Non-Negotiable

Said Obama: "I think that it's lowdown
To set up a Debt Ceiling showdown.
Though the House GOP
May well disagree,
It's a road I intend not to go down."

Battle lines have been drawn over the increase in the federal debt limit, which must happen by March to avoid a government shutdown and likely default.  President Barack Obama gave a press conference yesterday in which he pledged not to negotiate with the House GOP over the debt ceiling increase, saying that such crisis-fueled, eleventh-hour bargaining is no way to run the government.  The crux of the President's argument is that the Congress cannot refuse to incur the debts for the spending it has already approved; he likened it to beginning a diet by walking out on the rich meal you've just had, without paying the check. 

For their part, Republicans clearly intend to use any available leverage to force a reduction in federal outlays, regardless of default risk: House Speaker John Boehner, while acknowledging the economic harm that would come from a default, said: "The American people do not support raising the debt ceiling without reducing government spending at the same time."

However, the Washington Post's Greg Sargent thinks the Senate Democrats may hold the trump card: if the House passes a bill with both a debt ceiling increase along with big Medicare and Social Security cuts, the Senate could simply amend the bill by stripping out the cuts, and send it back.  Sargent believes that the Senate GOP is more politically realistic, and would not filibuster the amendment.

Bottom line: at this point, it's too soon to say that America has passed the era of banana republic politics.

In Lieu of Geithner

Said Obama: "In term number two,
For Treas'ry I want Mr. Lew.
I'll rely on his talents
To find fiscal balance,
And fight with Republicans, too."

It's reported that President Barack Obama will nominate Jacob ("Jack") Lew, his former budget director and current chief of staff, to succeed Timothy Geithner as Treasury Secretary.  As the mainstream media will tell you, this signals a change in focus from the global financial crisis that dominated the President's first term, toward budget fights with Congress, and long-term fiscal sustainability.  The Wall Street Journal characterizes Mr. Lew as "a veteran of numerous Washington budget battles, stretching back to his work as a senior congressional aide in the 1980s." Oddly, there is little initial signaling of congressional opposition to this proposed nomination, despite Mr. Lew's inflexible reputation and angry clashes with Republican aides during the 2011 debt ceiling fight. Former Senator Judd Gregg, a New Hampshire Republican, may have summed it up best: "He's a tough guy to negotiate with. He has his positions and he doesn't give much ground, though he's really a nice person."

Mint the Coin

With the Debt Ceiling coming up soon, it
Is time (although some may impugn it)
For coining a halt
To a US default
With a really big monet'ry unit.

A one-trillion coin, it is said,
Could be minted and shipped to the Fed,
In order to pay
What the US of A
Might be forced to renege on instead.

This sizeable denomination
Would be kept out of mass circulation,
The better to sidestep
That such an untried step
Precipitates hyperinflation.

When Republicans finally come round
From running bond issuance aground,
It's back to the Mint
For the Coin, where its stint
Will be wound up with melting it down.

So let's mint The Coin out of platinum!
Though objections there be, we may flatten 'em.
There are ways besides cash
'Round the Debt Ceiling clash,
But there's nothing as clever as that in 'em.

It's an idea so crazy, it just might work: the US Treasury could circumvent the looming debt ceiling showdown by minting a very large denomination platinum coin of, say, $1 trillion. The coin could be deposited in Treasury's account at the New York Fed, where the new funds could be used to pay any of the Federal government's many obligations. First proposed in a comment on an economic blog in 2010, the Coin is within the legal powers of Treasury, which "may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time." Never mind the fact that this law was intended to facilitate minting bullion coins for numismatists - it's on the books. Of course it's absurd to speak of minting a $1 trillion coin to keep the government out of default, but the debt ceiling itself is absurd, as is the threat to throw the nation into default for political purposes. So, it's a case of fighting crazy with crazier.

The "Mint The Coin" movement has been gaining steam thanks to the (only slightly tongue-in-cheek) advocacy of such leading economic writers as Bloomberg's Josh Barro and Business Insider's Joe Weisenthal. For those who fret that the issuance of a $1 trillion coin would ignite inflation of Zimbabwean proportions, a former head of the US Mint (who wrote the 1996 platinum coin law) has weighed in with a cogent explanation of why that would not happen. It all comes down to a choice: would we rather the US Treasury default, or do something absurd?

Kicking The Can Down The Cliff

Under watchful regard of a nation
In Twenty-Thirteen celebration,
Congressional members
Took leave of December
By rigging the rules of taxation.

