America’s credit score

Standard & Poor’s downrated US bonds from AAA to AA+, the first time we have been rated so low. That is a purely financial assessment. But factors include our impotent government, our inability to raise revenue, and our vast and increasing national debt. How humiliating. Just how doomed are we? How can we become a first world nation again?

Another economic collapse?

The stock market has nosedived 500 points and the economic indicators appear to be disastrous.

This, right after the debt ceiling agreement that supposedly allows the government to stay solvent by borrowing money while also cutting more than $2 trillion in government spending.

Could it be that Keynesian economics is right, that the government keeps the economy going through its spending and that cutting expenditures during a recession is exactly the wrong way to produce economic growth?  Or are the free marketers right and that the trillions in new debt will mean less money for productive investment?  Or, in the worst of all possible worlds, are both right?

Are there any policies the government should take that would actually help?  Or do we just need to let the cycle play out, even at the cost of another recession, or worse?

Satan sandwich with a side of Satan fries

The debt compromise had two groups of people who are normally polar opposites agreeing with each other at long last.  The measure was opposed by both those who are really conservative and those who are really liberal.   Here is what the latter are saying (lover of colorful metaphors that I am, I have to salute the imagery of “Satan sandwich”):

Dispirited liberals fumed Monday over the deal to raise the debt ceiling that would cut deeply across the government, include no new tax revenue from wealthy Americans and would not provide any additional stimulus for a lagging economy.

Most of all, they lamented President Obama’s failure to anticipate and overcome the leverage exerted by House Republicans who threatened to force a national default.

“It’s a surrender to Republican extortion,” said Rep. Jerrold Nadler (D-N.Y.), who voted against the deal. “It’s one thing to say we want this, we don’t want that as part of negotiations. It’s another to say we will destroy the country and the economy if you don’t do what we want.”

Rep. Elijah E. Cummings (D-Md.) said he, too, was voting no because of the “dangerous precedent” by Republican demands. But most offensive, he said, were the cuts unmatched by any new revenue. “My constituents are suffering; they’ve lost their jobs and their homes, and now to cut the very programs that could have provided them with support while the rich are given a pass — it’s ridiculous.”

The ire burned hottest online, where liberal groups such as mobilized opposition and Rep. Emanuel Cleaver II (D-Mo.) tweeted that the deal was “a sugar-coated Satan sandwich. If you lift the bun, you will not like what you see.”

The White House dispatched Vice President Biden to lobby congressional liberals, and by day’s end some were reluctantly coming round. House Minority Leader Nancy Pelosi (D-Calif.) led the way, telling ABC’s Diane Sawyer that she would support the deal despite it being a Satan sandwich “with some Satan fries on the side.”

via Angry liberals seek silver lining in debt-limit deal – The Washington Post.

Deal on the debt

Democratic and Republican leaders came to an agreement on raising the debt limit, looking to forestall the government from going into default on Tuesday.  But first both sides have to sell the agreement to their Congressmen and to their base.   Basically, the Republicans gave in to the Democrats’ desire for a two year provision, while Democrats gave in to the Republican’s desire for spending cuts without tax increases.  Here are some more details from the Associated Press story:

Details apparently included in the agreement provide that the federal debt limit would rise in two stages by at least $2.2 trillion, enough to tide the Treasury over until after the 2012 elections.

Big cuts in government spending would be phased in over a decade. Thousands of programs – the Park Service, Labor Department and housing among them – could be trimmed to levels last seen years ago.

No Social Security or Medicare benefits would be cut, but the programs could be scoured for other savings. Taxes would be unlikely to rise.

Without legislation in place by Tuesday, the Treasury will not be able to pay all its bills, raising the threat of a default that administration officials say could inflict catastrophic damage on the economy.

If approved, though, a compromise would presumably preserve America’s sterling credit rating, reassure investors in financial markets across the globe and possibly reverse the losses that spread across Wall Street in recent days as the threat of a default grew.

Officials familiar with the negotiations said that McConnell had been in frequent contact with Vice President Joe Biden, who has played an influential role across months of negotiations.

In the first stage under the agreement, the nation’s debt limit would rise immediately by nearly $1 trillion and spending would be cut by a slightly larger amount over a decade.

That would be followed by creation of the new congressional committee that would have until the end of November to recommend $1.8 trillion or more in deficit cuts, targeting benefit programs such as Medicare, Medicaid and Social Security, or overhauling the tax code. Those deficit cuts would allow a second increase in the debt limit.

If the committee failed to reach its $1.8 trillion target, or Congress failed to approve its recommendations by the end of 2011, lawmakers would then have to vote on a proposed constitutional balanced-budget amendment.

