Thursday, July 14, 2011

Pooling our ignorance...  

I am spending most of my meager surfing time reading as much as I can about the range of possible repercussions from US debt default, which I now rate as very likely. I can't help coming to a conclusion similar to Meagan McCardle:

And about that, Wall Street knows less than we here in Washington.  I dialed into a sell-side  conference call last week to hear what sort of high-level analysis the bond vigilantes were doing, and the answer seemed to be that they knew less than I did.  I didn't hear anything about the process that I couldn't have read in the pages of the New York Times or the Wall Street Journal--or my own blog.  Listening, I thought of the frustration I've often had with people in New York who blithely lay out political strategies for their favored party that couldn't possibly actually work, either because said New Yorkers don't understand the institutional barriers, or because they don't understand what is actually popular outside of Manhattan and Brooklyn.  Even a misunderstanding of small technical questions--like the need for a CBO score, the vulnerability of bills to amendment, or the time it takes to whip votes--lead people outside of Washington to frequently underestimate the difficulties of doing the "obvious" thing.  

On the flip side, it's also clear to me that many people in Washington are living in a bubble where procedure and politics often shut out common sense.  I know I'm losing valuable intelligence about what's happening in the financial sector, because I'm simply not marinating in it every day.  On that same call, I heard an analyst made a point about proposed 14th Amendment bypass of the debt limit, which was so obvious that I couldn't believe I hadn't thought of it: to wit, even if the Treasury simply went ahead and issued more debt, who was going to buy these instruments of dubious legality? And at what price?  Yet all the DC people I'd seen writing about the "14th Amendment Solution" had focused on the legality of the move, or the political fallout; no one had thought about, like, finding customers for the debt.

Washington almost never really thinks about the customers for our debt.  They're useful bogeymen who can be deployed against policies you don't like.  You see liberals claiming that bondholders will be horrified if we cut Social Security benefits (they won't, though they might be horrified if this becomes necessary because we don't lift the debt ceiling--but that worry will be a fear that Congress is crazy, not a fear that this means we're defaulting on our "obligations" to seniors)  You see Republicans claim that they'll be spooked by tax hikes (maybe if we were hiking them from 70% to 80%, but no, the bond market does not care whether top marginal rates are 35% or 45%.)  But on questions where it's actually important, we ignore the core problem of finding customers in favor of arguing about constitutional arcana.  I had an email exchange with someone about the legitimacy of the 14th amendment route, to whom I pointed out that it didn't seem very practical, and he replied "practicalities aside . . . "  Practicalities aside?  Who cares whether it's constitutional for the Treasury to issue bonds no one buys?

And don't get me started on the people who think that some sort of "technical" default wouldn't be a problem.

There are people in Washington who get Wall Street, and people on Wall Street who get Washington.  But they are a small minority in both places--and in both places, outcomes depend on the majority.  I submit that this disconnect is dangerous.  Wall Street is giving us too much rope to hang ourselves because they don't really understand the barriers to achieving fiscal sanity--and Washington is taking it, because they don't really understand how Wall Street thinks, and what the bond traders will do when they finally decide that we're likely to default. [More]
To be sure, our financial industry has passed into inscrutability in many areas like derivatives. This makes substituting simple models for true knowledge very tempting for both sides. But it would seem to me when we are so unsure what might happen to this huge, global economic lynchpin, driving the car over the edge to see what happens is absurd.
The level of misunderstanding is not faked either, I now believe. May Republicans subscribe to a theory that default is no big deal and not to use it to achieve their agenda is to pass up the chance of a generation.
Carl Hulse of The New York Times goes full scale shrill blogger and accuses House Republicans of deliberately engineering economic chaos in an effort to secure political advantage: “many Congressional Republicans seem to be spoiling for a fight, calculating that some level of turmoil caused by a federal default might be what it takes to give them the chance to right the nation’s fiscal ship.”
But he seems to have the goods:
“I certainly think you will see some short-term volatility,” said Representative Austin Scott of Georgia, the president of the freshman class. “In the end, the sun is going to come up tomorrow.”
Such sentiments are strongly influencing the negotiating posture of House Republican leaders as they try to strike an agreement with the White House while remaining well aware that the rank-and-file seem more than prepared to oppose a deal if they believe it falls short of the deep spending cuts they contend are required.
More surprising to me is the idea that the No. 1 priority for Republicans is exactly what Mitch McConnell stated some months ago: make Obama a one-term president. Why that takes precedence over the economic health of the country baffles me, but I now believe he was sincere.  For the right, this is not just about the economy, it is more about political power.

