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Economic View: How Boehner Could Find Blue Sky, Above the Debt Ceiling

January 12, 2013 by Leave a Comment

A valuable principle of negotiation is to “never bargain with someone who does not have the power to say yes,” and Mr. Boehner has demonstrated that he lacks that power. He couldn’t even persuade his caucus to agree on a Plan B counterproposal and had to let Vice President Joseph Biden and Senator Mitch McConnell, the minority leader, steer the deal that avoided, or at least postponed, the so-called fiscal cliff.

I have a suggestion for how Mr. Boehner could have himself invited back to the negotiation party. But first, let’s take stock of where we are.

What has been accomplished, for better or worse, is that the Bush-era tax cuts for families earning less than $450,000 a year have been made permanent — or at least as permanent as anything in the tax code can be. Those earning more than $450,000 face a tax increase. There are further complications, of course, but the important thing is that there was no substantive tax reform, and no decisions about spending. The final bill even preserved the tradition of corporate welfare by extending a subsidy to Nascar.

Over the next few months, Congress faces a new series of deadlines:

The spending cuts mandated by the sequestration will begin on March 1, unless Congress delays them again. Congress needs to pass a “continuing resolution” or government will shut down, as it did in the 1990s during the standoff between Bill Clinton and Newt Gingrich. And, finally, the debt ceiling will need to be raised or the government will no longer be able to pay its bills to Social Security beneficiaries, the military or the owners of government bonds — a group that includes nearly everyone with a retirement account.

I have listed these deadlines in increasing order of their hazard to our economic health. The spending cuts would be tough and arbitrary but gradual. Incurring them for a couple of months would be bad, but not horrible. Closing down the government is more serious. And even if you’d like a smaller government, you probably still want essential services to continue.

OF the three, the debt ceiling is likely to arrive first and is simultaneously the most serious and the most ridiculous. It’s serious because it’s unthinkable that the government would stop paying its bills, and the ramifications if we defaulted on our debt payments would be catastrophic for the nation and the global economy. We don’t even want to think about going there.

But the debt ceiling is also ridiculous, because the law is redundant. It’s a tradition for members of Congress who aren’t in the same political party as the president to make sanctimonious speeches against raising the debt limit, to keep that president from running up big bills. Yet it is Congress, in fact, that determines how much we spend and how much tax revenue we collect. Our representatives and their predecessors passed the bills and authorized the spending that got us to this place. If they want to reduce the deficit, they should cut spending, increase revenue, or both. But what they should not do, under any circumstances, is to look back at the decisions they have already made and conclude that it would be smart to declare the United States bankrupt, thus creating a second global financial crisis.

Which leads to my proposal for restoring Mr. Boehner’s relevance: He should propose that the debt ceiling be raised for at least two years or, even better, propose that it be abolished. He wouldn’t need a majority of his own party to vote for such a bill, of course, because it would have wide support among Democrats. He would just have to propose it and persuade some of his colleagues to support it. That would be enough.

Here is why I think this is a good idea, for him, the Republican Party and the country:

Congress has plenty of incentives to make a deal on spending. Taxes have already been increased and Republicans are eager to even the score. The sequestration-induced spending cuts coming on March 1 should provide more than enough impetus for Congress and the president to agree to something, even if it’s only a plan to undertake serious tax reform and a comprehensive evaluation of all government spending. By removing an option that we should never rationally use, we can immediately accomplish an often-cited Republican goal — reducing global uncertainty — and likely restore our triple-A credit rating. The Bipartisan Policy Center has estimated that the dillydallying about the debt ceiling last time, which ticked up interest rates, will end up costing more than $18.9 billion over 10 years, about the same amount as the recent Medicare “doc fix, ” which blocks cuts to doctor reimbursement rates.

Tea Party conservatives would undoubtedly be outraged by this suggestion, arguing that Republicans need to retain the debt ceiling threat if they are to get the best possible deal from the Senate and the president. But taking this crazy threat away from a group that just might use it is precisely the point.

By undertaking this act of unilateral disarmament, Mr. Boehner and whichever Republicans had the courage to join him would be signaling that they’re willing to engage in the serious discussions the country needs, and to put pressure on Democrats to do likewise. Anyone who has a large bomb and is threatening to push the button doesn’t deserve to be a party to these discussions.

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago.

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago.

Article source: http://www.nytimes.com/2013/01/13/business/how-boehner-could-find-blue-sky-above-the-debt-ceiling.html?partner=rss&emc=rss

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Political Memo: Congress Takes Up a Partisan Battle, Again, Over Spending

December 18, 2011 by Leave a Comment

Shutting down the government. Again.

For the third time in a year, the divided 112th Congress is dancing on the edge of catastrophe, locked in a bitter partisan battle over fiscal measures, with unrelated policy debates clinging to the side.

