debt limit kabuki--UPDATED
[UPDATED to add an thought I had originally but did not include in my first post]
Welcome back, eh?
I figure with the 2012 election about to hit stride, it was high time for me to return to my ever-so-slim space for political sanity. Of course, it doesn't hurt that "the deal of the century" is being debated right now in DC. In fact, it is this deal that brings me out of my hibernation.
Word leaking from the Hill today is that some compromise has been reached. This is a compromise that--supposedly--has agreement from all the major players. From what I understand, there is some big reveal scheduled for 4 PM EDT (about five hours from my writing of this).
Now on past "deals" I was really focused on the actual words and scoring of the bill. I have learned that listening to the party leaders talk about the virtue of their proposals is worthless--reading the thing (and the CRS or CBO report) is where the good information can be found.
I am not so careful to read the actual bill this time. Why is that? Gee, let me count the ways:
a) All these cuts are just funny money. $23B from this year's $3-plus TRILLION budget? $900B and change over 10 years (and about $40T in projected outlays)? Whatever. . .
b) Default is a crackpot argument. One person can lead us to default, and even though he has the bully pulpit I don't think even he and his media minions will be able to spin a default into a story that reflects well on them. Of all the possible outcomes of this huge debate, default on the country's obligations to creditors is probably a least-likely scenario;
c) Since default isn't a real fear, all these negotiations to solve the wrong problem have been a crudfest from the word go. Add to that the fact that the bills under consideration are bad bills that don't actually govern much of our future, and you have the current state of the drama in DC. Much ado about nothing.
d) The REAL problem with our debt limit is the credit rating. And in my opinion, none of the bills under consideration in this process--not even CCB--SHOULD stave us off from a downgraded credit rating--and that is a true calamity that our system certainly cannot deal with right now.
Now I know I need to explain this credit rating/real problem thing a little better, so here goes: S&P--one of the three main sovereign credit agencies--describes a nation's credit rating as a measure of its future ability and willingness to service their commercial financial obligations in full and on time. A sovereign rating is a forward-looking estimate of default probability. Further, default is generally defined as the failure to meet a principal or interest payment on the due date.
Now I said earlier that default was a least-likely scenario out of all this hullaballoo on the Hill right now. In other words, in my own estimate our country's default is not at risk--so why is our credit rating at risk? BY MY OWN WORDS, we're not going to default--AAA all the way, right?
Well, no. Not right.
For starters, while a AAA is a pretty good guarantee of zero default, so are lesser credit ratings. In fact, in the last five years, no sovereign with an "A" rating or higher has defaulted. So while AAA is practically a guarantee, there are other, lesser ratings that have a great track record against default.
But more importantly: a credit rating is an estimation of the sovereign's FUTURE ability to pay its bills. The rating takes political considerations into account, as well as economic structure, general debt burden, and several other factors (nine major factors in total, with several subcategories in each).
I want to focus on this "political" side of the equation. Listen, I don't think that we are right around the corner from a revolution--which is a ACT that would definitely lead to a downgrade (of course, at that time, we'd have other things on our collective minds). But is it pure fantasy to think that the political atmosphere is such that revolution is an impossibility? Think Wisconsin, where the will of the voters is trying to be overturned by unions that were called into action by members of the ruling establishment; think South Carolina, where the will of private industry is trying to be overturned by an unelected branch of the ruling establishment; think about all the work being done in this administration to instill cap and trade in effect to overcome the failed attempt to get it in legislation. . .is it really too hard to see a time when private citizens become enraged to the point of fighting back physically against the ruling establishment? It may take only one more incident. . .or it may take several hundred more. . .all I know is that we're TWO such incidents closer than we were just at this time last year. And given the ridiculous rhetoric from the Hill during this debt debate, I'd say the leaders of the ruling establishment are doubling-down on anger. In fact, I'd say their entire political calculus for the last 2 years has been to rule from fear and to inflame their partisans.
Such actions in the face of an awake, determined opposition do not have a history of ending in a statesman's favored way. And if you think this isn't obvious to the ratings agencies, then you are taking a leap of faith.
But again, that's only one aspect of the rating. We have an increasing debt (even if the rosy predictions of economic recovery manage to come true); due to high-and-not-improving-yet unemployment combined with anemic GDP numbers so far in FY11 we can look to another revenue hit (with an accompanying unplanned increase in debt) THIS year. And, worst of all, there is NO appetite to deal with our ever-increasing entitlement problem on Capitol Hill, and there won't be such an appetite until AT LEAST 2013--if ever.
