40 thoughts on “More on the debt ceiling aftermath”
Ed Hanson
Professor
I never considered non-payment of current Social Security payments a real risk. Obviously per your interviews, you did.
My thought on the issue derived from the analysis of Law professor Michael McConnell of the law regulating the Social Security fund. It can be found at: Contrary to the President, Social Security Checks Are Not At Risk
In a nut shell, the Fund holds $2.4 trillion in U.S. Treasury bonds which the Treasury, by law, must honor when presented. These bonds are part of the current US debt. As these bonds are ‘cashed in’, its effect is to lower the total debt a corresponding amount below the debt ceiling, allowing the Treasury to sell additional bonds for the money to pay the fund. In other words the transactions are a wash and will not change the size of the national debt.
What is it you are seeing that I am not? Why would Social Security payments be in immediate danger?
Anonymous
In other words the transactions are a wash and will not change the size of the national debt.
You are confusing the balance sheet with the income statement.
It is a cash flow issue. If the government doesn’t have the cash, it can’t redeem the trust bonds. And it can’t get the cash because it is currently forbidden to borrow.
This is the same problem that a business can have that forces it into bankruptcy, even though the balance sheet looks okay. In 2008 the commercial paper market collapsed. Businesses need cash to make payroll and buy supplies. Even if they have lots of orders and no debt, then need to be able to borrow to keep their business running day to day.
Rich Berger
Anonymous-
If you read the link you would see that redemption of the bonds reduces the debt, allowing an equal amount of borrowing without raising the level of debt.
Not to mention that the government gets enough cash to cover the SS benefits and the debt and military pay. The terrorists in the Democratic party were using no SS benefits to scare the elderly. The Republicans refused to give in to this extortion and stared them down.
Ed Hanson
Anon, what you say assumes the treasury has no cash on hand, which is simply not true. It is still a recipient of somewhere between 170 to 200 billion a month. The Treasury honors the claim from the SS trust, as it must by law. It immediately, and in all reality, simultaneously, replaces the cash outflow to the fund by selling new bonds that it now has room for under the ceiling.
No new debt is created. Only a change from special Treasury bonds of SS to perhaps ordinary Treasury bonds held by the public. The ceiling would not be breached.
Professor,
The reaction of the markets was not just “shrapnel” from the debt ceiling debate. A reaction this strong is decisive. You seemed to come close but you missed the message from the market.
The message was that investors accepted the deal as confirmation of support for US debt. Bonds purchases soared because investors saw that our government would do anything to continue expanding and paying debt.
But just as clearly the message was that the debt deal was a severe blow to the private sector. Investors saw that there was no change to the policies that have given us a massive debt and deficit, and investors know that the only place there are resources to cover this largess is to take from private sector producers.
The market showed confidence in government debt but a total destruction of confidence in the ability of the private sector to maintain itself.
But sadly, if the investor is right about the private sector then the source of support for government securities will dry up and we will have a crash in both.
The US outlook is not good.
I am confused. First, this is all digital. SS turns digitally to Treasury and says here’s some of my bonds. I want to redeem them digitally please. This is part of the debt total, so returning the bonds lowers the debt total owed, and thus automatically frees up, dollar for dollar, the exact same amount the SS redemption reduces the debt. In other words there’s space created under the debt ceiling. Debt the same, the redeemed bonds are turned to digital cash (and soon real cash to SS recipients).
I can’t find the supposed ‘cash flow’ issue. I can find a spending problem, but not one associated with existing Treasuries, or in SS case a special type of Treasury.
Not to belabor the issue, but what stops the Treasury from refinancing debt? Rates are very, very low right now. Wouldn’t it be wise to do so for Treasuries on the books right now with higher interest coupons? These higher couponed Treasuries are now trading at a significant premium in the secondary market, so Treasury could refinance them thus lowering the interest rate burden–and they could at the same time issue longer dated Treasuries using the premiums received to extend duration. That would reduce the overall risk of maturity mismatch as well.
