Posted on 05/28/2011 by Juan
The 8 wealthiest industrial countries, meeting at the G-8, urged that the world give Egypt, Tunisia and liberated Libya (‘emerging democracies in the Arab world’) some $40 billion in aid. The sum will make headlines but there is less to it than meets the eye.
The G8 is only ponying up $10 billion itself, and that is only in the form of relatively vague promises of a sort that have often not been completely followed through on in the past. It is urging that the Gulf oil states to give $10 billion, though some of them, like Saudi Arabia, were not actually very happy about Hosni Mubarak being overthrown and it is not clear that they will want to help grassroots democratization succeed. That $10 bn. may or may not come through, and if it did it might have strings attached that would actually be undemocratic. Saudi Arabia is very afraid of the outbreak of press freedom in Egypt, which could end its stranglehold over Arabophone journalism and open its authoritarian system to critique. What price would it extract from Cairo for its billions in aid?
Then the G8 is urging that the International Monetary Fund and the World Bank provide another $20 bn., but that aid is likely to be in the form of loans.
But Egypt alone is carrying $80 billion in debt, and its debt servicing costs have risen because its credit rating has been downgraded in the wake of the political crisis.
Tunisia is even worse off, with 1/8 of Egypt’s population but a debt of $50 billion racked up by the Zine El Abidine kleptocracy. Before the crisis, Tunisia had been looking to borrow nearly $3 billion this year just to pay the interest on the old debt and cover budget shortfalls (caused by the ruling class stealing the country blind).
So the G8′s idea of getting these countries further in debt, and making vague promises on direct aid, isn’t probably actually very helpful.
There is, moreover, a contrast to be made here in what the wealthy countries seem to most value when it comes to their financial dealings with places like Egypt. In 1990-1991, Egypt was $50 billion in debt, and then its government joined in the Gulf War against Saddam Hussein’s forces occupying Kuwait. After the Gulf War, $25 billion of the debt was forgiven, i.e., half, which uplifted the Egyptian economy in the early to mid 1990s. Pakistan also got very heavy debt forgiveness after 2001 for turning on the Taliban and allying with the United States and NATO.
If joining a war is worth half a country’s debt, then moving from a military dictatorship to trying to become a democratic country should be worth just as much. That would mean Egypt alone should be getting $40 bn. in debt forgiveness. After all, the debt was incurred by a military dictatorship that did not consult the people, and which was in the hip pocket of the Western Powers. Why should poor Egyptians in Ismailiya and Asyut be held hostage for repayment?
And, the $25 bn. in debt forgiveness for Egypt of the early 1990s was a sure thing, not vague promises and ‘calls’ on other countries and institutions of the sort that just came out of the G8.
It is also true that in the 1990s, US debt was relatively small and that Bill Clinton even had a budget surplus late in his term, whereas G.W. Bush and his Republican majority doubled the national debt and created long term structural deficit with his tax cuts and wars. (Obama’s deficits have been one-off and won’t affect things going forward.). But all that is not the fault of the Tunisian and Egyptian people, though it underlines how much Bush weakened America.
Egypt’s transition to democracy is going to be rocky enough without the albatross of Hosni Mubarak’s debts hanging around its neck. The world community needs to be far more generous and pro-active if Egyptians are going to feel rewarded rather than punished for their remarkable achievement in moving toward popular sovereignty and a rule of law. The same holds true for Tunisia. But Egypt is a fourth of the Arab world and an opinion leader, and its success really would resonate widely in the Arab world and Africa.
The G8 gesture was good as a confidence-building measure, but it is piddling in relationship to the real needs and is short-sighted in its picayune dimensions. It also signals that war-fighting is more valued than democracy-making.
One good thing about the likely victory of the Free Libya forces is that that country’s oil wealth ($26 bn a year) could be used in part to support the new democracies in its neighborhood, while Qaddafi would have tried to undermine them.
Showing posts with label Financial Crisis. Show all posts
Showing posts with label Financial Crisis. Show all posts
Monday, June 6, 2011
U.S. Has Binged. Soon It’ll Be Time to Pay the Tab.
NYtimes
By GRETCHEN MORGENSON
May 28, 2011
SAY this about all the bickering over the federal debt ceiling: at least people are talking openly about our nation’s growing debt load. This $14.3 trillion issue is front and center — exactly where it should be.
