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Congress Prepares for Absurd Failure on Debt Ceiling

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Speaker John Boehner is engaged in an epic struggle to pass some sort of compromise plan to raise the debt ceiling while cutting spending, moving forward with desperation and a certain amount of bullying to push through a plan which has now been modified and reduced to the point where it can only be described as absurd. Feeling the pressure from the endless fearmongering of President Obama and Timothy Geithner, Boehner seems to have gone off the rails with a plan which actually offers fewer cuts than the Democrats and no spending cap at all.

It’s a very heated issue in which some of the facts are being lost, so let me straighten them out.

Boehner’s Plan

Boehner’s current proposal is being described in some quarters as an increase in cuts from his earlier proposals, but in fact the cuts included are bizarrely inadequate. The plan currently includes $1.2 trillion in cuts over 10 years with another $1.8 trillion in unspecified cuts to be implemented by a special committee at some point in the future, in exchange for a $2.7 trillion increase in the debt ceiling.

There are a number of problems with this proposal.

The first phase of cuts only comes out of discretionary spending and all cuts to entitlements are left to the bipartisan committee at some future date. Whether this committee or its cuts will ever happen is highly debatable when the balance in Congress shifts next year and plans get rewritten.

The cuts are spaced out over a 10 year period, amounting to only $300 billion a year, and with more than half the cuts still in abeyance, the real cuts in the first year are only $120 bilion or likely even less. In fact, the way the cuts are structured the cuts in the next year may be as low as $6 billion. And because the cuts are not enough to offset increases in debt just from interest, spreading them out over 10 years means that they will be outpaced by debt increase and never come close to catching up. Ten years of small cuts to offset an immediate debt limit increase only works if there are not more debt limit increases down the road, and with cuts so small further increases are unavoidable.

The total cuts over a 10 year period, assuming even the entitlement cuts happen is less than the proposed budget deficit for the next two years, leaving 8 years worth of further debt increase in the next 10 years adding up to an increase of almost $10 trillion in the national debt. So the net result of the plan is a massive increase of the debt, not any real reduction.

The current Boehner plan also includes no provision to pass a strong Balanced Budget Amendment as a prerequisite to any debt limit increase. Every Republican in the House and Senate signed on to the Cap, Cut and Balance pledge and Boehner’s plan fails to meet its requirements. It also puts no caps on federal spending except for discretionary spending which makes up about a third of the budget.

Boehner’s plan is so bad that Sen. Harry Reid can actually make an argument that his proposed plan has more real cuts than Boehner’s does, because Reid’s plan includes substantial cuts to military spending and more overall cuts per year. It still results in a huge net increase in spending, and it raises taxes on those who already shoulder most of the tax burden, but in total it’s just a different bad plan, not really any worse than Boehner’s.

The Fearmongering

Perhaps the biggest lie in this whole melodrama is the claim coming from the White House and from Tim Geithner that the US will default and have our credit rating downgraded next Tuesday if we don’t raise the debt ceiling. These claims are nothing but an irresponsible intimidation tactic.

As Senator Rand Paul eloquently points out, and as I explained in detail in a previous article, there is absolutely no need to default on our debt if the debt ceiling is not raised. By prioritizing spending we can easily meet the requirements to servie the debt and provide for entitlements out of incoming revenue and we could probably keep doing that for 6 or 8 more months before it became a real problem.

Of course, this would put a lot of pressure on the administration because Obama and Geithner would be the ones who would have to make those spending decisions and they would get the blame for cutting subsidy programs, furloughing federal workers, closing down national parks and the other small short-term austerity measures necessary to meet obligations. They’d rather scare us with empty threats than admit the truth that we’re broke and need to tighten our belts – even in the federal government.

The other big lie here is that raising taxes on the “wealthiest among us” will actually solve the problem. If we were to raise taxes substantially on the top 1% of earners that would not be enough to balance the budget. Even raising taxes to the 70% rate of the Reagan era – almost double the current rate – would only raise about $300 billion more a year at a huge cost to the economy. So when Obama talks about raising taxes on the rich, he’s mostly making an argument for a symbolic act of class warfare.