KevinM
When does the Econbrowser recession indicator get updated?
2slugbaits
Ed Hanson Anonymous has it exactly right. McConnell was making the same mistake that poster CoRev kept making. Treasury had been doing exactly what McConnell suggested ever since last May. But you can only play that game as long as opening day cash on hand is large enough to cover the SSTF bonds presented to the Treasury that morning. Treasury is constrained and can only redeem bonds up to the dollar value of Treasury’s cash on hand, and that fact of life limits the amount of new borrowing space that Treasury can create each day.
May, June and July are traditionally above average in terms of Treasury receipts, but August is usually below average in receipts but average in disbursements (Treasury has a web page on the seasonality of receipts and disbursements). So Treasury knew August was going to be challenging, and they knew 3 Aug would be especially challenging because they did not anticipate closing the books on 2 Aug with enough cash on hand to redeem all of the SSTF bonds likely to be presented on 3 Aug. Treasury receipts and disbursements are lumpy. If the next day’s disbursement lump is greater than the overnight receipts, then the game Treasury was playing comes to an end. It’s kind of a Ponzi scheme and like all Ponzi schemes can only work so long.
I don’t know what’s in the water at Stanford and Hoover. Those guys and gals have been saying a lot of really stupid things lately.
JDH
KevinM: This is updated with each new advance GDP release, most recently last Friday when it rose to 14.4%. It is always calculated for the previous quarter (in this case, 2011:Q1) in order to allow for data revisions and trend recognition.
Mark A. Sadowski
“I don’t know what’s in the water at Stanford and Hoover. Those guys and gals have been saying a lot of really stupid things lately.”
Not just there, but here. There aren’t enough hours in the day to correct the amount of stupidity that qualifies as informed comments at econobrowser these days. Just sayin’.
By the way, the two year zero coupon inflation swaps closed near 1.5% today, down nearly 50 basis points for the week. (Not a voice of confidence on the debt deal.)
2slugbaits
Ed HansonAnon, what you say assumes the treasury has no cash on hand, which is simply not true. It is still a recipient of somewhere between 170 to 200 billion a month.
True, but irrelevant. What counts is the cash onhand on a given day, not the value of receipts over the whole month. If Treasury starts the day with $10B cash onhand and SSTF presents them with $11B in bonds, Treasury can only redeem $10B. That does create $10B in new space; however, that new space is not instantaneously available. And of course it still leaves you with $1B in unredeemed SSTF bonds. Treasury’s ability to redeem SSTF bonds is constrained to the opening day’s cash on hand.
jonathan
I can count on Ricardo to get things backwards. The idea he’s espousing is that more contraction, more austerity will generate confidence and that confidence will then generate more economic activity. I suppose a commenter who takes the name Ricardo is going to use Ricardian supply-based models as his take-off, though nothing much in his comments suggests he really understands them.
Where is the evidence for this belief? Where is the evidence that confidence will generate this economic activity? Why would suppliers produce more? Why would they hire more?
Consider then – not him, because he won’t listen – the British results. They are well on the road Ricardo espouses. Each economic report is getting worse. Even with relative devaluation of the pound, manufacturing fell off. This austerity program was specifically sold using this confidence idea. It isn’t working. The British government is now looking at changing course because more contraction in spending now looks, in the light of actual results, like it will actually contract the economy.
The idiocy of the argument is that contraction is somehow good. Like we’re pruning a garden in Chauncy Gardner speak. These are people’s lives, not plants.
Anonymous
Ed: The Treasury honors the claim from the SS trust, as it must by law. It immediately, and in all reality, simultaneously, replaces the cash outflow to the fund by selling new bonds that it now has room for under the ceiling.
You can’t just magically wave your hands and say that cash from new bonds simultaneously replaces redemption cash. The Treasury has to schedule an auction and they can’t schedule an auction if the debt limit prohibits it from doing so. If you had ever run a business you would know that you can’t just print hot checks and plan on it cancelling out at the end of the month or quarter when you get your receipts. That’s a cash flow problem. A debt limit throws a wrench in the works.