Into the fray comes a thoughtful new paper by Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics, which studies economic policy. Written with Marc Hinterschweiger, a research analyst there, the report states plainly: “That government debt will grow to dangerous and unsustainable levels in most advanced and many emerging economies over the next 25 years — if there are no changes in current tax rates or government benefit programs in retirement and health care — is virtually beyond dispute.”
The report then lays out a range of outcomes, some merely unsettling, others downright scary, that face us as a nation if we continue down the big-spending path we are on.
The report, “The Global Outlook for Government Debt Over the Next 25 Years: Implications for the Economy and Public Policy,” arrives when our debt as a percentage of gross domestic product is around 65 percent and rising fast. Much of the recent increase, up from 43 percent in 2007, is the result of the panic of 2008 and the ensuing recession, when the government stepped in to mitigate the damage.
The authors do not suggest that policy makers should hurry to raise taxes or cut spending right now. They acknowledge that the economic recovery is still fragile and propose that lawmakers wait to implement budget cuts currently under discussion until 2013 to 2015. Additional cuts would ideally go into effect in 2016.
What needs to be done now is to design a long-term plan to reduce fiscal deficits in the future. The authors contend that such a program would “reassure the markets, keep interest rates low and instill greater confidence and certainty about future tax and spending policies, thereby encouraging businesses to commit their resources to job-creating investment projects.”
An intriguing aspect of their analysis is how it views the rising tide of debt around the world from a historical perspective. For so many countries to be groaning under so much debt at the same time is unusual, the authors say. More typical are the somewhat contained debt crises, like in Latin America in the 1980s or in Russia in 1998. While both of those episodes reverberated beyond the countries from which they sprang, today’s debt problems are far more widespread. And, as a result, more worrisome.
The simultaneous buildup of very large public deficits and debt positions in virtually all of the advanced high-income countries “is a new element at work in the global economy,” the report says.
“It is unique in peacetime for so many countries to have so much debt,” Mr. Gagnon said in an interview last week. But he added that global capital markets, and the access to lenders that these markets provide, probably mute the ill effects of this simultaneous borrowing binge.
The paper assesses the potential consequences of a more pervasive debt crisis, one involving a number of countries in the same perilous position at the same time. The authors also consider the impact that future interest rate increases may have on these debt loads and provide separate estimates of how debt levels would grow under differing circumstances. They incorporate into these estimates expected growth rates in various regions as well as rising health care costs and retirement obligations. The analysis uses figures from the International Monetary Fund and the Organization for Economic Co-operation and Development.
Some of the results are surprising. For example, the study rebuts the commonly held notion that the outlook for Europe is worse than for the United States, as far as debt levels and obligations are concerned. This is because some euro zone countries have already begun to deal with their fiscal problems, Mr. Gagnon explained. “They’ve made some changes to long-run pensions, such as raising retirement ages,” he said, “and they’ve already made spending cuts and tax increases.”
Another surprise in the study: emerging markets are in much better shape, Mr. Gagnon said, than he had anticipated when he began the project.
Now, to the numbers, all of which are based on the status quo in tax rates and government obligations relating to health care and retirement.
You sitting down?
Under a best-case outlook, according to the authors, the nation’s net federal debt will rise to 155 percent of gross domestic product in 2035, more than double the current levels. (Net debt is defined as the government’s financial liabilities minus its financial assets.)
Under a more pessimistic view on growth rates, that load ratchets up to 302 percent of G.D.P. that year. As the paper notes, “debt ratios of around 200 percent of gross domestic product are at the extreme limit of what advanced economies can experience without becoming destabilized.”
Estimates for the euro zone fall well below these figures. Using an optimistic outlook for growth in that region, the analysis projects Europe’s debt to rise to 72 percent of G.D.P. in 2035. Taking a dimmer view on growth brings the debt level to 155 percent of output in the euro area.
Taken over all, debt levels in the advanced economies would rise to 122 percent of G.D.P. given an upbeat outlook, or 234 percent under grimmer circumstances, the study projects. Both Japan and the United States exceed these figures in expected debt loads.
By comparison, emerging economies look positively robust. Using an optimistic projection, their debt comes in at 35 percent of G.D.P., and under more pessimistic circumstances, rises to 59 percent.