SO why wouldn't we be downgraded on our sovereign credit rating? I honestly can't tell you why, but I do know that even Obama understands that such a downgrade cannot be good. That's why all the credit ratings agencies were in his office last week, don't you know.
Now I wrote earlier that none of the bills SHOULD save us from a ratings downgrade. So what should we have done? Here's some background of my plan: that last spending bill submitted by the administration that wasn't wholly rejected on Capitol Hill was centered on Obama's FY11 Budget Request (submitted to a Congress controlled 100% by his own party). That document established the following spending requests: for FY11, federal outlays of $3.84T with a proposed deficit of $1.27T; for FY12, federal outlays of $3.76T with a proposed deficit of $828B.
My plan is to raise the debt limit an amount equal to half of the proposed budget deficit for FY11 (would have equaled about $630B; logic is that this number should equal about 6 months of relief from the debt ceiling--thereby moving us into FY12) AND to legislate a limit on the Budget Resolution for FY12, establishing a max limit of $2.95T (or what the administration projected for revenues in FY12; this is about $600B less than what the House passed this year for the FY12 budget (the Ryan plan)--so yes, it is playing hardball with the Congresscritters' penchant to spend). This plan would take the near-term debt ceiling debate past October 1st of this year by which time we would be operating under a new budget with the $2.95T cap; while the '12 budget would still likely effect an annual deficit, the above-passed ceiling increase would likely take the deficit limit past initial budget activities for FY13. Both parties would be able to then negotiate the next increase in good faith, with a clear understanding of how well the other side "partnered" to meet the fiscal challenges this country faces.
Of course, my plan would never pass the Senate--because there is so much to hate about a "clean" increase of the current debt limit and a budget resolution that is matched to a rosy projection of revenue for the year.
Or maybe there isn't much to hate about that. Maybe we should let the Senate decide. . .
The second part of my plan is still applicable, since it appears these debt limit talks are a feature of the future: Congress should pass a bill that tells the President the order of bills to be paid. For example: "when the federal government cannot meet all fincancial obligations, the Treasury shall ensure that the following bills are paid in order: (insert order here, but it would probably be along the lines of "interest payments to creditors; military personnel; social security payments; etc etc etc)." Again, there's little chance such a bill would be signed into law NOW. . .but there's a good chance it could get through the Senate and at that point it's kind of a crapshoot as Obama deals with his reelection concerns.
Welcome back, eh?
I figure with the 2012 election about to hit stride, it was high time for me to return to my ever-so-slim space for political sanity. Of course, it doesn't hurt that "the deal of the century" is being debated right now in DC. In fact, it is this deal that brings me out of my hibernation.
Word leaking from the Hill today is that some compromise has been reached. This is a compromise that--supposedly--has agreement from all the major players. From what I understand, there is some big reveal scheduled for 4 PM EDT (about five hours from my writing of this).
Now on past "deals" I was really focused on the actual words and scoring of the bill. I have learned that listening to the party leaders talk about the virtue of their proposals is worthless--reading the thing (and the CRS or CBO report) is where the good information can be found.
I am not so careful to read the actual bill this time. Why is that? Gee, let me count the ways:
a) All these cuts are just funny money. $23B from this year's $3-plus TRILLION budget? $900B and change over 10 years (and about $40T in projected outlays)? Whatever. . .
b) Default is a crackpot argument. One person can lead us to default, and even though he has the bully pulpit I don't think even he and his media minions will be able to spin a default into a story that reflects well on them. Of all the possible outcomes of this huge debate, default on the country's obligations to creditors is probably a least-likely scenario;
c) Since default isn't a real fear, all these negotiations to solve the wrong problem have been a crudfest from the word go. Add to that the fact that the bills under consideration are bad bills that don't actually govern much of our future, and you have the current state of the drama in DC. Much ado about nothing.
d) The REAL problem with our debt limit is the credit rating. And in my opinion, none of the bills under consideration in this process--not even CCB--SHOULD stave us off from a downgraded credit rating--and that is a true calamity that our system certainly cannot deal with right now.
Now I know I need to explain this credit rating/real problem thing a little better, so here goes: S&P--one of the three main sovereign credit agencies--describes a nation's credit rating as a measure of its future ability and willingness to service their commercial financial obligations in full and on time. A sovereign rating is a forward-looking estimate of default probability. Further, default is generally defined as the failure to meet a principal or interest payment on the due date.
Now I said earlier that default was a least-likely scenario out of all this hullaballoo on the Hill right now. In other words, in my own estimate our country's default is not at risk--so why is our credit rating at risk? BY MY OWN WORDS, we're not going to default--AAA all the way, right?