Republicans and Democrats do not agree on how to pay for something that both sides claim to want — extension of a payroll tax holiday for almost every worker — and have until the end of the year to work it out or see the tax go up, something that most economists say would further damage the nation’s fragile economic health by taking money out of consumers’ pockets.

Now tied to this measure is a plan to keep the government financed through the rest of the fiscal year, because Senator Harry Reid, Democrat of Nevada and the majority leader, has indicated that he will not permit a vote on the huge spending measure until Republican and Democrats can come together on the payroll tax bill, which would also include an extension of unemployment benefits.

If an agreement on the spending bill does not come by midnight Friday, the government will be unable to pay its bills unless Congress passes yet another stop-gap financing bill to buy time, something the White House indicated late Wednesday night that it would prefer. 

Leaders of both parties say they are determined to avoid a pre-Christmas shutdown, raising the possibility that Congress may just pass a short-term bill to keep the government open and kick the whole payroll tax and spending mess into next year.

The ugly dynamic mirrors the battles of last spring, when the government came within a whisker of shutting down over a spending fight, and last summer, when the nation almost defaulted on its debt obligations when Congress fought over raising the debt ceiling.

Now, with Congress entering a winter of discontent, each side expressed outrage — much of it manufactured — on Wednesday and blamed the other side for the potential debacle looming at the end of the week.

After meeting privately with President Obama on Wednesday, Senate Democrats began to cobble together a new deal to extend the payroll tax without using a surcharge on incomes over $1 million, something Republicans detest. They hope the new measure will have legs in both chambers, but Mr. Obama’s press office said Wednesday that the president would like Congress to pass a short-term financing measure, known as a continuing resolution, for now. 

At the same time, House Republicans, who have already passed a payroll tax extension that Senate Democrats oppose,  late Wednesday night filed their own spending bill that they may bring to the floor Friday it an attempt to pass it,  leave town and force the Senate either to take or leave the House measure. But it was far from clear that they had the necessary votes to execute that tactic.

The last-minute wrangling is the predictable outgrowth of the failure last month of the special Congressional committee assigned to find $1.2 trillion in deficit savings. The panel was supposed to take care of the payroll tax holiday, the extension of unemployment issues and numerous other things, but its collapse left the fate of those issues and others up in the air.

The threat of the potential December shutdown is even more bizarre than the previous two near-misses, because it centers on the rank-and-file Republicans’ reluctance to extend a tax cut to middle-class workers and relatively minor issues over a spending bill that each side was tantalizingly close to signing off on.

This latest in a series of high-profile, last-minute fights, all in a single year, underscores that the 112th Congress has no modern antecedent for what many see as its unusual — and potentially dangerous — brinkmanship.

“This whole year has been historic in its patterns,” said Thomas E. Mann, a senior fellow at the Brookings Institution. “They always get work done at the end of sessions, they always put things off until they have to do them, but it’s the hostage taking and recklessness of it all that is so unusual.”

The day began with Mr. Reid sparring with Senator Mitch McConnell of Kentucky, the minority leader, on the Senate floor, with Mr. Reid expressing bafflement over Mr. McConnell’s refusal to let the Senate vote on the House payroll tax bill that passed earlier in the week.

Mr. Reid wants to quickly vote the bill down because while it would extend a cut in Social Security payroll taxes for 160 million workers, it also eases the way for an oil pipeline opposed by environmental groups, blocks certain air pollution rules, freezes the pay of many federal employees through 2013, increases some Medicare premiums, and greatly reduces unemployment benefits and adds a host of new rules for receiving them.

Mr. McConnell said he would not permit a quick vote on the measure until the spending agreement was passed in the Senate.

For their part, Senate Democratic leaders met with President Obama at the White House and resolved to prepare a new offer that would exclude their earlier plan to pay for the payroll tax holiday with a surcharge on incomes over $1 million, seeking savings instead from a variety of federal programs, with many of the cuts culled from the failed bipartisan committee’s list of things both sides agree upon.

As talk of another short-term spending agreement circulated, Jay Carney, the White House spokesman, said such a plan was not ideal but could be employed if a shutdown loomed.

Given the “dysfunctionality” that Congress has demonstrated this year, Mr. Carney added, it would be hard to “suggest that this Congress is capable of achieving an ideal.”

At the House, Speaker John A. Boehner said the ball was in the Senate’s court, even as he suggested that his chamber might pass its own spending bill based on a bipartisan agreement that was near completion, in spite of some Democratic concerns about provisions that would limit family planning for women in the District of Columbia and restrict visits to Cuba by Cuban-Americans.

“There is no reason for it to be held hostage to try to give one side leverage,” Mr. Boehner said.