HAPPILY, Mr. Gagnon and Mr. Hinterschweiger do not believe a Greek-style crisis is in the cards for the United States. They say that we have some time to start addressing our debt problems — five years at least. But given how our debt is growing, a fiscal crisis looms if policy makers do nothing.
“There may never be a single defining moment of crisis,” the authors write, “but rather a drift into ever-higher inflation and interest rates, ever-lower growth or deeper recession, and eventually hyperinflation along with rapid currency depreciation. Most economists would view such a prospect as a progressive strangulation of a nation’s well-being.”
This is straight talk on a vital topic. Let’s hope our leaders understand that living beyond our means will not be viable for a whole lot longer.
By GRETCHEN MORGENSON
May 28, 2011
SAY this about all the bickering over the federal debt ceiling: at least people are talking openly about our nation’s growing debt load. This $14.3 trillion issue is front and center — exactly where it should be.
Into the fray comes a thoughtful new paper by Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics, which studies economic policy. Written with Marc Hinterschweiger, a research analyst there, the report states plainly: “That government debt will grow to dangerous and unsustainable levels in most advanced and many emerging economies over the next 25 years — if there are no changes in current tax rates or government benefit programs in retirement and health care — is virtually beyond dispute.”
The report then lays out a range of outcomes, some merely unsettling, others downright scary, that face us as a nation if we continue down the big-spending path we are on.
The report, “The Global Outlook for Government Debt Over the Next 25 Years: Implications for the Economy and Public Policy,” arrives when our debt as a percentage of gross domestic product is around 65 percent and rising fast. Much of the recent increase, up from 43 percent in 2007, is the result of the panic of 2008 and the ensuing recession, when the government stepped in to mitigate the damage.
The authors do not suggest that policy makers should hurry to raise taxes or cut spending right now. They acknowledge that the economic recovery is still fragile and propose that lawmakers wait to implement budget cuts currently under discussion until 2013 to 2015. Additional cuts would ideally go into effect in 2016.
What needs to be done now is to design a long-term plan to reduce fiscal deficits in the future. The authors contend that such a program would “reassure the markets, keep interest rates low and instill greater confidence and certainty about future tax and spending policies, thereby encouraging businesses to commit their resources to job-creating investment projects.”
An intriguing aspect of their analysis is how it views the rising tide of debt around the world from a historical perspective. For so many countries to be groaning under so much debt at the same time is unusual, the authors say. More typical are the somewhat contained debt crises, like in Latin America in the 1980s or in Russia in 1998. While both of those episodes reverberated beyond the countries from which they sprang, today’s debt problems are far more widespread. And, as a result, more worrisome.
The simultaneous buildup of very large public deficits and debt positions in virtually all of the advanced high-income countries “is a new element at work in the global economy,” the report says.
“It is unique in peacetime for so many countries to have so much debt,” Mr. Gagnon said in an interview last week. But he added that global capital markets, and the access to lenders that these markets provide, probably mute the ill effects of this simultaneous borrowing binge.
The paper assesses the potential consequences of a more pervasive debt crisis, one involving a number of countries in the same perilous position at the same time. The authors also consider the impact that future interest rate increases may have on these debt loads and provide separate estimates of how debt levels would grow under differing circumstances. They incorporate into these estimates expected growth rates in various regions as well as rising health care costs and retirement obligations. The analysis uses figures from the International Monetary Fund and the Organization for Economic Co-operation and Development.
Some of the results are surprising. For example, the study rebuts the commonly held notion that the outlook for Europe is worse than for the United States, as far as debt levels and obligations are concerned. This is because some euro zone countries have already begun to deal with their fiscal problems, Mr. Gagnon explained. “They’ve made some changes to long-run pensions, such as raising retirement ages,” he said, “and they’ve already made spending cuts and tax increases.”
Another surprise in the study: emerging markets are in much better shape, Mr. Gagnon said, than he had anticipated when he began the project.
Now, to the numbers, all of which are based on the status quo in tax rates and government obligations relating to health care and retirement.
You sitting down?
Under a best-case outlook, according to the authors, the nation’s net federal debt will rise to 155 percent of gross domestic product in 2035, more than double the current levels. (Net debt is defined as the government’s financial liabilities minus its financial assets.)
