Friday, July 22, 2011

Republicans. Not Congress. Republicans.

Ezra Klein (with Dylan Matthews) had a great primer on the debt limit, both in general and the current fight, earlier today that I highly recommend. Klein also had a very nice item about the debt and the ratings agencies just now that I'd like to recommend, except for one thing. It's called "How Congress put our credit rating at risk."

In my view, and I believe in Klein's view, this is wrong. The piece would be accurate if he replaces "Congress" with "Republicans" each time. Or, if that's not what he believes, then he should be talking about "Congress and the president" throughout. But I don't think he believes that. I don't think he believes that Nancy Pelosi, or Harry Reid, or Kent Conrad, or Steny Hoyer has put our credit rating at risk. And I don't think he believes that Barack Obama has.

(For what it's worth, I don't believe that Mitch McConnell or John Boehner or Tom Coburn has, either, although in each of these cases, including with the Democrats, I'm open to evidence to the contrary).

No, I think it's Republicans, both in and out of Congress, who are threatening the economy. And they deserve to be called on it.


  1. My suspicion, honestly, is that this showdown was manufactured by Obama to get his left flank to go along with cuts they normally wouldn't support. However, I don't think he expected some Republicans to start claiming that the ceiling didn't need to be raised.

  2. Welcome to upside-down world, where it's the people who want spending to slow down, and not the people spending like mad, who are the threat to our credit.

  3. I don't think Obama wanted this fight, but I think its clear he's winning it. In every possible scenario, Obama comes out looking like a winner or at least the least irresponsible person at the table.

    If he pulls off the "grand bargain" which the ratings agencies are leaning on Congress for now, he'll go down as the President who got the least productive congress in modern American history to pass entitlement and tax reform.

    Since the Republicans tried for the first time in American history to tag the debt ceiling to cuts in spending they already approved, a clean debt ceiling vote is a major victory for the President because the Republicans will have held the country and the economy hostage for months for no reason.

    The McConnell cop-out plan to raise the debt ceiling is also a win for the president because it makes the Republican controlled house the first Congress in American history to literally abdicate their responsibility and give the president unilateral control of the debt ceiling. 40+ Republicans in the House could count on a primary challenge.

    If the debt ceiling is not raised, then President Obama will unilaterally save the day and invoke the 14th amendment. If he's lucky Republicans in the House will vote to impeach, but the country will be overwhelmingly behind him.

    All of these scenarios are wins for Obama because Republicans have already screwed the pooch on this fight. They've drawn the line at zero revenue increases, 100% cuts, which is a very unpopular position. They took the country hostage, and raised the stakes. They spooked the market by claiming to think an increase isn't necessary. If another clean debt ceiling vote were expected this year like every other year, the country's credit would not be at stake.

  4. I agree with some of those scenarios, sort of, but not with the first. You say he'll have "[gotten] the least productive congress in modern American history to pass entitlement and tax reform." I say the fact that it happens means they can't be characterized as quite so unproductive. It'd also be ridiculous to suggest that he "made" this happen, rather than that it was forced upon him by a mounting debt and a majority opposition.

    But yeah, there's always a way to act like he "won." But in that scenario, he doesn't, unless you spin the every-living daylights out of it.

    I also think you overestimate the degree to which most people would back him on so thoroughly abusing the 14th amendment. Though I guess we all overestimate the political engagement and constitutional awareness of the average person at our own peril. But constitutionally it's a nonsense idea.

  5. oh ya, @ anonymous: 2 unnecessary wars on top of 2 tax cuts we didn't have money for, not domestic discretionary spending OR social security put us in debt.

  6. No. Our long term debt has always been most threatened by the ongoing, exponentially growing costs of entitlements. Nobody seriously disputes this, except partisans trying to draw an equivocation on spending where none exists.

  7. It's worth remembering that the credit ratings agencies have been talking about downgrading our credit since before the debt ceiling showdown. Our rapidly accumulating debt is the real problem here.

  8. They weren't talking about in the fall of last year, sir.

  9. Anonymous (5:46), If you're talking to me... I’m not sure what you think the significance of autumn is. Read Jonathan’s second link, above. Standard & Poor’s identifies our debt as the real threat to the economy. My point is that this underlying problem is not created by the debt ceiling showdown. And the debt ceiling showdown is only looked upon poorly insofar as it’s shown S & P that there’s a lack of political consensus in Washington. I guess you could blame the Republicans for forcing the issue at a time when political consensus is seemingly impossible. But you could just as easily blame the Democrats, who nixed a deal that Boehner and Obama had worked out yesterday.