With many a jubilant *clink*,
The deficit promised to shrink,
But much is depending
On questions of spending,
And soon we'll be back at the brink.

The prospects are less than appealing
For the next round of Washington dealing,
Especially if
There's a new Fiscal Cliff
When Treasury hits the Debt Ceiling.

As everyone knows, the US Congress passed an emergency measure on New Year's Day to avert the worst of the automatic tax hikes that were to take effect under the "Fiscal Cliff" provisions that it enacted after last year's debt ceiling fight. For those who want to know what the latest tax deal means for them personally, Matthew O'Brien has a couple of helpful charts in The Atlantic. The bottom line is that, while everyone's tax rates and payments are now less than they would have been under the full Fiscal Cliff, most Americans will see another 1.5% of their income going to taxes, and the well-to-do will feel 3-8% poorer. Ironically, some of the most fortunate taxpayers are those whose income is between $200-500 thousand. They have mostly avoided marginal tax rate increases, which apply to income above $400,000 ($450,000 for joint filers) and will not pay more in alternative minimum tax, which has been permanently "patched".

Those who may have worried that a bipartisan agreement on taxation signals a change in the ways of Washington will be reassured to know that the deal has preserved an impressive array of obscure tax breaks for special interests, as the New York Times reports.

However... the thornier questions of cutting expenditurses (or at least, reducing their long-term growth) have been pushed off by a month, as has the always-explosive question of raising the Federal debt ceiling. Another high-stakes political standoff is therefore guaranteed, which means that the celebrated tax deal is actually not much to celebrate.

Noël Greetings

Merry Christmas to friends far and near,
And retailing holiday cheer,
With a dovish Fed rule
To stimulate Yule,
And a fiscally balanced New Year!

 - Dr. Goose

This Is The End

An ancient foretelling of verity
Said the world with go out with severity,
But may really impend
The recovery's end
In Washington's leap to austerity.

The Republicans' fiscal cliff diver
Advanced a proposal that neither
The White House or Senate
Would ratify when it
Was passed, which it never was, either.

One shouldn't put too much reliance
On the art of political science,
Which tends to foretell
The future as well
As the calendar made by the Mayans.

If you are reading this, then the world did not end on December 21, 2012, as predicted by the Mayan calendar. The negotiations to avoid the "fiscal cliff", however, are another story. Earlier in the week, optimism ran high as proposals advanced by House Speaker John Boehner and President Barack Obama were "only" $200 billion apart in long-term revenue raising.

Seemingly at the last minute, the Speaker shifted gears and announced a "Plan B" that, although rejected in advance by the White House and the Democratic-controlled Senate, had placed enough constraints on tax hikes to garner the needed support of House Republicans. In the event, the legislation was pulled due to many many of those Republicans' resistance to even modest tax increases on the very wealthy. With legislators now heading home for the holidays, it appears that Mr. Boehner's reputation as a negotiator is preceding the federal budget over the cliff.

The End (Of the Fiscal Cliff) Is Near

Said the President: "Well, We are possibly
Confounding the ominous prophecy.
If I may be concise,
We differ on price,
And not fundamental philosophy."

Reports are that President Barack Obama and Speaker of the House John Boehner are close to a deal that may avert the "fiscal cliff." The New York Times reports that the President has offered a deal that would raise revenues by $1.2 trillion over the next decade but keep in place the Bush-era tax rates for any household with earnings below $400,000. This offer is not very far from that which the Speaker proposed on Friday, suggesting that the two sides are dickering on price rather than looking out over an unbridgable gulf.

At this rate, a solution to the Federal deficit standoff may be found before the December 21 end of the world predicted by the Mayan calendar.

It's Beginning to Look A Lot Like...

It's beginning to look a lot like Cliffmas
Evvvv'rywhere you go.
They're intractable on the Hill,
The President's stronger still,
He's setting his toboggan in the snoooww...

It's beginning to look a lot like Cliffmas;
Soon the bells will chime,
And the posturing will be worst
On January First,
When we're ouuut o-o-of tiiime.

The President and his Republican Congressional opposition continue to sing from different hymnals on the major issues of taxation, while trying to reach a long-term deficit reduction deal that will avoid the "Fiscal Cliff." On a related note (see what I did there?), Matt Miller hypothesizes an Endless Cliff in the Washington Post:

It seems almost certain that any new deal that is struck, either before January 1 or some time afterwards, will involve some minor near-term “action” or “down payment” combined with the creation of a new fiscal cliff of unpleasant consequences to be triggered sometime in 2013 if a broader deal on tax and entitlement reform is not reached.

