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That Bad Treasury Bond is Turning Up Again

April 5, 2013
Joseph Minarik
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***An abbreviated version of this blog post appeared in The Hill’s Congress Blog on April 4. This version takes a deeper dive than is possible with 750 words.***

The temporary “suspension” of the nation’s debt limit expires on May 19, 2013.  On that date, the limit will become the amount of debt already incurred (see here).  The Treasury is prohibited from “borrowing ahead” to build up a cash balance, which makes the determination of the precise amount of the limit as of that date quite complex.

But the concept is clear enough.  On May 19, the debt limit will be (approximately) what the debt actually is as of that moment.  So the Secretary of the Treasury will need immediately to revert to the use of his “extraordinary measures” – highly technical authorities granted to him by law or custom, which over the last two decades or so have become unfortunately all too ordinary – to keep the debt subject to limit below the statutory ceiling.  As always, the public is not privy to the Treasury’s own internal estimates, and the future is always uncertain; but the best analysis available suggests that the Secretary will have run out of tricks by some time in this coming August.

Therefore, with the temporary tax cut expirations resolved, with appropriations for the federal agencies finally completed for the ongoing fiscal year, and the next fiscal year not beginning until September 30, 2013 (and with that appropriations process sure to be procrastinated down to the wire), it is likely that a collision with the debt limit will be the next budget-process bottleneck that the Congress and the White House will have to traverse.

Institutional memories are short in Washington, and history often is revised before it is written.  Somehow, a decent interval after the fact, 100 percent of the players on both sides of each Washington contest believe that they won the game.  So it is likely that the lessons of August, 2011 – and of the last several debt-limit standoffs – have not been learned as they should.  Thus, it is worth taking the opportunity of the waning days of the Easter/Passover congressional break to review just why going to the brink over the nation’s debt limit is such a bad idea.

This should not be a partisan issue.  The points below would apply regardless of who is in control of the White House, the Senate, or the House of Representatives.  Today’s situation is unique in detail, as is every day in Washington; but the amount of the stakes on this issue is always the same: approximately everything we’ve got.  So both current and future Congresses and Administrations should consider the following:

A fight over the debt limit is prone to disaster.  Even though the stakes on the debt limit are monumental, Members of Congress will always be inclined to grasp any opportunity to extract concessions from a President with different views.  Still, over time, standards of behavior on this front have deteriorated.  As they push a President further and further toward the brink, Members today should consider the precedent they risk setting.

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The Sequester: Turf Versus Grass

February 26, 2013
Joseph Minarik
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Just about everybody is familiar with the bureaucratic concept of “turf.”  As in, “That’s my turf.”  In other words, stay off.

However, experience indicates that there is an associated bureaucratic concept which is much less widely recognized: “grass.”  As in, “That’s my turf – so don’t you tell me that I need to cut the grass.”

Both “turf” and “grass” are at play in the current high-level dispute over the sequester of federal spending.  It is worth a review of the bidding thus far.

The sequester was written into law in the debt-limit deal of August 2011.  It was intended to be a fail-safe device in case the so-called “Supercommittee” failed to achieve its goal of $1.2 trillion of budget savings.  The Supercommittee duly failed.  The sequester was postponed from the beginning of this year to the beginning of this March – i.e., Friday.  The two parties in Washington argue over whose idea it was, who voted for it, and whose intransigence is causing it now to appear inevitable.  Those questions may be of academic interest, but not much more.

The importance of Who Shot the Federal Government As We Know It is limited because there is little dispute that the sequester is a Bad Thing.  Oh, there are some who say that there is a debt crisis going on, and so we must cut something.  But just about everyone recognizes that the sequester will not solve the problem.  More specifically, even those who would accept the sequester with the least remorse understand two facts:  First, if we do not have the sequester, the federal government’s finances will explode without fundamental reform of health care.  And second, if we do have the sequester, the federal government’s finances will explode without fundamental reform of health care.  The sequester will only buy time.  A little.

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A Cliff on Three Continents

November 2, 2012
Joseph Minarik
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National economies today are interdependent, as almost everyone understands.  That should be good news, in that strong economies can buck up the weak.  But it is bad news when most economies are weak.

And unfortunately today, the weakness of some economies extends beyond the obvious.  It includes failures of governance — specifically, failures to address critical problems.  This makes the situation of the United States — and of every other country — all the more dangerous.

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What Would A Successful Deficit-Reduction Program Look Like?