CoRev
I see logic is starting to out weigh 2slugs’ lumpiness argument. 😉
Ed Hanson
Anon and Slugs
If your point is that there is no quick fix to the runaway spending by the Federal government, then we have an area of agreement.
Your point that the US could not redeem and reissue current bonds held by SS under the old debt ceiling simply is unconvincing.
But the political scare tactic of threatening Social Security payments is simply shameful. It never was the immediate difficulty in outlays. If either of you would have said that it would hasten the day when SS no longer could sustain promised benefits, I suspect a good case could be made. But, such Ponzi schemes always have a habit of crashing before anybody expects.
Respectfully, still waiting for Professor Hamilton to respond.
2slugbaits
CoRev Not just my “lumpiness argument,” but also Ben Bernanke’s. The argument about the lumpiness of Treasury’s daily receipts and disburements constraining Treasury’s ability to create new borrowing space is the same argument Bernanke gave to the National Press Club a few months ago.
JBH
When will the scales drop away from the eyes of the liberal posters on this blog including its two principals? AAA downgrade of America to AA+ has happened precisely because of Keynesian spending desires on the part of most (not all) of those who post here, even more economists in liberal academia, the Democratic side of the aisle in Congress, and the current White House. Otherwise fiscal conservatives (read House GOP) would have cut $4 trillion over the next 10 years and the rating would still be AAA.
The reaction to the watertight logic of the above is predictable. The ground will shift in an eyeblink and you’ll hear a thundering: “We should have raised taxes to get to $4 trillion.” And with that said the ball moves a bit further downfield, and the issue can be reframed closer to the core of it all: “Just exactly what is wrong with raising taxes to cut the debt and keep our AAA rating? What is unfair (get that word unfair) about one unit of higher taxes and 3 units of spending cuts to get to 4?” To which I reply: Why don’t you go ask any of America’s 30 million businesses (also known as job providers) who are manifestly sitting on their hands and not hiring, because they – smart industrious men and women that they are – see all these powerful forces arrayed against them and poised like vultures to swoop down and take away a larger slice of the returns on the effort. And regulate them more, etc. etc.
JDH
Ed Hanson: Actually the U.S. Treasury ran up against the statutory ceiling in May, and had been keeping the process going in the subsequent months through a series of accounting maneuvers. My understanding is that those devices would have been exhausted by the Social Security payments needed for August 3, and that this fact was the basis for naming this date as the deadline.
It has always been my position that there existed other maneuvers and possible legal strategies that the Treasury could have (and, in all likelihood, would have) implemented on Aug 3 had the deadline been missed. I am skeptical of your particular proposed strategy for the cash-flow reasons given by other responders above, but perhaps that is one of the things that might have been attempted.
I have heard this argument that referring to Social Security, debt repayment, and soldier pay was a scare tactic, because there would have been adequate revenues to cover these three items. But if not these, what was President Obama supposed to cut? The law provided no guidance.
I understand your concern about my reference to Social Security as unnecessary politicization of the issue. I used this example not to scare people but instead to make the point concrete. We are supposed to deny somebody payments that legislation has required them to receive. Who is it supposed to be?
There was no proposal on the table to deny $100 billion in August payments to people previously authorized by Congress to receive them. Perhaps you have an ideal plan or strategy, or perhaps you have a preferred set of accounting games you wanted the Treasury to begin to play. But none of these were actually on the table, and indeed, where we would find $100 billion in spending cuts for August 2011 alone has still not been seriously proposed by anyone.
It was this extreme childishness and political pandering of the Republican position that bothered me the most. You cannot instruct the Treasury to spend more than it takes in and also prohibit it from borrowing. And I do believe that this was a very costly bit of grandstanding.
CoRev
2slugs, please explain the lumpiness in terms of cash flow management? Here’s a hint from the current auction schedule. Note the approximate weekly schedule: http://www.treasurydirect.gov/RI/OFAnnce
Your argument relies on Treasury not having learned how best to manage cash flows around that ole lumpiness issue, and your inability to believe the math of Total Debt, and Debt held by the public.