What they also don’t point out is that we’re just as likely to have our credit rating downgraded if either of the current proposals passes. Because both Boehner’s and Reid’s plans are so inadequate they don’t represent the kind of real solution to the long term debt problem which international credit agencies are looking for, so they’re really worth nothing at all.

Real Solutions

The reality is that we need to put all this bickering aside and pass a real plan which actually addresses this problem in a substantive way. We’re not getting out of this mess without major cuts and a real cap on spending along with some policy changes which will spur economic growth.

  • Pass a Balanced Budget Amendment and cap spending at a level tied to a percentage of GDP like the 18% proposed in the Cap, Cut and Balance pledge. Only by capping future spending can you make long-term cuts offset short term debt increases.
  • Make cuts equal to or greater than any increase in the debt limit and make them take effect more quickly so that they reduce debt faster than interest increases it. A minimum of $600 bilion a year for 5 years would be a responsible proposal. And to do this you would need to go beyond the Boehner proposal to go after both military spending and entitlements. Just ending our current foreign deployments would take care of most of these cuts.
  • If a tax increase is what it takes to get President Obama on board for real cuts, then let him have an increase of 10% on those earning in the top 1% (over $380 million a year), but offset that increase with a 10% cut in capital gains, which would have a great stimulative effect on the economy.
  • Do the only thing which will really spur the economic growth which will get us out of a recession relatively painlessly. Cut corporate taxes. They don’t bring in that much money and that revenue is going down as companies offshore to avoid what is now the highest corporate tax rate in the world. Cut the rate substantially or eliminate all corporate taxes so that they will come to the US as a tax haven instead of fleeing and taking jobs and money out of the country with them. Short of lowering wages – which is not at all popular – cutting taxes on businesses is the easiest way to create jobs and grow the economy.
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    At this point the melodrama surrounding this issue is becoming embarrassing. Real problems need real solutions, not pandering, fearmongering and passive-aggressive walkouts on negotiations. Boehner, Reid, Geithner and Obama need to start acting like grown-ups, make serious proposals and work out compromises which give up more than either side wants for the good of the people and the nation.

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    About Dave Nalle

    • http://BuckeyeTalkBack.com Mike Vrabel

      The unspecified cuts are a little strange and unlikely to actually happen. And were are the tax increases? I like the ideal of the cap, tax, and cut plans. Makes sense to do all three at this time.

    • Glenn Contrarian

      Dave –

      You’re off the edge of the map – and you’re pretending there’s no monsters.

      Perhaps the biggest lie in this whole melodrama is the claim coming from the White House and from Tim Geithner that the US will default and have our credit rating downgraded next Tuesday if we don’t raise the debt ceiling. These claims are nothing but an irresponsible intimidation tactic.

      Nearly every economist of note disagrees with you, because it’s looking increasingly likely that we WILL lose our top credit rating even if such a compromise were passed today. Tell me, Dave – is it really good for America, is it really in line with conservative values that every American (and every American business) that asks for credit will have to pay a higher interest rate? Because that’s what’s going to happen.

      And when it comes to “prioritizing spending”, what cuts are you suggesting? Don’t send out the Social Security checks to the elderly and disabled? Don’t pay the Medicare bills? Don’t pay the military? There’s a reason behind the old saying that “the devil’s in the details”.

      And one more question – WHEN our credit is downgraded, then who becomes the liar? Obama? Or Rand Paul and yourself, since both of you claim that it’s a lie that our credit will be downgraded? Oh, never mind – I forgot! You’re Absolutely Sure that we can just take the money from entitlements (which would otherwise go to support deadbeats and societal parasites like the sick and the elderly and the military) and use that money to pay the interest to avoid default.