September 7, 2012
Joseph Minarik
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After the election campaign, the nation likely will turn in one way, shape or form to dealing with the budget.  Several analysts and bipartisan groups have had their say on what the ultimate plan should be.  Among those statements is a paper by Andrew G. Biggs, Kevin A. Hassett and Matthew Jensen of the American Enterprise Institute, entitled “A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked.”  This paper, released in December 2010, has received an enviable amount of attention for a fairly technical enterprise.

To tell you what I am going to tell you:  The authors argue that the United States should reduce its deficit much more (they pick 85 percent) by reducing spending, and thus much less by raising revenues, than the most widely recognized bipartisan plans (which are at about 50-50).  I think they overplay their statistical hand.  This post gets a bit nerdy, but in my view the reasoning comes down to a fairly fundamental issue.  So all but the faint of heart, please read on.

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Fixing The Budget: What’s In It For Us

August 10, 2012
Joseph Minarik
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The standard argument for repairing the nation’s hemorrhaging budget is that it would be good for the economy.  Many economists are in the lead of the campaign to do so.

However, many would-be economists are among the cheerleaders, and some of the chants that you hear make no sense.

Still, fixing the budget is an economic imperative.  We just need to understand the relevant laws of physics to do it right, and not wind up causing more harm than we avoid.

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Stimulus II: How (And How Not) To Do It

July 31, 2012
Joseph Minarik
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The European economy continues through its “Perils of Pauline” drama.  The latest positive news, European Central Bank chair Mario Draghi’s “whatever it takes” statement last week, afforded the U.S. stock market its customary 48 hours of euphoria.  Whether the market will continue walking on air this week – or more importantly, will have good reason to in the weeks and months to come – is uncertain.

However, other economic news is less than favorable.  The economy has apparently lost the momentum that it showed last winter and early spring.  Growth in the second quarter has clocked in at only 1.5 percent, which does not meet Federal Reserve chair Ben Bernanke’s criterion of supporting improvement in the labor market.  Even if the good news from Europe should stand up, the U.S. economy may already have drifted below stall speed, and be heading for an outright downturn.  If we are anywhere close to that point, the economy may soon need a boost.

For economists, one of the most unfortunate pieces of fallout from recent political developments has been the demonization of the word “stimulus.”  It always is difficult to communicate to the public that, yes, things have improved at a frustratingly slow pace, but were it not for a particular policy intervention, things would have been worse still.  A policy that makes things less bad should be called a success, but to the non-specialist public, because things are worse than they once were, or worse than expectations, that policy usually is deemed a failure.

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News From The Fiscal Cliff

July 24, 2012
Joseph Minarik
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This week, the end-of-year automatic policy changes that were originally intended to steady the shaky federal budget appeared to rise in public concern.  A Wednesday front-page above-the-fold Washington Post article was headlined, “For U.S., economic worries come home / ‘Fiscal cliff’ is replacing European turmoil as top threat to recovery.”  The Congress debated (to the extent that its free-form discussion without specific legislation on the table is “debate”) the issue at length.

This sentiment was reinforced by Federal Reserve Board Chair Ben Bernanke’s twice-yearly monetary policy report to the Congress, and his associated testimony before the Senate and House banking committees on Tuesday and Wednesday (see here).  Chairman Bernanke wrote in his prepared statement that “I would like to highlight two main sources of risk:  The first is the euro-area fiscal and banking crisis; the second is the U.S. fiscal situation… As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery. That recovery could be endangered by the confluence of tax increases and spending reductions that will take effect early next year if no legislative action is taken.”

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Shlock Economics and Bad History

July 13, 2012
Joseph Minarik
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Two columns in the Washington Post this week provided serious misinformation.  One misleads the making of economic policy in the future; the other slanders the innocent dead.  Both fail to recognize shlock economics when they see it.

The first column, “The denier in chief,” was written by Michael Gerson.  Gerson was a speechwriter for President George W. Bush for six years, and this column is a very straightforward election-campaign attack on President Barack Obama, which of course is Gerson’s right.  However, he should be called to task for a fundamental economic error in his argument, because that error is gradually making its way into the conventional wisdom and could hamper policymaking crucially in the future.

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IN CASE YOU MISSED IT: New budget resolutions, CBO analysis, and more.

April 20, 2012
CED Staff
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This was a busy week in Washington as the budget battles continue in this election year. Some key highlights from the U.S. fiscal scene:

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