Under a more pessimistic view on growth rates, that load ratchets up to 302 percent of G.D.P. that year. As the paper notes, “debt ratios of around 200 percent of gross domestic product are at the extreme limit of what advanced economies can experience without becoming destabilized.”
Estimates for the euro zone fall well below these figures. Using an optimistic outlook for growth in that region, the analysis projects Europe’s debt to rise to 72 percent of G.D.P. in 2035. Taking a dimmer view on growth brings the debt level to 155 percent of output in the euro area.
Taken over all, debt levels in the advanced economies would rise to 122 percent of G.D.P. given an upbeat outlook, or 234 percent under grimmer circumstances, the study projects. Both Japan and the United States exceed these figures in expected debt loads.
By comparison, emerging economies look positively robust. Using an optimistic projection, their debt comes in at 35 percent of G.D.P., and under more pessimistic circumstances, rises to 59 percent.
HAPPILY, Mr. Gagnon and Mr. Hinterschweiger do not believe a Greek-style crisis is in the cards for the United States. They say that we have some time to start addressing our debt problems — five years at least. But given how our debt is growing, a fiscal crisis looms if policy makers do nothing.
“There may never be a single defining moment of crisis,” the authors write, “but rather a drift into ever-higher inflation and interest rates, ever-lower growth or deeper recession, and eventually hyperinflation along with rapid currency depreciation. Most economists would view such a prospect as a progressive strangulation of a nation’s well-being.”
This is straight talk on a vital topic. Let’s hope our leaders understand that living beyond our means will not be viable for a whole lot longer.
Pressing Obama, House Bars Rise for Debt Ceiling
NYtimes
May 31, 2011
By JACKIE CALMES
WASHINGTON — The House on Tuesday overwhelmingly rejected a measure to increase the government’s debt limit, acting on a vote staged by Republican leaders to pressure President Obama to agree to deep spending cuts.
Republicans brought up the measure, which was defeated 318 to 97, to show the lack of support in the House for raising the $14.3 trillion debt ceiling without concrete steps to rein in chronic budget deficits.
The preordained outcome followed several acts of odd political theater on the House floor: Republicans urged the defeat of their own measure, while Democrats — who not long ago were seeking just such a vote to raise the debt ceiling without attaching spending cuts — assailed Republicans for bringing it up, saying its certain defeat might unnerve the financial markets.
Just in case, Republican leaders scheduled the vote for after the stock market’s close, and in the preceding days called Wall Street executives to assure them that the vote was just for show, to show Mr. Obama that he would have to make concessions in budget negotiations if a debt-limit increase is to pass Congress.
“This vote, based on legislation I’ve introduced, will and must fail,” said Representative Dave Camp, Republican of Michigan and chairman of the Ways and Means Committee.
Representative Chris Van Hollen of Maryland, the senior Democrat on the Budget Committee, objected. “This is a political stunt,” he said.
Voting against the measure were 236 Republicans and 82 Democrats. No Republicans voted in favor.
The showdown over the issue is likely to continue well into the summer, with consequences for both parties and, potentially, for the economy and Wall Street, where the bond market in particular is watching the partisan standoff closely. Yet for all the talk of crisis should Congress fail to raise the debt ceiling by Aug. 2, when the Treasury Department says it will run out of room to meet all the government’s obligations without further borrowing, the financial markets are likely to yawn at Tuesday’s proceedings.
“Wall Street is in on the joke,” said R. Bruce Josten, executive vice president of the U.S. Chamber of Commerce.
But beyond this week, Wall Street has reason to be nervous as the issue plays out, said people in both parties and in finance.
Investors have grown accustomed to partisan games of chicken that always end with the needed increase in the government’s borrowing authority. But this showdown, many say, is riskier because of the strongly held antispending, antitax views of the many freshman House Republicans combined with the fragility of the economic recovery.
“The people who are more politically savvy realize this may not be the normal brinkmanship,” said Senator Mark Warner, Democrat of Virginia. Nor, he added, is this standoff like the fight a few months ago over the current year’s spending, which ended with a late-night deal shortly before the government would have shut down.
“The thing that people are missing is that in shutting down the government you can go to the 11th-and-a-half hour, and the consequences of not doing it, while significant, are not economy-threatening,” Mr. Warner said. “You can’t go to the 11th-and-a-half hour on the debt limit. You don’t know what’s going to spook the bond markets.”