  10. I read Ezra's article on his blog earlier today. First of all, Standard and Poor's is not looking at threads to "our economy." They are espousing their opinion on how likely it is that investors will get their money back. Their ideas about that changed because of the GOP's actions. They saw that many were reluctant to raise the debt ceiling at all, and making hay about the consequences of default. The gridlock is what changed their view about the likelihood that the United States will eventually manage these issues.

    Secondly, how could you blame the Democrats for nixing a deal that Boehner and Obama had worked out when most accounts suggested that they hadn't worked out a deal. According to the White House, the President got a call from the Speaker late this afternoon that the House GOP was working with Senate leaders. Boehner claimed they were never close to a deal and the President insisted on tax hikes. There's a lot of spin but I haven't read any accounts suggesting that House and Senate Democrats shot down a deal that Boehner and Obama worked out.

    For anyone generally interested in the consequences of downgrade, they're not pretty. However, some suggest it won't be as ugly as Ezra's post says. There are links to reports from Alliance-Bernstein and Wells Fargo that suggests it won't be that terrible.

  11. Anon -- Klein's piece doesn't mention fear of a default as the reason for concern -- if you read the S&P Update, it says that a default is unlikely and the assumption is that Congress will raise the debt ceiling. The concern is that a credible debt reduction plan is not politically viable. From the report:

    “We may lower the long-term rating on the U.S. by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.”

    Raising the debt ceiling will not spare us this fate... And you only need to look at what’s happening in Europe to see why our “debt burden” is of such concern to bondholders.

    On the second point – Yes, there is plenty of spin and misinformation. FWIW, I was repeating information that was reported on All Things Considered.

  12. I know that it's more than the debt ceiling, per se for S&P, but I'm saying it's the attitudes and rigidness of the GOP and the debate that changed the game. You talk about the debt as being the key to all of this, but the contours of our long-term fiscal situation did not dramatically change between October and last week. Moreover, Derek Johnson found in an interview with someone at S & P that they said the government attitudes *were* the issue. Our *debt* alone led to a very different report last fall. If the debt was the driving problem, why didn't they threaten to downgrade last fall?

    I agree with Paul Krugman that the Hellenization of debt discourse has gone too far. Look at Europe. According to CBO, our debt-to-GDP ratio numbers are deeply troubling over the long haul, but we're still a pretty far way from Greece.

    And "such concern to bondholders"? Treasuries are quite low by historic standards. Our interest ratings are not very different from the UK's which undertook a harsh austerity program. Many people in the know who are looking at this issue believe that bond holders are too lax and going too far in giving the government the benefit of the doubt.

    Here is one Wall Street Strategist talking about these issues on Klein's blog:
    "Markets are giving policymakers a huge benefit of the doubt by assuming future deficits will be made sustainable. That’s a leap, but that’s what history tells you — the US has never let deficits run at a damaging level for a sustained period. Sure, there will likely be a time when yields rise in a way that compels Washington to cut deficits, but where exactly on the curve should that be priced in now?
    My checklist for when the day of reckoning arrives is some combination of the following: deleveraging is close to running its course, emerging markets seriously revalue their currencies (taking EM central banks out as big buyers of treasuries), foreign govts clean up their fiscal problems (the PIMCO line about US treasuries being the least dirty shirt in the laundry), and Washington demonstrates an inability to cut longer-term deficits. The last isn’t the only item on the list."

  13. “If the debt was the driving problem, why didn't they threaten to downgrade last fall?”
    Because they believed at that time that a credible debt reduction plan was more likely to be arrived at by policymakers over the next two years. Recent events make them believe that a consensus is less likely in DC. You can blame Republican “rigidness” for this failure if you want, but none of this would be an issue if our debt levels weren’t perceived as a major threat to bondholders. S&P isn‘t bothered by the fact that Republicans have forced a debate on this… indeed, it’s exactly the debate they’d like to see, they’re just disappointed with its outcome so far.

    As to the rest -- When you add state liabilities, the US debt-to-GDP ratio falls between that of Portugal and Greece. I agree with your analysis about what drives bondholder behavior here. Part of my concern is that the US is getting the benefit of the doubt simply because we are the US… which means the markets will allow us to get closer to the precipice and give us more rope to hang ourselves.


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