake, if there is no debt extension by Aug. 2, it’s possible there will never be one. Our government could break down and real chaos like we have never seen could develop.

I still think that the key to any “deal” is to specify, in advance, the cuts that are necessary, right now and over time, and come clean as to who is affected.

Roland S. Martin, CNN Political Contributor,  has an op-ed "Stand up, America, demand a deal on debt". So I did so, yesterday. Perhaps I am like Chicken Little in that 3-D Disney film, when "CM" got dinged by his father for ruining the family's reputation of the Web.

Here’s the letter I wrote to James P. Moran, D-VA, 8th District, yesterday.


Rep. Moran:

We’ve corresponded many times before, most of all on managing and finally ending the “don’t ask don’t tell” policy for the military.

I just wanted to take a moment to express my shock at the behavior of some members of Congress during the debt negotiations.  Some freshmen congresspersons seem to believe the government can just not pay some of its bills with impunity, and expect Americans to live locally with increasing chaos and breakdown that would follow.  I cannot believe some of the rhetoric I have heard.  Some members of Congress think their constituents want them to drive the economy off a cliff.

One Congressman said he was elected to do what his constituents want (anarchy, I guess), not what is right. It would be “arrogant” he said, for him to judge his constituents.

I think to get a deal, you have to do two things:

(1)    Specify the exact spending cuts.  That could even mean some means testing even of current Social Security and Medicare beneficiaries, to the extent that the benefits they receive may exceed the actuarial value of their past FICA and Medicare taxes (a difficult calculation, to be sure, given all the levels of benefits).  But it’s obvious that there are many cuts in contracting, pork, even things like drug enforcement (making marijuana illegal is very expensive for government).  Some big roads and rail projects can be paid for by higher tolls and fares rather than taxes.  Cuts in areas like Metro transit would have to be specified. But you have to lay down the details now, in a way that anyone can read.  Cuts in mortgage assistance would sound likely.
(2)    Specify the revenue increases.  Generally, they can be achieved by closing loopholes, but remember closing them still affect some people and jobs.  Generally, the GOP is right in that there should be a mathematical relationship between debt extension, spending cuts, and revenue.  But the problem is that no one, in all these weeks of bickering, can get specific as to the consequences.

All of this reminds me of the 1975 New York City financial crisis, and the New York Daily News “Ford to City: drop dead”.  But the unions soon settled.

The consequences of a default could be grave and long-lasting and dangerous to the lives of some people, especially the elderly (I am 68 myself).

Let’s get the deal done, now.   I feel that I could go into the conference room and get a deal out of them in three hours!

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