This, because a divided Washington needs “a forcing device” to instigate action.

But what will have changed later in 2013 to produce a different outcome? Arguably nothing. And so we have the prospect of another deal with illusory progress later in 2013, along with the creation of the next forcing device. Which eventually forces the next sham deal and the creation of the next forcing device.

It's beginning to look a lot like only a major political disruption - such as Congressional district un-gerrymandering, a Democratic sweep of the next midterm elections, or the complete removal of money from politics - could stand in the way the Endless Cliff Hypothesis becoming reality.

(Embedded music track powered by mp3skull.com)

No Cliffhanger

A pundit, politically touting,
The conventional wisdom was flouting,
When he roundly dismissed
The Fiscal Abyss
As "Over, except for the shouting."

The Business Insider's Joe Weisenthal declares that today's stock market is in the throes of a "Morning Money Ben rally." That's because Politico's Ben White has made the gutsy call that the fiscal cliff is already over. Swimming against the current of mainstream media coverage of this supposed January 1 cliffhanger, Mr. White points out the essential difference between the political situation today and that which prevailed during the Debt Ceiling debacle:

Nearly every signal from Republicans suggests they understand they have lost the war over taxes going up on the wealthiest Americans and are just trying to figure out how to get the least objectionable deal that includes real spending cuts and a trigger for tax and entitlement reform. It’s clear from polling that the GOP will get the blame if taxes go up on everyone on Jan. 1 and any subsequent damage to the economy and markets will fall squarely at the party’s feet. Republicans are no longer ignoring such polls.

In a somber counterpoint to Mr. White's analysis, Mr. Weisenthal reminds us that the greater political difficulty for President Obama this time may lie on his own Democratic side, in getting Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi to play ball in the field of Social Security and Medicare cutbacks.

A Perfect Scandal

In DC, it's a welcome distraction
From each warring political faction:
Invoking, in speeches,
Security breaches
From man-on-biographer action.

It appears that the affair of CIA director David Petraeus and his biographer, Paula Broadwell, is the perfect Washington scandal, giving the mainstream media just enough connection to supposed "national security issues" to justify around-the-clock coverage of a tabloid story. This was made abundantly clear today during President Barack Obama's midday press conference.  The President spoke on progress in negotiating a long-term budget deficit solution that would avoid the fiscal cliff (or "austerity bomb," as I like to call it), with special attention to his insistence on letting the Bush tax cuts expire for the top 2% of income earners.  The first question went to the AP's Ben Feller, who asked:"Can you assure the American people that there have been no breaches of national security or classified information in the scandal involving Generals Petraeus and [John] Allen?"

Now, this is a non-question, since it is already evident that there was no breach of national security, and we already know that Ms. Broadwell had classified information on her computer.  Of course, Mr. Feller's question gives him an opening to write a lede containing the keywords "sex scandal", which is much juicier than leading with "tax cuts" or the "fiscal cliff". However, this is a time when the nation needs to focus on its long-term sustainability, and the Ben Fellers of this world should be helping us to do so - as should the Dr. Geese.

Rhyme & Reason on the Fiscal Cliff

If rational ladies and chaps
In Congress agree to put caps
On deductions from taxes,
Then revenue waxes,
With deficits waning, perhaps.

But merely increasing the revenue,
For sustainable budgets, would never do.
Our care for the aged
Must now be re-gauged,
If balance long-term we endeavor to.

To establish a little more surety
For Medicare and Social Security,
We must compensate
For our slowing death rate
By raising the age of maturity.

The Congress may not be remiss
In horsetrading that against this,
For to hope there is reason
That Washington's seizin'
Escape from the Fiscal Abyss.

Over the weekend, Dr. Goose was seized by optimism when he read Greg Mankiw's latest blog post regarding the resolution of the fiscal cliff. In a post entitled "How To Raise Tax Revenue From The Rich Without Increasing Tax Rates," Prof. Mankiw writes:

According to the Tax Policy Center, if we cap itemized deductions at $50,000 and keep tax rates as they are today, we would raise $749 billion in tax revenue over ten years. Moreover, according to the TPC's distribution table, 96.2 percent of the extra revenue would come from the top quintile, with 79.9 percent from the top one percent.