We are preparing for some rude shocks here at Route 2, even though I'm not clear what form they will take. Certainly an exit of fund money from commodity markets might be one reflex, and it would be capable of overpowering a simultaneous drought threat in the short run.

We've already locked in as much long term interest rates as we can, and we are looking at the "transfer tax" window to take advantage of offloading appreciating real estate to downstream generations, since all bets would be off on estate taxes in recessionary government revenue shortfall.

Speaking of which, lost in all the insistence for tax cuts is the fact they are really, really low right now. And the fact that deficit reduction by spending cuts alone is not all that popular outside the far right.

I have no idea whether the political payoff will be there for those betting on default as an election strategy. But I think we we learn about the consequences both quickly and brutally.


Anonymous said...


I agree that a default could do serious harm to the economy and needs to be avoided. I am not near smart enough to know how bad it could be, but it is a road I don't want to go down! - see also "Law of unintended consequences".

I also understand and appreciate your drifting to the "left". BUT I am a little disapointed with your assesment of the the GOP #1 goal of a 1 term BHO - IMHO it is demogogary (sp ?, I can also say nuclear). I think that was a cheap shot on your part and think you are above that. I believe those of us who enjoy your posts expect a little more than that from you. I would not like to see this discussion on such an important topic go down "that" road here. Both sides have enough sound bites to totally derail the real issue. or I totally missed your point.

Anonymous said...

And who walked out of the negotiations? Political posturing? Come on John give me a break... You're sounding more and more like a MSNBC pundant than the sound critical thinker I used to read.

John Phipps said...


You are right - I should not have used an absolute statement asserting all Republicans have that priority. I try to avoid sweepingly inclusive judgments. "Many Republicans" would have expressed my position better. The larger problem is we are not hearing much from other than the hard right of the GOP, so that\s all we have to judge their position on.

That said, McConnell's latest remarks are hard for me to construe otherwise. I did not comment on his first "one-term" statement, dismissing it as hyperbole, but along with David Brooks and Greg Mankiw (hardly left-wing) I have decided they mean exactly what they are saying to the base. (I apologize for not linking to the statments referenced but it is a bear on my iPad)

Finally, turning down an 88/12 split offer indicates to me they would reject 99/1 split. This is not negotiating for an economic future, IMHO.


Cantor. It was his exit and subsequent undercutting of Boehner that probably froze the Rep position and doomed the chance for a grand bargain.. BTW, watching that internecine war is pretty ugly itself.

Anonymous said...

Well one walk out deserves another after Cantor's little bit of drama. Does he think that he should be the only one allowed to be dramatic. By now it is clear to most that one doesn't pay kidnappers, extortionists and gangsters. John I think your estimate on a failure come August 3rd is too low. The only possibility now is if the business community comes in and knocks a few heads together. Then maybe some progress will be made.

Gary Anderson said...

It seems like we’re already putting the entire blame for this showdown, and possible default, on the Republicans. But from my perspective, while I’m no shill for the Republicans, I am in their camp on this one. I’d given up on them in recent years when they had repeatedly fueled the spending “beast” with their own pet projects, ethanol being one. The Democrats have shown no competence in directing the economy. Keynesian economics has a very poor track record of curing economic woes, (FDR proved it first by keeping us in a depression for 10 years with it, unemployment never falling below 20% during his first 8 years in office.) Are we to hold contempt for the Republicans who are trying to avoid sucking more money from the private sector through tax increases? I’m certainly not! This one is all on the Democrats, and while Republicans may fail in the court of public opinion in their attempts to stop tax increases (which, John, argues against your thought that their #1 priority is to make Obama a one term president), they are right to try to stop the illicit spending projects and “investments” that have no multiplier effect and, contrarily, suck money from the private sector that could be used to produce growth and jobs.

I hold contempt for the notion that Washington, and many state capitals as well, think that private sector money is theirs and only out of their benevolence do we get to keep it. The funds they take as “eminent domain” are then used to fund the 4th branch of government, the bureaucracies, which, IMHO, have become the monarchical branch of government subject to no checks and balances as theorized by the Founders.

No, the spending has to be disciplined, and the Democrats are using the default threat and its associated fears to manipulate for more illicit spending. Too little written and verbal media commentary is devoted to pointing out the Democrat’s culpability in this stand-off.

In short, I favor “starving the beast” and this is a necessary exercise.

Gary Anderson

Bob said...

Here is a link to a proposal by the Bipartisan Policy Institute to attempt to achieve control over spending:

There is also a very detailed day by day projection of the impact of a failure to increase the debt limit:

Anonymous said...