      But it looks like John Boehner disagrees with you – he says that the Republicans (the ones mostly comprising the hardcore Tea Party caucus, obviously) WANT the default!


      Well, first [the Tea Party caucus wants] more. And my goodness, I want more too. And secondly, a lot of them believe that if we get past August the second and we have enough chaos, we could force the Senate and the White House to accept a balanced budget amendment. I’m not sure that that – I don’t think that that strategy works. Because I think the closer we get to August the second, frankly, the less leverage we have vis a vis our colleagues in the Senate and the White House.

      So when it comes to what the Tea Party supporters in Congress wants, do I believe you? Or do I believe John Boehner? I’ll believe the latter.

      You also said:

      Pass a Balanced Budget Amendment and cap spending at a level tied to a percentage of GDP like the 18% proposed in the Cap, Cut and Balance pledge. Only by capping future spending can you make long-term cuts offset short term debt increases.

      Yes, and IIRC part of it requires a two-thirds vote in order to get a tax increase, no matter how badly it’s needed…just like California’s Prop. 13. CA once had one of the best educational systems in America, with college that was nearly free for all – which resulted in little things like Silicon Valley. Now California has had to lay off tens of thousands of police just to stay within the tyranny of the budget despite their still-booming population.

      You said:

      If a tax increase is what it takes to get President Obama on board for real cuts, then let him have an increase of 10% on those earning in the top 1% (over $380 million a year), but offset that increase with a 10% cut in capital gains, which would have a great stimulative effect on the economy.

      I would agree…except that capital gains are now taxed at, what, 15%? Or is that just dividends? At any rate, the EFFECTIVE tax rate on the richest is now about 18% (reference available if you need), and there is NO reason why the rich shouldn’t pay at least an equal portion of their income as does the middle class! Even Warren Buffet agrees with this!

      You said:

      Cut corporate taxes. They don’t bring in that much money and that revenue is going down as companies offshore to avoid what is now the highest corporate tax rate in the world.

      You keep repeating that America has the second-highest corporate tax in the world – and you’re right when it comes to the NOMINAL tax rate. BUT after we take into account all the deductions and breaks and loopholes, America has the second-LOWEST corporate tax rate in the world! I’ve pointed this out to you more than once…and you’ve ignored it every time.

      Furthermore, there are tax breaks FOR companies who offshore their manufacturing! Get RID of those tax breaks! Obama already tried to do so – that was how he was going to pay for healthcare for the 9/11 responders, remember, until the Republicans filibustered it and claimed that such was actually some kind of tax hike!

      You said:

      If we were to raise taxes substantially on the top 1% of earners that would not be enough to balance the budget. Even raising taxes to the 70% rate of the Reagan era – almost double the current rate – would only raise about $300 billion more a year at a huge cost to the economy.

      I think you mistyped this, because I KNOW that you know that the tax rate for the Reagan era was less than half that. And you also know very well that our economy did quite well, thank you very much, in the 1950’s and 1960’s when the tax rates for the rich was MUCH higher than they are now.

    • http://www.republicofdave.com Dave Nalle

      Nearly every economist of note disagrees with you, because it’s looking increasingly likely that we WILL lose our top credit rating even if such a compromise were passed today. Tell me, Dave – is it really good for America, is it really in line with conservative values that every American (and every American business) that asks for credit will have to pay a higher interest rate? Because that’s what’s going to happen.

      I covered this in the article already. As you say, our credit rating may well be lowered whether we default or not. But the point – and economists do not dispute this because they can’t – is that there is no actual reason why we should suddenly default next week. It may not make a difference as far as a credit downgrade, but an actual default is really not on the table unless Obama chooses to default on purpose.

      And when it comes to “prioritizing spending”, what cuts are you suggesting? Don’t send out the Social Security checks to the elderly and disabled? Don’t pay the Medicare bills? Don’t pay the military? There’s a reason behind the old saying that “the devil’s in the details”.

