Monday, July 25, 2011

The debt limit will be raised

There's a lot of political posturing going on in Washington, but by the end of the week we are almost certain to see an increase in the debt limit, because neither party can afford to fail on that issue. What is not clear, however, are three things: 1) how much the limit will be raised (will it be a short-term fix, or a fix that will take us beyond next year's elections?), 2) how much spending will be cut (spending will definitely be cut), and 3) whether taxes will increase. On the latter point, I see almost no chance that tax rates will increase; if higher revenues are part of the deal, the money will come as the result of cleaning up the tax code (eliminating deductions), and from a stronger economy. The economy is not strong enough to sustain tax rate increases, and everybody knows that.

So by the time the dust settles later this week, there's a very good chance that we will see Washington take action to fix our biggest problem, which is too much spending. The debt limit debate has served a good purpose, which has been to focus the public's mind on the huge growth in government spending that has left us with a staggering burden of debt in just a few short years. It's about time. Fiscal policy was on an unsustainable course, and now it looks like a  course correction is imminent. The problem won't be completely solved, of course, because it will take years to fix. But next year's elections will give the people ample time and opportunity to think about our priorities. I suspect that the ongoing popularity of the Tea Party reflects a widespread and growing belief that government has become too large and must be cut back. If that's the case, then there is plenty of room for optimism.

Whether US debt is downgraded or not is almost a side-show compared to the bigger, long-term issue of the size of government. A downgrade doesn't seem very likely, but if it were to occur it would just add to the pressure to cut spending, a process that is already underway.

But all this is hardly news, and I only point out the obvious. A quick glance at the bond market, where 10-yr Treasuries are trading at 3%, is enough to know that the market is not at all concerned about the possibility that the US might actually default on its debt obligations.

UPDATE: This quotation from Thomas Babington Macaulay seems to fit perfectly the emerging mood of the people:

Our rulers will best promote the improvement of the nation by strictly confining themselves to their own legitimate duties, by leaving capital to find its most lucrative course, commodities their fair price, industry and intelligence their natural reward, idleness and folly their natural punishment, by maintaining peace, by defending property, by diminishing the price of law, and by observing strict economy in every department of the state. Let the Government do this: the People will assuredly do the rest.

HT: Don Boudreaux


Benjamin Cole said...

I hope Scott Grannis is right in this intelligent analysis. I hope Grannis is not too reasonable a man to understand today's right-wing.

I fear there are elements on the right-wing who want Obama to fail, and if that means making the economy fail, so be it.

The GOP nihilists seem to be calling the shots.

I am no Obama fan--I think he is the picture of mediocrity. We are still stuck in Afghanistan, military spending remains incredibly bloated, and his health plan is too expensive. Obama appears completely uninterested in Fed policy. Obama's energy policy is a zero. He anachronistically demonizes the oil industry.

All that and he is still better than his predecessor and I hope we get a budget deal.

McKibbinUSA said...

I tend to agree that a deficit reduction deal will happen this week -- however, I am pondering the hypothesis that both parties are actually jockeying for a sideline position in order to avoid blame for some sudden and unforeseen inflationary event -- gold is already moving into new highs in global markets -- imagine that some unimaginable global market reaction occurs suddenly and without notice sometime this week and the US Congress and Federal Reserve had to deal with that hypothetical fiscal crisis at the same time they are working on negotiating a budget deal this week -- almost any global crisis would force the US over the edge at this point -- investors should remain vigilant and alert until the US comes up with a deal that will shore up the nation's stature as a world financial leader -- everyone should watch this video:

I personally refuse to be blind-sided by the nation's economy...

John Short ad sinorazum said...

Over 40 years of history, we have seen only raising of the debt ceiling. The mere fact they cannot come to an agreement with the most conservative of democratic presidents in 40 years, shows clearly the GOP has become far more fundamentalist, like the Taliban, than I ever imagined.

Paul said...

"I fear there are elements on the right-wing who want Obama to fail, and if that means making the economy fail, so be it."

Names and evidence, please.

Benjamin Cole said...

(Reuters) - Home building likely won't return to normal levels until 2014, and then only if housing prices rebound and foreclosures drop sharply, research from the San Francisco Federal Reserve Bank showed.

Continued weakness in the housing market is dragging on the U.S. economy, which is losing ground under the weight of 9.2 percent unemployment and declining consumer confidence.

A report on Friday is expected to show the U.S. economy expanded at a 1.8 percent clip in the April-to-June period, below the first quarter's tepid 1.9 percent rate.