Dr JDH, I am shocked to hear you confirming the president’s lie about SS checks after saying this: “I couldn’t agree more. Too many of my colleagues pay too little attention to how markets and institutions actually function. The profession and our ability to offer constructive policy advice are seriously impoverished as a result.” From this article: “Relevant economics” here: https://econbrowser.com/archives/2011/07/relevant_econom.html
After your comment about too little attention, we can add US Government operations to the list of subjects, and thus understanding. Sounds like confusion over stock and flow to me. 😉
Joseph
Well, now S&P has downgraded U.S. debt. Creditworthiness is determined by two factors — ability to pay and willingness to pay. No one has ever question the ability of the U.S. to pay its debts, which are denominated in its own currency. However, we now have to question its willingness to pay debts already incurred, thanks to the Republicans. Republicans are quite simply crazy. They provide nothing but obstruction and destruction.
CoRev
Dr JDH said: “My understanding is that those devices would have been exhausted by the Social Security payments needed for August 3,…” Note my prior comment!
The pandering was evident and extensive from both sides. Your acceptance of one over the other is OK, but political.
Soon we sill see more of the I hate/am disappointed/will not vote for/will not vote rhetoric from the Obama supporters. Here’s a potential reason:
sammy
Libs are turning on Obama. Why? Here’s a theory:
Consider the results thus far of the Obama presidency:
Two million-private sector jobs have been lost.
Unemployment jumped from 7.8 to 9.2 percent with a simply terrible 2011 first-quarter economic growth rate of just 0.4 percent.
A record 1 in 7 Americans is on food stamps.
Gasoline prices more than doubled, from $1.83 to $3.74 per gallon.
National debt increased 35 percent, to $14.5 trillion, or $137,000 for each taxpayer.
National unfunded liabilities increased 47 percent, to $114.9 trillion, or a cool $1 million for each taxpayer (and this does not yet include Obamacare).
America is on the verge of losing its AAA credit rating.
If you are a liberal, there are two ways of looking at this: you can conclude that liberalism is a failed ideology, or that Barack Obama isn’t as smart as you thought. It’s no surprise that most liberals prefer the latter choice:
So, as the liberal presidency of Mr. Obama becomes increasingly indefensible, the liberal is faced with an unthinkable dilemma: acknowledge the fundamental failure of his collectivist liberal philosophy, which tends toward socialism, or blame its failures on a single man whom, until just recently, the liberal deified. http://www.powerlineblog.com/archives/2011/08/obamas-fall-to-earth.php
3 days ago, 6:56:28 PM
I don’t remember if I said so here, but I have said else where that we conservatives thank Obama for showing the rest of America how actually bad were liberal policies. With Obama you have implemented many of those policy/political dreams you have had for generations, and they have not only proven to be bad, but horrid.
That’s the liberal policy/Debt Ceiling aftermath. What you liberal Dems fail to see is this: http://www.youtube.com/watch?v=8SGyVNippvA
Don’t push them/us any further. Elections are coming soon!
2slugbaits
CoRevNote the approximate weekly schedule
I don’t know about your world, but here on planet Earth “weekly schedule” is not the same as “instantaneous.” As as I said above, the kind of scheme proposed by McConnell required the ability to instantaneously auction off new debt as soon as space was opened up.
You keep thinking that you have some special revelation about total debt and debt held by the public. Newsflash: we all understand that when Treasury redeems an SSTF bond that creates new debt space exactly equal to the value of the redeemed SSTF bonds. We all understand that. And Treasury understands it too, which is why they had been doing exactly the kind of thing you are talking about ever since last May. Treasury’s point was that the game was up on or about 3 August. JDHIt has always been my position that there existed other maneuvers and possible legal strategies that the Treasury could have (and, in all likelihood, would have) implemented on Aug 3 had the deadline been missed.