The chief wild card is the House Republican majority, which was elected last November after a campaign defined by voters’ antipathy toward budget deficits. More numerous than the insurgents elected in the conservative waves of 1980 and 1994, many freshman Republicans have no experience in public office and consider themselves citizen-legislators who entered government to shrink it, regardless of the political costs.
“The people who have been sent to Washington most recently are bringing a strong message from the Republicans more to the right that really want something done about government spending,” said Joseph E. Kasputys, founder of IHS Global Insight and an official in the Nixon and Ford administrations.
Many House Republicans have said publicly that they either do not believe the government will default or that they do not fear it. Many embrace a proposal by Senator Patrick J. Toomey, a first-year Republican from Pennsylvania, for the Treasury to pay bondholders with incoming tax revenues and delay other government payments pending a resolution. Treasury Secretary Timothy F. Geithner and many on Wall Street call the idea unworkable.
Many Republicans have also made comments indicating that they do not understand or do not care that an increase in the debt limit is needed not only for new spending but also to cover Social Security checks, military pay and myriad other obligations previously agreed to, as well as for payments to creditors holding Treasury bonds.
Another difference from recent decades, when the parties several times agreed to bipartisan budget-cutting deals to raise the debt limit, is the scale of spending cuts that Republicans are demanding as the price of support — up to $2 trillion in savings over a decade.
For Republicans and Democrats to agree this summer on such a far-reaching deficit reduction plan is a hurdle that is all the higher given how far apart the parties are. Republicans oppose any new taxes while Democrats say a balanced package must include higher revenues.
Just as the political dynamic is more precarious than in years past, so too, say some analysts, is the economic recovery. The combination “definitely makes it more dangerous” to even flirt with default, said Rick Rieder, a managing director of BlackRock, the world’s largest investment management firm.
“The practical ramifications of it are dramatic, and I truly believe this,” Mr. Rieder said. At some point short of actual default, he said, “you’re going to run down the road where the rating agencies are going to have to react, the Fed is going to have to make a set of decisions, international investors are going to have to interpret what this means, and you could functionally have a self-fulfilling prophecy in terms of the risk while not actually having a default.”
“That is such a dangerous path to go down,” he said.
Not everyone believes an impasse would necessarily provoke economic damage. But much of the business community is concerned. “Am I the only one who remembers the split screen on TARP?” asked Mr. Josten.
He is not. Worriers from Washington to Wall Street increasingly recall how, amid the financial crisis of September 2008, House Republicans voted by a two-to-one ratio against the proposed Troubled Asset Relief Program, better known as the bank bailout. Cable networks split screens, showing stock markets going down simultaneously with the House vote; the Dow Jones industrial average fell more than 777 points, its largest single-day point drop.
Within days Congress approved a revised bailout and President George W. Bush signed it into law.
Jennifer Steinhauer and Carl Hulse contributed reporting.
May 31, 2011
By JACKIE CALMES
WASHINGTON — The House on Tuesday overwhelmingly rejected a measure to increase the government’s debt limit, acting on a vote staged by Republican leaders to pressure President Obama to agree to deep spending cuts.
Republicans brought up the measure, which was defeated 318 to 97, to show the lack of support in the House for raising the $14.3 trillion debt ceiling without concrete steps to rein in chronic budget deficits.
The preordained outcome followed several acts of odd political theater on the House floor: Republicans urged the defeat of their own measure, while Democrats — who not long ago were seeking just such a vote to raise the debt ceiling without attaching spending cuts — assailed Republicans for bringing it up, saying its certain defeat might unnerve the financial markets.
Just in case, Republican leaders scheduled the vote for after the stock market’s close, and in the preceding days called Wall Street executives to assure them that the vote was just for show, to show Mr. Obama that he would have to make concessions in budget negotiations if a debt-limit increase is to pass Congress.
“This vote, based on legislation I’ve introduced, will and must fail,” said Representative Dave Camp, Republican of Michigan and chairman of the Ways and Means Committee.
Representative Chris Van Hollen of Maryland, the senior Democrat on the Budget Committee, objected. “This is a political stunt,” he said.
Voting against the measure were 236 Republicans and 82 Democrats. No Republicans voted in favor.