Well, no. Not right.
For starters, while a AAA is a pretty good guarantee of zero default, so are lesser credit ratings. In fact, in the last five years, no sovereign with an "A" rating or higher has defaulted. So while AAA is practically a guarantee, there are other, lesser ratings that have a great track record against default.
But more importantly: a credit rating is an estimation of the sovereign's FUTURE ability to pay its bills. The rating takes political considerations into account, as well as economic structure, general debt burden, and several other factors (nine major factors in total, with several subcategories in each).
I want to focus on this "political" side of the equation. Listen, I don't think that we are right around the corner from a revolution--which is a ACT that would definitely lead to a downgrade (of course, at that time, we'd have other things on our collective minds). But is it pure fantasy to think that the political atmosphere is such that revolution is an impossibility? Think Wisconsin, where the will of the voters is trying to be overturned by unions that were called into action by members of the ruling establishment; think South Carolina, where the will of private industry is trying to be overturned by an unelected branch of the ruling establishment; think about all the work being done in this administration to instill cap and trade in effect to overcome the failed attempt to get it in legislation. . .is it really too hard to see a time when private citizens become enraged to the point of fighting back physically against the ruling establishment? It may take only one more incident. . .or it may take several hundred more. . .all I know is that we're TWO such incidents closer than we were just at this time last year. And given the ridiculous rhetoric from the Hill during this debt debate, I'd say the leaders of the ruling establishment are doubling-down on anger. In fact, I'd say their entire political calculus for the last 2 years has been to rule from fear and to inflame their partisans.
Such actions in the face of an awake, determined opposition do not have a history of ending in a statesman's favored way. And if you think this isn't obvious to the ratings agencies, then you are taking a leap of faith.
But again, that's only one aspect of the rating. We have an increasing debt (even if the rosy predictions of economic recovery manage to come true); due to high-and-not-improving-yet unemployment combined with anemic GDP numbers so far in FY11 we can look to another revenue hit (with an accompanying unplanned increase in debt) THIS year. And, worst of all, there is NO appetite to deal with our ever-increasing entitlement problem on Capitol Hill, and there won't be such an appetite until AT LEAST 2013--if ever.
SO why wouldn't we be downgraded on our sovereign credit rating? I honestly can't tell you why, but I do know that even Obama understands that such a downgrade cannot be good. That's why all the credit ratings agencies were in his office last week, don't you know.
Now I wrote earlier that none of the bills SHOULD save us from a ratings downgrade. So what should we have done? Here's some background of my plan: that last spending bill submitted by the administration that wasn't wholly rejected on Capitol Hill was centered on Obama's FY11 Budget Request (submitted to a Congress controlled 100% by his own party). That document established the following spending requests: for FY11, federal outlays of $3.84T with a proposed deficit of $1.27T; for FY12, federal outlays of $3.76T with a proposed deficit of $828B.
My plan is to raise the debt limit an amount equal to half of the proposed budget deficit for FY11 (would have equaled about $630B; logic is that this number should equal about 6 months of relief from the debt ceiling--thereby moving us into FY12) AND to legislate a limit on the Budget Resolution for FY12, establishing a max limit of $2.95T (or what the administration projected for revenues in FY12; this is about $600B less than what the House passed this year for the FY12 budget (the Ryan plan)--so yes, it is playing hardball with the Congresscritters' penchant to spend). This plan would take the near-term debt ceiling debate past October 1st of this year by which time we would be operating under a new budget with the $2.95T cap; while the '12 budget would still likely effect an annual deficit, the above-passed ceiling increase would likely take the deficit limit past initial budget activities for FY13. Both parties would be able to then negotiate the next increase in good faith, with a clear understanding of how well the other side "partnered" to meet the fiscal challenges this country faces.
Of course, my plan would never pass the Senate--because there is so much to hate about a "clean" increase of the current debt limit and a budget resolution that is matched to a rosy projection of revenue for the year.
Or maybe there isn't much to hate about that. Maybe we should let the Senate decide. . .
The second part of my plan is still applicable, since it appears these debt limit talks are a feature of the future: Congress should pass a bill that tells the President the order of bills to be paid. For example: "when the federal government cannot meet all fincancial obligations, the Treasury shall ensure that the following bills are paid in order: (insert order here, but it would probably be along the lines of "interest payments to creditors; military personnel; social security payments; etc etc etc)." Again, there's little chance such a bill would be signed into law NOW. . .but there's a good chance it could get through the Senate and at that point it's kind of a crapshoot as Obama deals with his reelection concerns.
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