March 29, 2024

Out of Debt-Limit Fight, a Bit of Stability on Spending

While provisions to raise the debt limit and create a Congressional deficit reduction committee drew most of the attention in the legislation that allowed the government to narrowly avert a default, House and Senate leaders also used the measure to establish federal spending limits for the next two years.

Lawmakers are still likely to clash over just how the money is parceled out to various agencies and the Pentagon. But members of both parties say the bipartisan compromise on overall spending makes it unlikely that an impasse will push Congress back to the brink of closing the government in a repeat of the April showdown that ended just hours before federal money ran out. The current fiscal year ends Sept. 30.

“It substantially reduces the risk of a shutdown fight,” said Representative Chris Van Hollen of Maryland, the senior Democrat on the Budget Committee, who added that the prospect of spending certainty helped him sell the debt limit agreement to his fellow Democrats.

In the debt limit bill, Congress allotted $1.043 trillion for spending on federal agencies and national security in 2012, an amount that does not include money for so-called mandatory programs like Medicare.

That level is $7 billion less than current spending, but $24 billion more than would be allowed under the budget drafted by Representative Paul D. Ryan, Republican of Wisconsin, and passed by House Republicans earlier this year. The ceiling rises to $1.047 trillion in the 2013 fiscal year, potentially saving Congress from another politically charged spending fight before the midterm elections in November 2012.

With the Congressional appropriations process in a shambles in recent years and the government running for months at a time on stopgap bills, leaders of both parties say the agreement could restore some order.

“It is imperative that the Congress complete these must-pass bills in a timely manner to avoid the harmful, destabilizing effects caused by a delayed and drawn-out appropriations process,” said Representative Harold Rogers, Republican of Kentucky and chairman of the House Appropriations Committee.

Still, obstacles remain. Congress has not passed even one of the 12 spending bills due by Oct. 1. While the new agreement is expected to accelerate consideration of spending measures, the shortage of time means the House and the Senate will probably have to again enact temporary stopgap measures to give lawmakers a chance to assemble the bills and bring them to the floor.

At the same time, some conservative activists are pressing House Republicans to insist on lower overall spending totals, noting that the debt limit legislation established ceilings but does not require that all the money be spent.

In an internal survey released last week, the conservative House Republican Study Committee asked its members to weigh in with their views on the new spending levels and how conservatives can use the coming spending deadline as leverage to continue to push for cuts.

But Mr. Rogers and House Republican leaders like Representative Eric Cantor of Virginia, the majority leader, are advocating that Republicans abide by the new agreement and not try to force lower spending.

“While all of us would like to have seen a lower discretionary appropriations ceiling for the upcoming fiscal year, the debt limit agreement did set a level of spending that is a real cut from the current year level,” Mr. Cantor said in a recent memorandum to his colleagues. “I believe it is in our interest to enact into law full-year appropriations bills at this new lower level.”

The Republican leadership would also like to focus most of its firepower on the new deficit reduction committee created under the debt limit deal and its efforts to find $1.2 trillion or more in savings over the next decade — a process with the potential for a bigger budgetary impact than another protracted tussle over just a few billion dollars in annual spending. The spending fights are taking a definite toll on the public’s view of Congress, according to recent polls.

Mr. Van Hollen and other Democrats noted that a push for cuts below the newly established levels would make Republicans look as though they were reneging, since the leadership negotiated the spending agreement and it was backed by most House Republicans as part of the legislation to break the debt limit impasse.

Even with the agreement on the so-called top-line dollar figure, Democrats and some Republicans say the spending restraints will force difficult choices since real spending would be reduced for agencies that have already absorbed a first round of cuts in the spending deal struck last April.

Aides have already begun trying to identify programs that can be trimmed back, and they predict that the House and Senate will face tough negotiations over spending on individual programs.

Efforts to add contentious policy provisions to the spending measures are also expected to set off partisan disputes. House Republicans have shown a determination to try to use the spending measures to block implementation of the new health care law, limit regulatory efforts by the Environmental Protection Agency and other agencies, and impose other restrictions on the Obama administration. While those fights could be messy, top lawmakers and aides do no expect them to prompt a government shutdown.

Article source: http://feeds.nytimes.com/click.phdo?i=2d55f47d909572f27c71e0abc33de8f1

Economix: Doing Away With the Debt Ceiling

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

Almost 10 years ago, I testified before the Senate Finance Committee that the debt limit should be abolished. Among the others who testified that day, including Treasury Secretary Paul O’Neill, no one supported my position.

Today’s Economist

Perspectives from expert contributors.

What we have seen, currently and in the years since that hearing, is that for any politician to deny the validity of the debt limit is effectively to support unlimited debt, something no member of either party can afford to be accused of.