Possibly. And Treasury later revised the drop dead date to the 10th of August after some more maneuvers. But we were always talking about playing around at the margins. Sooner or later (and more likely sooner) Treasury was going to hit an absolute wall. JBH…not to be confused with JDH. Sounds to me like you got your information from last night’s Fox News intepretation of the S&P decision. Did you actually read what S&P said? Doesn’t sound like it. S&P was pretty clearly blaming the political process, and by that they meant the refusal of Republicans to consider tax increases down the line as part of the solution. I like to watch Fox News when these kinds of events come along because it’s entertaining to see how they consistently botch things. And last night they did not disappoint.
goodrich4bk
Can those who refuse to consider a 3:1 spending cut/tax increase solution (or any tax increase for that matter) explain why central banks and their corporate masters around the world universally recommend both spending cuts and tax increases for any country with a deficit problem? If tax increases are “job killers” and yield less revenue, why is Germany demanding that Ireland increase its corporate taxes? Why is the ECF demanding that Greeks collect more tax revenue? Why is it that everywhere else in the world tax increases are an acceptable adjunct to spending cuts in addressing unsustainable deficits? Or is this part of the American Exeptionalism conservative meme?
2slugbaits
CoRev So Obama’s Presidency has proven that the liberal ideas of the Krugman/DeLong/Thoma axis are all wrong? Really? And here I thought Obama’s policies were designed to placate the clueless right wing? Here I thought he was dumbing things down in order to avoid filibusters. Silly me.
Here’s the actual history. Obama takes office and the economy is shedding jobs at a godawful rate. We now know that GDP was falling at an annual rate of 9%. The stimulus plan begins in 2nd quarter and the economy starts to level off. The economy is doing pretty well, not great, but pretty well in 2009Q3 and 2009Q4. Just as Keynesian economics predicted and just as you specifically denied would happen. And let’s be clear here…you were predicting that there would not even be a short term increase. And then, just as Krugman/DeLong/Thoma predicted in Jan 2009, GDP would begin to fall off in 2010 as stimulus dropped off and inflation would remain very low. So far things have played out exactly as predicted by Keynesian macro. And exactly the opposite of what you and others on the right were predicting. You were predicting high inflation. You were predicting that less government stimulus would increase GDP. So far we have exactly the opposite. Low inflation and less stimulus leading to lower GDP growth.
Yes, elections are coming and I worry. You and the GOP are preaching knownothing economics. There are a lot of uninformed voters out there who buy into this governments-are-just-like-households nonsense. Voters proved how stupid they were in 2010 and look at what we got.
BTW, that other GOP economic genius Eric Cantor just took another personal financial bath. He made a large bet/investment that Treasury interest rates would spike in August. He lost his shirt again. He made a similar short term bet against the stimulus in early 2009 and lost something like $40K on that investment. I on the other hand made exactly the opposite bet 4 weeks ago and I made about as much as Cantor lost. Economic geniuses you guys aren’t. So why do you keep listening to these fools who get it wrong every time?
Johannes
Looks like econbrowser turns into a political discussion forum.
Maybe thats a fact not to avoid in playing high-level economics …
One of the guys above mentioned “AA+ instead of AAA is NOT because of ability, but because of willingness to repay debt”, well, all right, I would say: the charade in the last weeks turns out to be expensive for the US taxpayer. Does anyone really care.
Anyway, the game here in Europe to drive the stock market is even much more funny than the US theatre. Just say : Germany pays all.
Johannes
Dear James, thanks for your link to Bloomberg TV.
Just saying : do not blink with your eyes before an interview, this body language shows unconfidence and nervousness. My hint for you to improve in such a stressful situation.
CoRev
Johannes, this is our political funny season. It will get much worse as we get closer to the election. Separating economics from politics is nearly impossible.
2slugs, it must be difficult to realize so many of your basic beliefs are being disproved now that they are implemented.