Research released Monday by William Hedberg, a San Francisco Fed research associate, and John Krainer, a senior economist there, indicate the drag from housing is likely to continue for years.

"Our analysis suggests that even an unusually strong period of real house price appreciation would not, on its own, lift starts to long-run average levels," the researchers wrote in the regional Fed bank's latest Economic Letter. "A significant easing of the drag on housing stemming from the inventory of foreclosed homes is also needed."

Foreclosures would need to drop by 50,000 homes per quarter starting in 2012, the researchers found, and home prices would need to stop falling by 2013 and then begin to rise, for housing starts to return to pre-2004 levels by 2014.

Such a scenario is optimistic, they said, because the inventory of foreclosed homes is still rising, and the 50,000 unit-per-quarter decrease would match the sharp pace of increase in foreclosures when they began in 2006.

Ouch--but the important thing is that we keep a lid on inflation.

BTW, house prices have fallen for 20 straight years in Japan.

brodero said...

"I suspect that the ongoing popularity of the Tea Party"

I don't want to burst your bubble
but the popularity of the tea party
is the same as it was last year...
the difference is it's unpopularity
has grown....The American people
have never liked extremism from the
left or the right...

Benjamin Cole said...

BTW, Don Boudreaux authored a piece in 2006 arguing that the CPI very much overstates inflation, due to product improvement, and constant business and consumer migration to better and cheaper goods and services. He is head of the George Mason Econ Department.

With the CPI core at 1.6 percent over the last 12 months, and that may be overstating the case--why is not Boudreaux calling on the Fed to stimulate?

Benjamin Cole said...


The Tea Pary/GOP schism is a fascinating item to watch. In the last couple elections, Tea Partiers easily ousted establishment GOP'ers from their seats in primaries.

This means the establishment has lost control of the party, and control now is nowhere, or resting with radio talk-show hosts. Call it the Sarah Palinification of the GOP.

House Majority Leader Boehner was on the Rush Limbaugh show kow-towing to his Excellency recently. And Rush has explicitly stated he wants Obama to fail. Rush also has enough money banked (even after recreational drug expenditures) to take on a few years of recession easily.

It is hard to know who, if anybody, is running the GOP now. The little weenies at the RNC seem cloutless, and playing second fiddle to Koch brothers and others.

I suspect the GOP will lose the next cycle due to that reality, and extremism. But it will be a fascinating show to watch.

The GOP nihilists may overplay their hand.

mmanagedaccounts said...

"even after recreational drug expenditures"

Benjamin, exactly what are those recreational drug expenditures?

John said...

We cannot afford to not have some kind of tax increase. With two wars taxes have been cut and it has always been unheard of not to see taxes raised to help fund a war.

Look at the costs of these wars this past decade compared to our debt.

If anyone was to actually listen to real economists you will understand that lowering taxes doesn't increase revenue.

Currently many companies are making larger profits than before the recession after reducing their workforce. They are not taking these profits and hiring more people or even people back. It is ridiculous to believe companies are simply going to hire people because they can afford to.

The need a cash incentive and if that means getting taxed higher due to higher profits then they will be sure to eliminate those profits by reinvesting in the company, including employees.

The Bush era tax cuts certainly didn't generate a boom in the economy as promised ... in fact, the recession began after these cuts.

Nobody wants higher taxes but if we get something of value and needed back for these taxes then we shouldn't complain.

The mantra of lower taxes being the golden rule is something lazy minds buy into.

Jim said...

If Americans were logical we would not have voted for a barely freshman senator with no business and legislative experience.

The question you should be asking is what if?

William said...

This is what everyone seems to forget about our $14.3 Trillion debt.

"In 2000, at the beginning of Republican George W. Bush's presidency, U. S. national debt was $5.7 trillion, according to the U.S. Treasury Department -- a time when the United States also had a projected surplus of $5.6 trillion over 10 years."

From Reuters:


Benjamin Cole said...

Managed Accounts-

As a non-doper, I am not expert in this matters. Rush L. has a doper past. Some sort of painkillers--used so heavily he lost his hearing.

It was a joke--my understanding is that Rush earns $50 millions a year or close to it. Even a few million for drugs would not dent this guy.

Mike Eliason said...

Scott, I hope to God that you're right. Now it's look like the Boehner plan may not even get through the House. If that can't pass the House, what can?

A part of me thinks Obama wants the debt ceiling not to get raised. This way, when our credit gets downgraded, he can blame the downgrade on the Republicans in the House. I'd like to think Obama would put the interests of the country first, but has he ever done that? He's an ideologue first.