      I covered this in a previous article and I also addressed it here. Just ending the wars would be more than sufficient to buy a couple of years to deal with this manufactured crisis. And ending the wars alone would be more than enough to take care of all the social programs and all the essential spending as well as the debt service.

      And one more question – WHEN our credit is downgraded, then who becomes the liar? Obama? Or Rand Paul and yourself, since both of you claim that it’s a lie that our credit will be downgraded?

      No, I never claimed that it is a lie that our credit will be downgraded. It’s a lie that we will inevitably default. The downgrade may happen either way.

      Oh, never mind – I forgot! You’re Absolutely Sure that we can just take the money from entitlements (which would otherwise go to support deadbeats and societal parasites like the sick and the elderly and the military) and use that money to pay the interest to avoid default.

      Again, I specifically did not say this in the article. You still aren’t reading before responding, I see.

      But it looks like John Boehner disagrees with you – he says that the Republicans (the ones mostly comprising the hardcore Tea Party caucus, obviously) WANT the default!

      Really? Show me a source. Not that I take anything Boehner says seriously at this point.

      Well, first [the Tea Party caucus wants] more. And my goodness, I want more too. And secondly, a lot of them believe that if we get past August the second and we have enough chaos, we could force the Senate and the White House to accept a balanced budget amendment. I’m not sure that that – I don’t think that that strategy works. Because I think the closer we get to August the second, frankly, the less leverage we have vis a vis our colleagues in the Senate and the White House.

      You are operating on the assumption that the Democrats are willing to play their bluff out to the point where they destroy our economy rather than make necessary cuts. You may be right. Let’s just hope the public sees their behavior for what it is and votes them all out.

      Yes, and IIRC part of it requires a two-thirds vote in order to get a tax increase, no matter how badly it’s needed…just like California’s Prop. 13. CA once had one of the best educational systems in America, with college that was nearly free for all – which resulted in little things like Silicon Valley. Now California has had to lay off tens of thousands of police just to stay within the tyranny of the budget despite their still-booming population.

      First off, their population is not booming. People are moving out of California in droves. And if they could address this by reducing the size of their bloated police forces then that proves my argument.

      I would agree…except that capital gains are now taxed at, what, 15%? Or is that just dividends? At any rate, the EFFECTIVE tax rate on the richest is now about 18% (reference available if you need), and there is NO reason why the rich shouldn’t pay at least an equal portion of their income as does the middle class! Even Warren Buffet agrees with this!

      What the rich should do and what you can make them do are two different things. Raise their taxes and try to collect and they are gone just like the corporations the left has driven overseas.

      You keep repeating that America has the second-highest corporate tax in the world

      Not anymore. It’s now the highest.

      - and you’re right when it comes to the NOMINAL tax rate. BUT after we take into account all the deductions and breaks and loopholes, America has the second-LOWEST corporate tax rate in the world! I’ve pointed this out to you more than once…and you’ve ignored it every time.

      The breaks and loopholes are selective and not systematic. It’s only a favorable system for those who operate the way government wants them to operate or who locate most of their operations overseas to reduce onshore profits. The breaks you talk about are effectively incentive programs to drive businesses out of the country.

      Furthermore, there are tax breaks FOR companies who offshore their manufacturing! Get RID of those tax breaks! Obama already tried to do so – that was how he was going to pay for healthcare for the 9/11 responders, remember, until the Republicans filibustered it and claimed that such was actually some kind of tax hike!

      You seem not to understand the most basic principles of business. If you take away the tax breaks for offshoring some of their operations they just take their ENTIRE business out of the country. This is how the idiots on the left have already gotten us where we are today. Just stop taxing them and you remove the incentive to offshore at all.

      You said:

      I think you mistyped this, because I KNOW that you know that the tax rate for the Reagan era was less than half that.

      No, at the start of the Reagan era the top tax rate was 70%.

      And you also know very well that our economy did quite well, thank you very much, in the 1950’s and 1960’s when the tax rates for the rich was MUCH higher than they are now.