The showdown over the issue is likely to continue well into the summer, with consequences for both parties and, potentially, for the economy and Wall Street, where the bond market in particular is watching the partisan standoff closely. Yet for all the talk of crisis should Congress fail to raise the debt ceiling by Aug. 2, when the Treasury Department says it will run out of room to meet all the government’s obligations without further borrowing, the financial markets are likely to yawn at Tuesday’s proceedings.
“Wall Street is in on the joke,” said R. Bruce Josten, executive vice president of the U.S. Chamber of Commerce.
But beyond this week, Wall Street has reason to be nervous as the issue plays out, said people in both parties and in finance.
Investors have grown accustomed to partisan games of chicken that always end with the needed increase in the government’s borrowing authority. But this showdown, many say, is riskier because of the strongly held antispending, antitax views of the many freshman House Republicans combined with the fragility of the economic recovery.
“The people who are more politically savvy realize this may not be the normal brinkmanship,” said Senator Mark Warner, Democrat of Virginia. Nor, he added, is this standoff like the fight a few months ago over the current year’s spending, which ended with a late-night deal shortly before the government would have shut down.
“The thing that people are missing is that in shutting down the government you can go to the 11th-and-a-half hour, and the consequences of not doing it, while significant, are not economy-threatening,” Mr. Warner said. “You can’t go to the 11th-and-a-half hour on the debt limit. You don’t know what’s going to spook the bond markets.”
The chief wild card is the House Republican majority, which was elected last November after a campaign defined by voters’ antipathy toward budget deficits. More numerous than the insurgents elected in the conservative waves of 1980 and 1994, many freshman Republicans have no experience in public office and consider themselves citizen-legislators who entered government to shrink it, regardless of the political costs.
“The people who have been sent to Washington most recently are bringing a strong message from the Republicans more to the right that really want something done about government spending,” said Joseph E. Kasputys, founder of IHS Global Insight and an official in the Nixon and Ford administrations.
Many House Republicans have said publicly that they either do not believe the government will default or that they do not fear it. Many embrace a proposal by Senator Patrick J. Toomey, a first-year Republican from Pennsylvania, for the Treasury to pay bondholders with incoming tax revenues and delay other government payments pending a resolution. Treasury Secretary Timothy F. Geithner and many on Wall Street call the idea unworkable.
Many Republicans have also made comments indicating that they do not understand or do not care that an increase in the debt limit is needed not only for new spending but also to cover Social Security checks, military pay and myriad other obligations previously agreed to, as well as for payments to creditors holding Treasury bonds.
Another difference from recent decades, when the parties several times agreed to bipartisan budget-cutting deals to raise the debt limit, is the scale of spending cuts that Republicans are demanding as the price of support — up to $2 trillion in savings over a decade.
For Republicans and Democrats to agree this summer on such a far-reaching deficit reduction plan is a hurdle that is all the higher given how far apart the parties are. Republicans oppose any new taxes while Democrats say a balanced package must include higher revenues.
Just as the political dynamic is more precarious than in years past, so too, say some analysts, is the economic recovery. The combination “definitely makes it more dangerous” to even flirt with default, said Rick Rieder, a managing director of BlackRock, the world’s largest investment management firm.
“The practical ramifications of it are dramatic, and I truly believe this,” Mr. Rieder said. At some point short of actual default, he said, “you’re going to run down the road where the rating agencies are going to have to react, the Fed is going to have to make a set of decisions, international investors are going to have to interpret what this means, and you could functionally have a self-fulfilling prophecy in terms of the risk while not actually having a default.”
“That is such a dangerous path to go down,” he said.
Not everyone believes an impasse would necessarily provoke economic damage. But much of the business community is concerned. “Am I the only one who remembers the split screen on TARP?” asked Mr. Josten.
He is not. Worriers from Washington to Wall Street increasingly recall how, amid the financial crisis of September 2008, House Republicans voted by a two-to-one ratio against the proposed Troubled Asset Relief Program, better known as the bank bailout. Cable networks split screens, showing stock markets going down simultaneously with the House vote; the Dow Jones industrial average fell more than 777 points, its largest single-day point drop.
Within days Congress approved a revised bailout and President George W. Bush signed it into law.
Jennifer Steinhauer and Carl Hulse contributed reporting.