This elegantly simple modification to the tax code, which was also floated by Mitt Romney during his presidential campaign, could be the core of a compromise on the federal budget. The quid pro quo would be a reduction in the growth rate of spending by "gradually but significantly increasing the age of eligibility for Medicare and Social Security." Of course, there's more to it than this, and the devil, as always, is in the details, but it does give one hope to see a simple framework on which reasonable people can come together.

In a related point, I like the term "austerity bomb" as a more descriptive alternative to "fiscal cliff" for describing what will happen if no budget deal is reached.

Big Bird Trilogy

Said Romney: "I find it absurd
Giving federal support to Big Bird.
To feather his nest
Leaves our budget distressed -
Free markets are really preferred."

"Though he helps us to learn ABCs,
Our country is fiscally squeezed,
And funding this fellow
Who's goofy and yellow
Means borrowing from the Chinese."

"In our nation's historic chronology,
We patriots make no apology
To assert: win or lose
It's our birthright to choose -
'Give me freedom before ornithology.'"

Romney's Good Idea

Said a policy wonk named Maria:
"We're in need of a tax panacea,
And I'm hearing that Romney,
The GOP nom'nee,
Has floated a clever idea."

"Mr. Romney proposes to cap
Those deductions it's too hard to scrap,
To bolster his case
Of broad'ning the base
While constricting the deficit gap."

"Though a limit of 17G
Balanced budgets will not guarantee,
I'm glad to see some
Specificity from
This heretofore vague nominee."

On the day before his first debate with Pres. Barack Obama, Mitt Romney introduced an intriguing(*) new element into the campaign with a proposal to cap personal income tax deductions at $17,000. Among the blognoscenti and twitterati, the electrified reaction was: "Tax specifics from Mitt Romney? Stuff just got real!" The concept is simple, but elegant: Romney would like to lower tax rates while broadening the base, by eliminating deductions, exemptions, credits, etc. Since each of those tax expenditures comes with a constituency that will fight to keep it, one simply sidesteps those fights by keeping all the loopholes, but limiting one's capacity to use them. In Romney's own words: "As an option you could say everybody’s going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction, or others - your healthcare deduction. And you can fill that bucket, if you will, that $17,000 bucket that way."

Now, as Josh Barro explains in Bloomberg, even a simple and elegant proposal has the devil in the details. Moreover, it's likely that this cap will not be enough to pay for the across-the-board 20% tax cut that Mr. Romney wants. However, as we chew over this interesting new idea, it pays to remember that the perfect should never be the enemy of the good.

(*)As always, I am required to disclose that the use of the word "intriguing" signifies a good idea from someone with whom I generally disagree.

Krugman Examines the Ryan Plan

That dapper young Congressman Ryan
Was sellin' what many were buyin'.
A wonk came along,
Announced he was wrong,
And proved it without even tryin'.

"My plan," said the Chair of the Budget,
"Will balance the books, as I judge it."
Said Krugman: "Your cuts
Are unspecified, but
Any figure looks fine if you fudge it."

"To cite what I find so offending
In the plan that the Chairman's intending,
Have a look at the dents
That he'd make in Defense
And in Other Discretion'ry Spending."

"They'll cut, say the Chair and his staff,
From 12 points to 3 1/2.
Since the Pentagon's spent -
On its own - 4%,
This projection is good for a laugh."

"If you doubt this Princetonian nerd,
Let the CBO have the last word:
'The specifications
For these calculations -
At this point - have yet to be heard.'"

Paul Krugman, in his New York Times blog, asked What's In The Ryan Plan and determined: not much. His dismissive critique of House Budget Committee Chairman Paul Ryan's US federal budget proposal is based on the analysis of the Congressional Budget Office, which found that the plan's headline numbers were unsupported by specific proposals to achieve them.

Running Mates

Mitt Romney had tried not to frighten
Those whose Medicare worries were heightened,
But picked for his second
A fellow who reckoned
He'd cut it, and put that in writin'.

Republican Presidential candidate Mitt Romney has chosen as his running mate Representative Paul Ryan of Wisconsin, Chairman of the House Budget Committee. While Mr. Romney's core beliefs can sometimes seem hard to pin down, Mr. Ryan has captured the attention of the political world with a deficit-reduction proposal that would do away with Medicare in its current form, something heretofore considered the "third rail" of American politics. In the Ryan proposal, Medicare would become a state-administered voucher program. In bringing Rep. Ryan into his campaign, Mr. Romney has given new energy to both Republicans and Democrats, each of whom now see a starker choice in November.

Sermon on the Fiscal Mount

In Congress, there's no more finessing this:
Our budget is bound for the precipice.
The free ride is ending
(Low taxes, high spending),
Though Washington's slow in addressing this.