The negotiations leading up to Sunday night’s announcement that President Obama and Congressional leaders of both parties had reached a deal to cut trillions of dollars in federal spending over the next decade makes the case against the debt limit that much stronger. We now know that it is a powerful mechanism for political extortion.

Unless the party holding the White House has a comfortable majority in the House of Representatives and at least 60 seats in the Senate, raising the debt limit is going to remain a means by which the minority party can impose its demands on the majority.

Even if the Treasury avoids default on government debt this week, we will inevitably have to go through the same political drama the next time the debt limit runs out and every time thereafter. And sooner or later the shoe will be on the other foot, as Democrats hold the debt limit hostage against a Republican president.

Unfortunately, the option of just letting the debt limit expire is not available. It is permanent law and can be abolished only by repeal or by a ruling by the Supreme Court that it is unconstitutional. Note that the law does not impose a deadline at which the debt limit runs out; rather, the limit is a dollar figure that must be amended when the gross federal debt reaches it. The date when the limit is breached is a function of Treasury’s cash flow and expenses.

The Constitution grants Congress the power to “borrow money on the credit of the United States.” Before World War I, it had to authorize each and every Treasury bond issue and its precise terms. During an era when the federal budget was usually balanced, this was not a huge problem.

But with the unprecedented borrowing needs of the First World War, Congress ceded to Treasury the power to decide when and under what terms it would borrow, subject only to an overall dollar limitation.

While politicians and the general public believe that the debt limit is an important constraint on national indebtedness, not one iota of evidence supports this belief. Economists have been making this point repeatedly for more than 50 years. In 1959, Marshall Robinson of the Brookings Institution came to this conclusion in a book-length study of the debt limit:

On the record, the debt ceiling experiment has failed. Although at times the ceiling has clamped down on government spending, it has not prevented the long-term growth of debt. Indeed, there is some evidence that reactions to its short-run pressure may ultimately contribute to the growth of debt.

Before 1974, it was plausible to argue that there was some virtue in having a debt limit because it forced Congress to acknowledge the consequences of deficit spending from time to time. But that year, it enacted the Congressional Budget and Impoundment Control Act, which requires Congress to enact a budget resolution annually that specifies an appropriate level for the deficit and the debt.

Consequently, a separate vote on the debt limit is at best superfluous. As the General Accounting Office put it in a 1979 report:

The implementation of the Congressional Budget and Impoundment Control Act of 1974 has brought into question the need for the Congress to consider the debt ceiling separately from the budget process.

This fact led Alan Greenspan, then chairman of the Federal Reserve, to recommend abolition of the debt limit in 2003 testimony:

In the Congress’s review of the mechanisms governing the budget process, you may want to reconsider whether the statutory limit on the public debt is a useful device. As a matter of arithmetic, the debt ceiling is either redundant or inconsistent with the paths of revenues and outlays you specify when you legislate a budget.

Mr. Greenspan’s point is crucial: the decision to run a deficit and increase national indebtedness is made by Congress when it votes to cut taxes, create entitlement programs and enact appropriations that will necessarily cause spending to be higher than revenues – not when it raises the debt limit.

As the Congressional Budget Office put it in a 2010 report:

By itself, setting a limit on the debt is an ineffective means of controlling deficits because the decisions that necessitate borrowing are made through other legislative actions. By the time an increase in the debt ceiling comes up for approval, it is too late to avoid paying the government’s pending bills without incurring serious negative consequences.

It is nothing but grandstanding for members of both parties to vote routinely for legislation that they know will create deficits and then profess shock and horror that the debt limit must be increased as a consequence. Even Captain Renault in “Casablanca” would be offended by such hypocrisy.

Historically, raising the debt limit was mere political theater giving cover to Congressional double-talkers because everyone knew that it would be increased. But that is no longer a foregone conclusion now that a significant number of Republicans in both the House and Senate believe that default on the debt is preferable to deficit spending.

Indeed, many say publicly that they will never support a debt limit increase under any circumstances and will even filibuster one, asserting that default would actually be a good thing because the budget would be balanced overnight.

For these reasons, the debt limit must be abolished. While that is extremely unlikely at this time, it is nevertheless necessary. As the computer eventually learned in the movie “War Games,” the only way to avoid disaster in this sort of game is not to play.

Article source: http://feeds.nytimes.com/click.phdo?i=1ed573e41706d7155b33181696bd3492

Economix: Insights on Stimulus From the Mafia

It is hard to prove that a burst of public spending can stimulate economic activity. Governments generally try the experiment in response to a downturn, and who is to say how quickly an economy would have recovered?

Believers in stimulus have pressed their case in recent years by examining changes in public spending that are unrelated to broader economic cycles.

Say, for example, in Italy, where the national government freezes spending on local projects when provincial officials are found to have Mafia ties.

That’s right, search engines: This blog post is about the Mafia.