Saturday, April 16, 2011
Obama announces framework for cutting deficit by $4 trillion over 12 years
By Lori Montgomery and Zachary A. Goldfarb, Wednesday, April 13, 10:43 PM
President Obama entered the debate about the national debt on Wednesday after months on the sidelines, offering a plan to trim borrowing by $4 trillion over the next 12 years by combining deep cuts in military and domestic spending with higher taxes on the wealthy.In a stinging rebuke to Republican budget-cutters, Obama acknowledged that the debt must be tackled faster than he has previously proposed, but he rejected GOP calls to make fundamental changes to Medicare and Medicaid and to scale back his initiative to expand health-care coverage to the uninsured.
“We don’t have to choose between a future of spiraling debt and one where we forfeit investments in our people and our country,” he said. “To meet our fiscal challenge, we will need to make reforms. We will all need to make sacrifices. But we do not have to sacrifice the America we believe in. And as long as I’m president, we won’t.”
Obama announced his framework for deficit reduction in a speech that at times employed the highly partisan words he used on the campaign trail. But it included only a few notable, and largely incremental, policy proposals.
And even as he joined the battle, Obama immediately volleyed the substantive work of debt reduction back to Capitol Hill, calling on lawmakers to reach “a final agreement on a plan to reduce the deficit” before the Treasury breaches the $14.3 trillion legal limit on borrowing in early July. The country could face devastating economic consequences if it were to stop borrowing and default on its obligations.
Obama said the talks, to be led by Vice President Biden, would begin in early May, after lawmakers return from a two-week Easter break. With polls showing rising public anxiety about the tide of red ink, many lawmakers say they cannot vote to raise the debt limit without some new mechanism to control spending.
Obama never mentioned the highly technical issue of the debt limit, casting the congressional discussions as an effort to “find common ground” in “this larger debate we’re having about the size and role of government.” But lawmakers and other observers said they had little doubt about the true aim of the talks, which the president said should include 16 lawmakers — four from each party in each chamber.
“This is the ‘debt crisis avoidance committee,’ ” said Robert L. Bixby, executive director of the nonprofit Concord Coalition, which advocates for balanced budgets. “Since there’s not a whole lot of time to actually fix Medicare and Social Security and rewrite the tax code, they are probably going to resort to some sort of procedural device,” he said.
The White House has urged Congress to approve an increase in the debt limit without attaching other provisions, an idea lawmakers in both parties call unrealistic. But after meeting with the president early Wednesday, House Speaker John A. Boehner (R-Ohio) said Obama signaled that he might be willing to consider a bill that includes spending limits.
In fact, the president offered his own alternative Wednesday: a “debt fail-safe trigger” that would cut spending across the board if lawmakers did not approve policies that would set the debt on a downward path by 2014. The trigger should spare Social Security, Medicare and programs for the poor, Obama said, and should raise taxes by cutting dozens of tax breaks that benefit people and corporations.
Republicans blasted the president’s plan, rejecting the need for additional tax revenue. With the critical vote on the debt limit looming, Senate Minority Leader Mitch McConnell (R-Ky.) called Obama’s insistence on higher taxes “counterproductive.”
“The American people are well past the point of believing that Washington will be able to make good on all its promises and that entitlement programs will be strong and solvent if Democrats are allowed to raise taxes,” McConnell said in a statement.
Boehner also declared tax increases “a non-starter.” And, in an interview, House Budget Chairman Paul Ryan (R-Wis.) accused Obama of abdicating leadership at a crucial point in the debate over the nation’s fiscal future with his proposal for another round of bipartisan talks.
“Delegating leadership to other people in other bodies is not what we need right now,” he said. “I think the president’s giving a speech today because he’s getting a lot of criticism for avoiding this issue. But you can’t fix these things by giving speeches.”
Reaction among Democrats was supportive but muted. Although Obama offered little guidance for navigating the immediate legislative battles, Democrats said he effectively highlighted the philosophical divide between the parties heading into the 2012 presidential campaign.
“He laid out the choices very clearly,” said Rep. Chris Van Hollen (Md.), the ranking Democrat on the Budget Committee. “The question is not whether you reduce the deficit, but how. And he clearly outlined the choices in front of the American people.”