      Yes, because as I pointed out earlier the tax rate and the income levels of the very rich are largely irrelevant to the economy.

      Dave

    • Glenn Contrarian

      “No, at the start of the Reagan era the top tax rate was 70%.

      Ah – so what the tax rate at the START of the Reagan era defined the Reagan era? Never mind that Reagan ran on – and quickly enacted – drastically cutting taxes, and soon dropped that top tax rate down to 25%?

      Come off it, Dave! You know better than this!

      You seem not to understand the most basic principles of business. If you take away the tax breaks for offshoring some of their operations they just take their ENTIRE business out of the country.

      Oh, that’s REAL good! “If you don’t PAY them to move SOME of their business offshore, they’ll just move EVERYTHING offshore!” This is perhaps the least intelligent thing I’ve ever heard you say, Dave. You really, truly need to lay off the Kool-Aid.

      And when it comes to us having the ‘highest’ corporate tax rate in the world, our corporate taxes as a percentage of our GDP IS the second-lowest in the developed world – second only to that other economic giant and financial paragon of stability, Iceland!

      First off, their population is not booming. People are moving out of California in droves. And if they could address this by reducing the size of their bloated police forces then that proves my argument.

      Dave, can’t you even ATTEMPT to verify your claims? If people are moving OUT of CA “in droves” as you claim, then explain this:

      California’s population was counted by the US Census Bureau at 37,253,956 for the 2010 census, making it the most populous state. Between 2000 and 2009, there was a natural increase of 3,090,016 (5,058,440 births minus 2,179,958 deaths). During this time period, international migration produced a net increase of 1,816,633 people while domestic migration produced a net decrease of 1,509,708, resulting in a net in-migration of 306,925 people. The State of California’s own statistics show a population of 38,292,687 for January 1, 2009.

      You also said:

      No, I never claimed that it is a lie that our credit will be downgraded. It’s a lie that we will inevitably default. The downgrade may happen either way.

      Oh? Well, I suppose the always-Right-wing Rasmussen Reports site is to, um, “liberal” for you:

      …dysfunctional is the too-polite term for the House of Representatives, specifically its dominant tea party Republicans, who can be described in far less dainty psychological terms. Even the most extreme Republican partisans in the Senate seem to realize that their House colleagues, seized by some combination of ideology, madness and pig ignorance, are propelling the country and the world toward economic chaos.

      Of course, the tea party Republicans insist that no such thing will ever happen — the warnings from economists, business leaders, financiers and public officials are merely so much “scare talk.”

      But one of the first things you said was:

      It may not make a difference as far as a credit downgrade, but an actual default is really not on the table unless Obama chooses to default on purpose.

      Yes, Dave, it’s all SO simple! All he has to do is to take YOUR Tea Party bill and accept EVERYTHING that’s on it WITHOUT any attempt at compromise or negotiation, without ANY consideration for what the majority party wants, and that way there’s no default! If Obama doesn’t give YOU everything YOU want – never mind what the great majority of the nation wants, but it’s what YOU want – then it will be Obama’s fault that the nation defaults…ALL BECAUSE HE DIDN’T GIVE THE TEA PARTY EVERYTHING THE TEA PARTY WANTED!

      You know, Dave, most people refer to such tactics as hostage-taking, and what does the perp always say? “If YOU let anything happen to this hostage, it’ll be YOUR fault!”

      Lastly, Dave, here’s something just for you.

    • http://wp.me/pXxif-6O Devont’e K. Watson

      I have been fallowing this article for a substantial amount of time. He is being down-graded by his own party. He needs to side with other plans because his is not compatable for the economy.

      I am a PBS Correspondent and covered this story.

    • Glenn Contrarian

      Hm – isn’t that interesting! Very interesting indeed!

      I guess that’s what happens when you say things like “you have to give tax breaks to corporations to move operations overseas because if you don’t, then the corporations will move their operations overseas”.