Friday, July 15, 2011

The Fevered Debt Ceiling Debate - Recent Proposals

Michael D. Shear, online July 15, 2011 (in the Saturday, July 16 NY Times), provides a “cheat sheet” on the various proposals for meeting the August 2 deadline for raising the debt ceiling. Comment: Not mentioned is the fact that Both Moody’s and S&P have threatened to lower their triple-A ratings on long-term U.S. debt if the deadline is not met, with S&P going further and expressing hawkish views about the terms of any compromise. The threat of a downgrade at least partly offsets the argument that cuts in spending now might bring on a double-dip recession. Here is an abbreviated summary of eight overlapping and evolving proposals, with a few additional facts from a Washington newsletter (W&J Washington Update, July 15) and other sources, and my comments:

1. The Obama-Boehner $4 Trillion Grand Bargain. The “big deal” worked on between President Obama and House Speaker John Boehner (R-OH) would add up to more than $4 trillion in deficit reductions over ten years, with $1 trillion of it from new tax revenue. But the tax revenue portion of this bargain made it unpalatable to Republicans. Boehner backed off from this last weekend but the President still likes this idea. Comment: S&P also likes this approach, saying that there is a 50 percent chance it will downgrade U.S. debt within 90 days, and suggesting that anything less than a $4 trillion deficit-reduction plan over ten years could trigger a downgrade. .
2. The Biden Half-Bargain. House Majority Leader Eric Cantor (R-VA) revealed some details of VP Joe Biden's  plan to cut $2 trillion. Health care would lose about $340 billion. Reducing the debt would save $300 billlion. The Biden plan included several hundred billion dollars of new revenues from sources such as owners of private jets, hedge-fund managers and large oil companies. Cantor said the new tax revenues were a nonstarter. Comment: This would add up to about the $2.4 trillion of the debt-ceiling increase; it would not meet the S&P $4 trillion standard.
3. Cantor’s $2.4 Trillion Cuts. Cantor proposed $2.4 trillion worth of spending cuts without revenue increases. The President responded that these cuts are too deep, and would affect middle-class programs - student loans, Veterans’ benefits, Medicare and Medicaid – and that the cuts should be offset at least in part by higher taxes on wealthy individuals. Comment: Focusing only on the spending side does not meet the test of fairness.
4. White House: Proposed $1.5+ Trillion Cuts. President Obama has proposed cuts of $1.5-$1.7 trillion. Cantor says this would not be enough. Comment: Even if these cuts were matched by $700-$900 billion in new taxes to get to the $2.4 trillion of the debt increase, the total is below the S&P standard.
5. Cantor’s Stepwise Debt Increases. Rep. Cantor has suggested votes that would increase the debt ceiling in steps, with each step allowing Republicans to call again for more spending cuts. President Obama is opposed, saying that he wants to deal with the long-term deficit problem now. Comment: The President is operating on the sound principle that painful adjustments are best made as part of a package that shows fairness in the bearing of sacrifices.
6. The “Balanced Budget” Amendment.  In the background, House conservatives are seeking to tie an increase in the debt ceiling to the passage of a constitutional amendment requiring Congress to balance the budget. Another proposal is a cap on federal spending as a share of GDP. Comment: Would such an amendment be ratified by two-thirds of the states? Unlikely. It would make Keynesian counter-cyclical fiscal policies more difficult, limiting the ability of future fiscal policymakers to respond to a recession or depression. (But on the plus side it might end the practice of financing wars with new debt.)
7. The McConnell Three-Step Option. Senate Minority Leader Mitch McConnell (R-KY) proposes allowing President Obama to raise the debt ceiling in three steps ($700 billion, $900 billion and $900 billion) between now and the end of 2012. Even if the Senate joins the House in voting against the debt-ceiling hikes, the President could veto their opposing legislation and go ahead. Comment: This would put the onus on the President but would also get past the deadline – it’s a better alternative than defaulting on debt payments, but does not address the long-term deficit concerns of the rating agencies.
8. The Hybrid Obama-McConnell. President Obama would be given the authority to raise the debt ceiling in return for the President’s commitment to the level of cuts that he proposed as a starting point. Then a base-closing-type commission would come up with additional deficit-reduction plans by the end of 2011 for an up-or-down vote. Comment: A well-thought-through package like this might conceivably be enough for the rating agencies, at least for this year.