With the US in fiscal distress so,
We could levy more from the noblesse, though
The mean millionaire
Pays more than their share,
(If billionaires still somewhat less so).

Some say for the deficit's end,
We must simply rein in what we spend,
Though cutting back solely
Would undermine wholly
The programs on which most depend.

It's time for the US community
To realize that none have immunity;
To fix our finances,
The most likely chance is:
In sacrifice, we may find unity.

The preceding limerick homily, in this summer of the Fiscal Cliff, was inspired by David Wessel's column in The Wall Street Journal, in which he points out that there are no easy, scientific solutions to the question of "tax fairness," and by extension, deficit reduction. Mr. Wessel's figures demonstrate that, while taxes on the rich have come down over the last 30 years, so have those on everyone else. Somewhat sparingly, he does mention that the super-rich - the 0.1%, the Forbes 400 - do pay less than the "merely" rich because of their reliance on income from dividends and capital gains, which are taxed at only 15%. The aforementioned inequity notwithstanding, it appears insufficient to look for deficit reduction only by "asking the rich to pay their fair share," as it does only by "cutting out-of-control spending." In other words, we can't solve our fiscal problems only by asking the other person to take the hit.

Hat tip to Barry Ritholtz for highlighting the key facts of Mr. Wessel's column.

Fed Chairman's Senate Testimony

Said Bernanke, in Congress to testify,
To the Senators: "Gents, it is best if I
Admonish this hearing
The fiscal cliff's nearing
Which brinksmanship must be arrested by."

Federal Reserve Chairman Ben Bernanke gave his semiannual testimony to the Senate Banking Committee yesterday, and painted a bleak picture of the economy's prospects. Among the familiar litany of economic ills are high unemployment, a weak housing market due to tight credit standards and poor creditworthiness, and a slow business investment outlook. Unfortunately, it appears that the additional tools at the disposal of the Fed are limited in scope and liable to cause unwanted side effects. The Chairman reminded the senators that another economic danger - the so-called "fiscal cliff" of expiring tax cuts and automatic federal spending reductions set for January - is outside of the Fed's purview and squarely in the hands of his Congressional interrogators. Alarmingly, they as yet show no signs of applying the brakes before the sputtering recovery is driven over the precipice.

That January Deadline

An economist whispered: "I fear
That the time for can-kicking draws near;
For tax cuts on income
And payroll (and then some)
Expire the first of the year."

Alan Blinder must hope that Congress doesn't want to "shoot the messenger." The Princeton economist and former Vice Chairman of the Federal Reserve reminds them and us that, in January 2013, deadlines loom for:

• the expiration of

the Bush tax cuts

the 2% payroll tax cuts

extended unemployment benefits

and

• the imposition of automatic spending cuts from the failed deficit reduction super committee.

Taken together, these falling cans - if not adroitly kicked further - would take 3.5% from America's GDP at one stroke. Time for those Congressional punters to start warming up...

Belt-Tightening Blues

In the stock market sell-off's severity,
There's a White House political rarity:
While private demand
Is too soft to expand,
There's a Democrat talking austerity.

As millions of Americans fretted about S&P's Friday night downgrade of US sovereign debt, Monday's stock markets saw a tsunami of selling that began in Asia and rolled across the world, ending with the S&P 500 stock index down 6.7% for the day. However, the downgrade itself was not the catalyst, as evidenced by the fact that Treasury prices actually rose. The market was much more spooked by waning growth prospects, caused in part by government belt-tightening at a time of slack private demand. How ironic that, following a Republican President who stimulated the economy with spending and tax cuts, and his Democratic successor announces years of growth-dampening spending cuts ahead.

Debt Ceiling Lesson

Said Boehner: "My lasting impression
Of this Washington debt ceiling session?
It's a wonderful thing
The minority wing
May employ to extract a concession."

The budget compromise worked out in dramatic fashion on Sunday night between U.S. President Barack Obama and congressional leaders is actually not very definitive, considering the amount of time and angst that went into making it. Republicans can point to one key accomplishment: the White House’s agreement to $917 billion of spending cuts over the next ten years. As for the next $1.5 of deficit reduction, that particular can has, as they say, been kicked another six months down the road. The most important legacy of this protracted episode of brinksmanship may be that a vocal and well-organized minority can use the debt ceiling to bend the government to their will. One wonders what Denmark – the only other developed country with a debt ceiling – will make of all this.