Article source: http://feeds.nytimes.com/click.phdo?i=4453cb7d9381a6818082fcd68826938e

Filed Under: Economy News Tagged With: , ,

Bernanke Urges Obama and Congress to Do More for Economy

October 5, 2011 by Leave a Comment

Mr. Bernanke described the nation’s economic health in bleak terms, saying that “the recovery is close to faltering,” and suggested that avoiding another recession might require fresh government action. “We need to make sure that the recovery continues and doesn’t drop back,” he said.

Such talk from a Fed chairman usually means the central bank is preparing to reduce interest rates, and Mr. Bernanke said that the Fed was not ruling out such a step. But on Tuesday, as at other recent appearances, he made clear that his remarks were aimed at the rest of the government.

“Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” Mr. Bernanke said. “Fostering healthy growth and job creation is a shared responsibility of all economic policy makers.”

Mr. Bernanke has repeatedly called on Congress to adopt a plan for paying down the federal debt, as well as for reducing inequities and loopholes in the corporate tax code, two ideas that enjoy wide support among economists. On Tuesday he also focused on housing policy, suggesting that the government could help underwater homeowners refinance and also improve the availability of mortgages for potential buyers.

However, the Fed chairman sidestepped a number of questions from Republicans and Democrats seeking his support for specific legislative proposals to reduce the federal deficit or to encourage job creation.

Mr. Bernanke’s critique of Congress mirrors mounting frustrations among some lawmakers over his leadership of the central bank. Some liberals want the Fed to try harder to increase growth by further reducing interest rates or injecting money directly into the economy. Conservatives, meanwhile, warn that any new efforts by the Fed are more likely to harm the economy.

Members of the Joint Economic Committee, where Mr. Bernanke answered questions for about 90 minutes Tuesday, pressed both of those arguments. But Mr. Bernanke remained firm in his position that the Fed already had done a great deal, and that it might do more — but not right now.

The central bank, he said, “is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability.”

In recent speeches, Mr. Bernanke had suggested that the economy did not need much more help, and that growth would pick up speed so long as the government did not interfere, for example, by making sharp cuts to short-term spending. But the Fed, like many private sector forecasters, has been too optimistic in its predictions over the last two years, repeatedly overestimating the pace of growth.

On Tuesday, Mr. Bernanke reiterated the Fed’s forecast that the health of the economy would probably improve, but suggested there was also a significant risk of a second recession unless the government acted to increase growth.

He suggested that Congress should keep four goals in mind: Reducing debts to a sustainable level, avoiding short-term spending cuts that could impede recovery, adjusting spending and tax policies to support growth, and improving the government’s decision-making process.

“There is evident need to improve the process for making long-term budget decisions, to create greater predictability and clarity, while avoiding disruptions to the financial markets and the economy,” Mr. Bernanke said.

Representative Mick Mulvaney, a South Carolina Republican, said that the central bank’s policy of maintaining low interest rates had made it irresistible for Congress to keep borrowing money rather than rein in federal spending.

“We’re able to borrow so much money right now at a reduced rate; there’s a very strong impetus here to simply put off the tough decisions,” he said.

Mr. Bernanke responded that the Fed was holding down interest rates, but “I don’t think that eliminates the responsibility of Congress to take its own action.”

The Fed’s own recent efforts to increase growth have been modest in scope. The central bank announced in August that it intended to maintain short-term interest rates near zero for at least two more years. In September, it announced an effort to further reduce long-term interest rates by moving $400 billion from investments in short-term Treasury securities to longer-term Treasury securities. Both policies are aimed at reducing borrowing costs for businesses and consumers.

Mr. Bernanke said on Tuesday that the Fed estimated the September program would reduce the interest rate on Treasury securities by about 0.2 percentage points. Analysts estimate that the August program will have a similar impact.

“We think that this is a meaningful but not an enormous support to the economy,” Mr. Bernanke said. “It should help somewhat on job creation and growth.”

But the efforts also have highlighted the limits of the Fed’s power. While it can reduce the cost of borrowing, it has not made it easier for consumers and businesses to qualify for loans. Mr. Bernanke noted the example of mortgage loans, saying that lower interest rates had not increased the volume of new loans.

Article source: http://www.nytimes.com/2011/10/05/business/economy/fed-chief-raises-doubts-on-recovery.html?partner=rss&emc=rss

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Second Recession in U.S. Could Be Worse Than First

August 8, 2011 by Leave a Comment

If the economy falls back into recession, as many economists are now warning, the bloodletting could be a lot more painful than the last time around.

Given the tumult of the Great Recession, this may be hard to believe. But the economy is much weaker than it was at the outset of the last recession in December 2007, with most major measures of economic health — including jobs, incomes, output and industrial production — worse today than they were back then. And growth has been so weak that almost no ground has been recouped, even though a recovery technically started in June 2009.

“It would be disastrous if we entered into a recession at this stage, given that we haven’t yet made up for the last recession,” said Conrad DeQuadros, senior economist at RDQ Economics.