Not to worry John, your man Obama is safe for a second term. Boehner will blink and cave on his election mandate just like Gingrich did on his "contract with america" or Bush 1 did on raising "read my lips no new" taxes. In recent memory Reagan was the only Republican who could hold his ground (and he was a turn coat Dem).
The Democrats are the ones that stay on courze and are slowly but surely plodding us forward into socilalism.

John Phipps said...


As Bruce Bartlett painstakingly documents in his new book, "starving the beast" has never worked, just like tax cuts don't pay for themselves.

These are wonderful myths the right embraces to avoid the hard solutions to our very complicated economy. When Bush cut taxes the beast didn't starve, because Congress never gets to step 2: cutting spending. In fact, Rep's have voted for higher debt limits without blinking during previous administrations.

I just finished BB's book. I'll try to post about it soon to advance my argument.


Your characterization of compromise by Boehner as "caving" is my greatest disagreement with the right. Governing is a matter of compromise, and the hard line stance of the TP has probably already done significant damage to our economy for no valid reason.

I agree the TP has pushed the GOP so far right even moderates look like Dems, and judging from polls they are appealing to a smaller portion of the electorate every day.

So what if Obama is re-elected or not? I could live with Romney or other qualified candidates, but in the absence of a process that chooses our best to run, we will likely get a hard-to-elect Republican candidate.

The concern I have is for the process of running the country. I believe it has been significantly damaged, whoever is in charge.

And the "socialism" slam is about as valid as the "he's gonna take our guns" scare. Especially coming from anybody involved in our socialist grain farming programs. Lookit, we're selling off US ownership in banks and GM at decent profits or small losses (privatizing). And as for health care, the mandate used to be a Republican idea.

And it will be again, I'll bet.

Anonymous said...

Tax cuts used to grow an economy (more jobs = more tax payers) does work. Reread Milton Friedman. Kennedy proved it in the 60s, Reagan layed the groundwork with them in the 80s for "Clintons" economy in the 90s.
It's strange but expected how liberals use "compromise" only when they are in a inferior position. The ram thru read later Healthcare compromise. Spend like a drunken sailor 2009-2010 compromise. Finally realize we're let's compromise to get out of this well.
The two steps foward one step back march to bigger government less freedoms hasn't changed through out history.

Gary said...

Congress never gets to step 2 because the electorate doesn’t hold their feet to the fire. And it doesn’t help when respected commentator’s such as yourself cut them slack for their spending. It seems that your viewpoint is that “we can’t beat ‘em, so join ‘em”.

And, while you argue that tax cuts don’t pay for themselves (I think I can make an argument to the contrary but there is not enough space here), certainly you’re not arguing that the spending over the last three years pays for itself, as evidenced by the ballooning subject deficit and debt ceiling. Furthermore, there is no discussion in the current debt ceiling debate about cutting taxes. Republicans simply want to avoid increases.

I’ve no doubt of the serious ramifications of debt default. That’s what makes it such an effective lever. But the spenders use it more effectively and have always won when it’s applied. I want to see more effort on the part of those who want to contain spending.

I’ll look forward to reading Bartlett’s book. I’ve read some of his commentary over the years and have found him to be all over the map ideologically.


John Phipps said...


Do you have a Kindle? I'll loan BB's book to you. You get it for two weeks. Contact me by e-mail if you are interested.

I'll post about the misunderstandings of where the deficit comes from. Surprisingly when you count the wars, recessionary spending (unemployment, Medicaid, etc.), spending has not grown dramatically. TARP isn't even a big factor and much of that money is being recovered.

Revenues have plummeted to the lowest levels in 50 years. The Bush Tax cuts are one big problem, but the recession is another. It is easily seen from the data that while spending has risen for the reasons above revenues have nose-dived. ACA is not a big item because it's backloaded and self-funding, nor has there been much growth in spending other than to counter the recession.

I have posted numerous times with sources all over the spectrum about the taxes-paying-for-themselves. Bottom line: you get back about 40% with a well targeted tax cut. Many bad cuts generate zero return. It simply is not true.

JRthe Original said...

I say boomers are the problem! You guys lived off the teat while pushing the credit card bill off to your kids and grandkids.

Boomers spent like drunken sailors and didn't pay for half of it. Hows a bunch of boomers supposed to fix the problem, When their have it all now and let my kids pay for it mentality hasn't changed? Raise taxes and cut spending. Also don't borrow any more Some of us under 40 crowd are gonna get real pizzed off soon. Ubfortunaltly many of your kids have the same theory and are still paying off student loans from 20 years ago. We are screwed.