Although Obama stumbled when describing some of his own proposals, he was eloquent in savaging the budget blueprint House Republicans announced last week, calling it a “deeply pessimistic” vision of the national character and of government’s ability to solve society’s most basic problems. He said the plan “would lead to a fundamentally different America than the one we’ve known throughout most of our history.”
The framework Obama offered builds on the budget proposal he sent to Congress in February and adds recommendations from the bipartisan fiscal commission he appointed last year.
That panel proposed to cut $4 trillion from deficits over a decade. The House GOP plan would cut deficits by about $4.4 trillion over a decade. Obama proposed to reduce borrowing by $4 trillion over 12 years, including $3 trillion over the next 10 years.
In addition to detailing his plan, the president tried to explain how the nation dug itself so deeply into hock. Among the culprits, he said, are politicians who tell people the debt is driven by “waste and abuse” rather than spending on valued programs, such as a strong military, education, Social Security and Medicare.
“Because all this spending is popular with both Republicans and Democrats alike, and because nobody wants to pay higher taxes, politicians are often eager to feed the impression that solving the problem is just a matter of eliminating waste and abuse,” he said.
But Obama has at times done the same. In his first address to Congress, one month after taking office, he pledged to cut deficits in half by the end of his first term. And he said he would start by going “line by line through the federal budget in order to eliminate wasteful and ineffective programs.” His team, he said, had already identified $2 trillion in savings over the next decade.
The assertion was false. Although Obama’s team had forecast a $2 trillion reduction in the deficit, it was not through cutting wasteful programs. Half of it would come through lower projected spending on the wars in Iraq and Afghanistan. Most of the rest would come from higher taxes.
montgomeryl@washpost.com
Obama’s Budget Balancing Act
CFR
April 13, 2011
| Author: | James M. Lindsay, Senior Vice President, Director of Studies, and Maurice R. Greenberg Chair |
|---|
President Barack Obama's speech today at George Washington University put his marker down in the debate on what the United States needs to do to put its fiscal house in order. His plan has no chance of passing as is, and the president said as much. But it does mean that the long-awaited "adult conversation" about government red ink has begun.
Obama's deficit reduction plan is less ambitious than the one that House Budget Committee Chairman Paul Ryan (R-Wis.) floated earlier this month. The president would slash federal borrowing by $4 trillion over the next twelve years, which is well below the target not just in the Ryan plan but also in the Bowles-Simpson Deficit Commission recommendations.
Obama's plan will draw criticism from all quarters. Republicans adamantly oppose his call for higher taxes. Deficit hawks will argue that tax increases for the wealthy will not be enough and that higher interest rates would wipe out much of Obama's projected savings. Democrats will argue that the budget cuts go too far.
But it is a mistake to read Obama's speech solely as a budget document. Its purpose was primarily political. It kicked off the 2012 presidential campaign by contrasting the competing visions Republicans and Democrats have for America's fiscal challenge. It painted Republicans as reckless and radical in using deficit reduction as a means of "changing the basic social compact in America."
In comparison, Obama's "more balanced approach" envisions that "we live within our means while still investing in our future." This approach recognizes that a desire to cut budgets shouldn't obscure the importance of preserving some types of federal spending. An America that refuses to invest in its future will be a country that is less able to hold its own in an increasingly competitive global economy, argues Obama, citing specifically the spending on energy alternatives and education by other industrialized states such as China, Brazil, and South Korea.
More immediately, though, Obama's speech tried to frame the debate for the impending vote on the national debt ceiling. The U.S. government will hit the debt limit in mid-May, after which time it will be barred by law from borrowing any more money. The White House has abandoned its original hope that Congress will pass a clean bill. House Republicans have made clear that they will not vote for any bill that is not linked to what they see as a credible plan to cut federal spending.
The struggle now is over whose deficit reduction vision wins. Speaker of the House John Boehner (R-Ohio) reiterated today the Republican position that "raising taxes will not be part of" any debt ceiling deal. Obama just as firmly insisted that he will oppose radical changes in Medicare or further extension of the Bush tax cuts.
Both sides will jockey for political advantage over the next several weeks. Neither side will tip its hand on its willingness to compromise on key principles until the last moment, if at all.
The stakes in the debate are high. Default on U.S. debt obligations would cause unimaginable economic harm and derail not just the U.S. economic recovery but global growth more generally. Even the prospect that Washington might not be able to find common ground could roil the markets and have much the same effect.
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