When the last downturn hit, the credit bubble left Americans with lots of fat to cut, but a new one would force families to cut from the bone. Making things worse, policy makers used most of the economic tools at their disposal to combat the last recession, and have few options available.

Anxiety and uncertainty have increased in the last few days after the decision by Standard Poor’s to downgrade the country’s credit rating and as Europe continues its desperate attempt to stem its debt crisis.

President Obama acknowledged the challenge in his Saturday radio and Internet address, saying the country’s “urgent mission” now was to expand the economy and create jobs. And Treasury Secretary Timothy F. Geithner said in an interview on CNBC on Sunday that the United States had “a lot of work to do” because of its “long-term and unsustainable fiscal position.”

But he added, “I have enormous confidence in the basic regenerative capacity of the American economy and the American people.”

Still, the numbers are daunting. In the four years since the recession began, the civilian working-age population has grown by about 3 percent. If the economy were healthy, the number of jobs would have grown at least the same amount.

Instead, the number of jobs has shrunk. Today the economy has 5 percent fewer jobs — or 6.8 million — than it had before the last recession began. The unemployment rate was 5 percent then, compared with 9.1 percent today.

Even those Americans who are working are generally working less; the typical private sector worker has a shorter workweek today than four years ago.

Employers shed all the extra work shifts and weak or extraneous employees that they could during the last recession. As shown by unusually strong productivity gains, companies are now squeezing as much work as they can from their newly “lean and mean” work forces. Should a recession return, it is not clear how many additional workers businesses could lay off and still manage to function.

With fewer jobs and fewer hours logged, there is less income for households to spend, creating a huge obstacle for a consumer-driven economy.

Adjusted for inflation, personal income is down 4 percent, not counting payments from the government for things like unemployment benefits. Income levels are low, and moving in the wrong direction: private wage and salary income actually fell in June, the last month for which data was available.

Consumer spending, along with housing, usually drives a recovery. But with incomes so weak, spending is only barely where it was when the recession began. If the economy were healthy, total consumer spending would be higher because of population growth.

And with construction nearly nonexistent and home prices down 24 percent since December 2007, the country does not have a buffer in housing to fall back on.

Of all the major economic indicators, industrial production — as tracked by the Federal Reserve — is by far the worst off. The Fed’s index of this activity is nearly 8 percent below its level in December 2007.

Likewise, and perhaps most worrisome, is the track record for the country’s overall output. According to newly revised data from the Commerce Department, the economy is smaller today than it was when the recession began, despite (or rather, because of) the feeble growth in the last couple of years.

If the economy were healthy, it would be much bigger than it was four years ago. Economists refer to the difference between where the economy is and where it could be if it met its full potential as the “output gap.” Menzie Chinn, an economics professor at the University of Wisconsin, has estimated that the economy was about 7 percent smaller than its potential at the beginning of this year.

Unlike during the first downturn, there would be few policy remedies available if the economy were to revert back into recession.

Article source: http://feeds.nytimes.com/click.phdo?i=a0d93ce0d93ec9a2d7c1c44b1eaeff9b

Filed Under: Business News Tagged With: , ,

Economix: Still Playing Catch-Up, Across the Economy

August 3, 2011 by Leave a Comment

Given that the downturn began nearly four years ago, and that the population has grown significantly since then, the economy should instead be bigger than it was before the financial crisis. But Calculated Risk, a finance blog, makes a good observation: On most major measures of economic health, the economy is still worse today than it was before the recession began.

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

Here’s a chart I’ve put together showing the percentage changes in several important economic indicators since the start of the recession in December 2007. The categories are: overall economic growth (gross domestic product), jobs (nonfarm payrolls), personal income (without transfer payments from the government, like unemployment benefits), the length of the workweek, personal spending, and industrial production.

Source: Bureau of Labor Statistics, Federal Reserve, Bureau of Economic Analysis, all via Haver Analytics

As you can see, all of these categories but one are still below where they were when the recession began. Industrial production is by far the worst off, since an index of this activity is nearly 8 percent below its level in December 2007. Second-worst is employment; today there are 5 percent — or about seven million — fewer payroll jobs than there were when the recession began.

Inflation-adjusted personal income and gross domestic product are still below the last business cycle peak, as is the average work week.

The one major indicator shown that is (barely) above its level at the start of the recession is inflation-adjusted consumer spending. Much of that growth has been subsidized by government transfer payments, however. And to further rain on this parade, remember that if the economy were healthy, consumer spending would probably be much higher today than it was before the recent recession. Just take a look at the longer-term trend:

Source: Federal Reserve Bank of St. LouisFigures on left axis are expressed in “chained” dollars — inflation-adjusted, in 2005 dollars.

Article source: http://feeds.nytimes.com/click.phdo?i=3cb3379491255cf19144e88efffae5ae

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