A new paper by three Italian professors finds that freezes in government spending in response to public corruption do have a significant impact. For every $1 the government doesn’t spend, economic activity shrinks by as much as $2.

The paper was brought to my attention by Greg Ip of The Economist, who says it provides evidence that government spending can stimulate growth. Of course, it only demonstrates directly that cutting government spending can reduce economic activity. But happily, that point is more relevant to this political moment, as Democrats and Republicans decide just how much to cut federal spending.

(Mr. Ip, in turn, referred readers to a post by Olaf Storbeck, an economics reporter for the German newspaper Handelsblatt. The post is in English, and provides an excellent account of related research on the subject.)

The Italian economists saw an opportunity in a 1991 law that allows the Italian government to replace local governments suspected of corruption with appointed officials, and to freeze spending on public works projects while authorities look for evidence of Mafia involvement.

“Because of the sheer size of public works projects under the control of local administrations, these have become an extraordinarily lucrative business for the Mafia,” write Antonio Acconcia and Saverio Simonelli, professors at the University of Naples, and Giancarlo Corsetti, a professor at Cambridge University.

The large scale of the projects also means the resulting disruptions are significant. Italy has ejected and replaced 172 local governments as of 2008, creating a large set of experiments on what happens when public spending stops suddenly.

The result, according to the new paper, is a broader decline in spending.

The conclusion that such cuts have consequences is not consistent with a prominent piece of economic theory holding that changes in public spending will be mirrored by changes in private spending, with no net impact. It’s a good bet that proponents will find faults with the new paper, as they have with similar research. Indeed, the authors acknowledge their own statistical tests could not exclude the possibility there was no impact.

They also acknowledge the possibility that any drop in economic activity might be caused by political disruption rather than the loss of government spending.

For example, as the authors note, “The Mafia may relocate some of its business for fear that the whole area will be subject to intense police investigation.”

Article source: http://feeds.nytimes.com/click.phdo?i=c42a56e62db735602957765907c92abd

Stocks and Bonds: Commodities Gain as Inflation Worries Take Hold

The minutes, from the Fed’s meeting on March 15, confirmed that members of the central bank are split about whether it needs to tighten credit later this year to ward off inflation. All of the committee’s members agreed that the economy was improving.

The Dow Jones industrial average fell 6.13 points, or 0.05 percent, to 12,393.90. The Standard Poor’s 500-stock index was down 0.24 points, or 0.02 percent, at 1,332.63. The Nasdaq composite index gained 2.0 points, or 0.07 percent, to 2,791.19.

Companies that make basic materials from commodities rose as traders anticipated continued price increases for commodities. The aluminum maker Alcoa rose 2.8 percent, Newmont Mining rose 4.4 percent and Dow Chemical rose 1.3 percent.

Howard F. Ward, the chief investment officer for Gamco Investors, said the market appeared to be concerned the Federal Reserve chairman, Ben S. Bernanke, “doesn’t share the same level of concern regarding inflation that it might wish him to, and that is leading to stronger commodity prices.”

Many investors have been more focused on the policies of the Fed rather than the threat of a government shutdown if Republicans and Democrats cannot reach an agreement on federal spending levels. “There is a game of chicken going on in Washington right now to see who will move first,” Mr. Ward said.

Stocks edged lower in early trading like most world markets after China raised an important lending rate and Moody’s lowered Portugal’s credit rating.

A survey from the Institute for Supply Management reported growth at service companies last month but at a slower rate than analysts were expecting.

Technology companies climbed after Texas Instruments said it planned to buy National Semiconductor for $6.5 billion in cash. Shares of National Semiconductor rose 71 percent.

After falling several dollars earlier in the day, Apple regained most of its losses. The Nasdaq OMX Group announced a rebalancing of the Nasdaq-100 index for next month that will cut Apple’s weighting in the index to 12 percent from 20 percent. That will probably force some money managers to reduce their holdings.

Trading in the largest stocks of the Nasdaq index may be more volatile before the rebalancing takes effect, but the change may make index funds that are based on the Nasdaq more appropriate for lay investors, said John DiBacco, global head of equity finance at UBS.

“When you buy an index fund you are hoping for diversification,” he said. “If one name makes up a fifth of the index you aren’t quite accomplishing what you hoped.”

KB Home fell 4 percent. The home builder reported a first-quarter loss of $1.49 a share, more than the 25 cents loss analysts were expecting.

Crude oil prices were steady, while gold rose more than 1 percent.

Interest rates were higher. The Treasury’s benchmark 10-year note fell 17/32, to 101 6/32, and the yield rose to 3.48 percent from 3.42 percent late Monday.

Article source: http://feeds.nytimes.com/click.phdo?i=c3fb6925f34f7b5edef5e399e10603b7