If that failed to pass, automatic spending cuts totaling $1.2 trillion would automatically take effect, and the debt limit would rise by an identical amount.

Social Security, Medicaid and food stamps would be exempt from the automatic cuts, but payments to doctors, nursing homes and other Medicare providers could be trimmed, as could subsidies to insurance companies that offer an alternative to government-run Medicare.

via News from The Associated Press.

Both tea party Republicans and leftist Democrats are howling, for different reasons.    Do you think this deal should be approved?   Who do you think got the better of the negotiations?

The trillion dollar coin

The weirdest idea for solving the debt crisis comes from Ezra Klein of the Washington Post:

Obama could always just solve the crisis with a pair of magical platinum coins. Sure, that sounds preposterous, but Yale’s Jack Balkin argues that this is actually a perfectly legal strategy. Here’s the logic: Under law, there’s a limit to how much paper money the United States can circulate at any one time, and there are rules that limit how many gold, silver and copper coins the Treasury can mint. But the Treasury is explicitly allowed to mint however many platinum coins it wants and can assign them whatever value it pleases.

So the Mint makes a pair of trillion-dollar platinum coins. The president orders the coins to be deposited at the Federal Reserve. The Federal Reserve moves this money into Treasury’s accounts. And just like that, Treasury suddenly has an extra $2 trillion to pay off its obligations in the near term without issuing new debt. If the Fed was worried about all that newly created money being pumped into circulation, it could always counteract the inflationary effects by selling off the $2 trillion in securities it owns from quantitative easing (thereby taking an equivalent amount of money back out of the economy). Problem solved. Right?

Well, sort of. The interesting thing about the platinum option, as it turns out, is that it actually seems to be on a firmer legal footing than the 14th Amendment approach. The law very clearly states that the Treasury Secretary can mint these platinum coins. He could even adorn them with the face of House Speaker John Boehner (R-Ohio) if he fancied. The trouble, of course, is the politics. Does Obama stage a press conference where he holds up the two large coins and announces what he’s doing? It’d be hard to see how he could do that with a straight face. (When I tried calling various market observers to get a sense of how Wall Street might react, responses ranged from “I don’t really want to talk about this” to actual laughter.)

via Can a giant platinum coin save our credit? – Ezra Klein – The Washington Post.

The two debt-reduction plans

So House Majority Leader John Boehner has a debt reduction plan on the table.  It is competing with Senate Majority Leader Harry Reid’s plan.  (Notice how both sides are cutting President Obama out of the discussion.)  Both plans cut spending by $1.2 trillion.  Neither plan involves a tax increase.  In fact, the two plans are extremely similar.  Philip Klein gives us a useful comparison:


— Both plans claim to reduce discretionary spending by $1.2 trillion.

–Both plans create a joint, bipartisan, Congressional committee to find future savings.

— Neither plan includes specific entitlement reform.

–Neither plan includes specific tax increases.


— Reid’s plan wants to raise the debt ceiling all in one chunk (and boosts the claimed deficit reduction number by relying on savings from the expected wind down of the wars in Iraq and Afghanistan), but Boehner it raised in two parts.

— While both plans endorse a joint committee, the Boehner plan makes the second debt limit increase contingent on Congress passing $1.8 trillion in additional deficit-reduction based on its recommendations.

— Boehner plan would ensure a vote in both chambers on a Balanced Budget Amendment.

— Boehner proposes caps to future spending.

Possibilities for compromise:

— It would be easy for Reid to allow a vote on the Balanced Budget Amendment.

— The differences over whether the debt limit increase should be short-term or last through the 2012 election is not an ideological-based disagreement, so it seems either side could give way on that one.

— Depending on the level of the spending cap, there may be some compromise there.

via Boehner and Reid plans aren’t that different: a comparison | Philip Klein | Beltway Confidential | Washington Examiner.

And yet, for all of the similarities, both sides are still at each other’s throats. Not only that, Boehner’s own party is in revolt against his plan.   I’m not sure why.  Surely the Republicans are getting what they want, over a trillion dollars in cuts and no new taxes.  The main issue now is political:   Reid is proposing a two year package, tiding things over until after the 2012 elections, while Boehner wants to go through all of this again in a year.

Meanwhile, the country faces default and probably worldwide economic collapse if the debt ceiling isn’t raised by August 2.

Under President Clinton, the ascendant Republicans  in Congress shut down the government, sparking a popular backlash that re-elected the unpopular president.  I suspect the same thing will happen again:  Today’s ascendant Republicans, giddy with having taken the House of Representatives, will show themselves willing to shut down the economy, sparking a popular backlash that will re-elect President Obama.