You also said: “What counts is the cash onhand on a given day, not the value of receipts over the whole month. If Treasury starts the day with $10B cash onhand and SSTF presents them with $11B in bonds, Treasury can only redeem $10B. That does create $10B in new space; however, that new space is not instantaneously available.”
So you persist in your belief that Treasury does not know how to manage SS check outlays after these many decades. Weekly auctions are not for instantaneous needs, but to best manage cash flow, including the SS checks.
So much for lumpiness!
2slugbaits
CoRev If you understood some math you might want to try and build a little model of how you think Treasury manages cash. Treasury certainly knows how to manage cash. And since their hair was on fire about the 2 Aug date don’t you think you should have believed them?
Frankly, your whole argument is just bizarre. You seem to be simultaneously claiming that Treasury knows what they are doing and must therefore agree with your viewpoint, and then at the same time you claim that there was no threat of not paying SS beneficiaries because (apparently) you think Treasury doesn’t know what they’re doing. Your thinking on this is completely muddled. Maybe it’s your tea time.
Your obvious confusion on this issue is exactly why I worry about the 2012 elections. Uninformed voters are always a threat, but uninformed voters who think they’re informed are the greater threat.
Ed Hanson
Professor Hamilton
I understand that the Treasury actually bumped up against the ceiling in May, and understand that the Treasury used what has become time tested accounting maneuvers to forestall the current funding crisis. I suspect as you hint that the Treasury may still had room to to shift the actual end day a little. But I no problem with the Treasury drawing the line in the sand in August to get the deal done. All said, but you may have misunderstood me. I never said that without raising the debt ceiling the government and country would be without crisis, only that current Social Security payments were not part of that potential crisis.
It is based on my reading of others and my understanding of current law. To reiterate; the Social Security trust holds over 2 trillion of special Treasury bonds that were were part of past debt. These bonds could and would be presented to Treasury as needs arise, and the Treasury by law must redeem them. It had the resources because as these bond were redeemed, it dollar for dollar reduced the current debt below the ceiling. This gave room for treasury to issue new bonds, again, dollar for dollar, to cover the outlay to the SS trust.
Would the Social Security trust do this, again by law, it is obligated to continue current benefits until the trust fund is exhausted, at which time the benefits are cut to current moneys generated by it payroll tax.
Conclusion. Social Security checks were not part of this crisis. Other government outlays certainly were. The use of fear of no Social Security checks was strictly political. And I was upset when good thinking honorable people such as yourself took up that talking point, possibly without fully researching the laws in place that took Social Security off the table for the current crisis. Anyway, that’s my two cents.
Ed Hanson
Now the political side. Because these post will be long, I intend to break it into two parts. First what is childish, and then into what is pandering.
Professor Hamilton wrote in part about the politics of raising the debt ceiling; “It was this extreme childishness and political pandering of the Republican position that bothered me the most. You cannot instruct the Treasury to spend more than it takes in and also prohibit it from borrowing. And I do believe that this was a very costly bit of grandstanding.”
Does a Congress have an obligation when after they have authorized spending above the level of revenue to increase the debt ceiling to ensure that the funding is available, the answer is yes. But was generating a crisis, either or both childish or pandering, the answer is no. And here, in my opinion, is why.
The year before the 2010, election, the overwhelming democrat majority refuse to do their Constitutional and legally mandated duty to produce a budget. Instead, they relied on a continuing resolution for funding the government, to continue its baseline spending, which automatically increases that spending further beyond revenues. A political calculation was made that no hard look at government expenditures would be made, because it was thought that hard decisions on particular parts of the budget might upset the democrat political base. And the political calculation was made that by use of a continuing resolution, rather than a budget process, it might avoid the general electorate from holding each elected official personally responsible for the huge deficit. The political calculation was wrong, the voters in part, seeing an irresponsible Congress, not doing its most important task, spank them in the election, sending new Representatives and Senators with a mandate to their job.
So what happened so far this year. The President presented a budget, that in my opinion and obviously all of the Senate, which simply was unrealistic for today’s economy. But the President had that prerogative, he did his mandated job of submitting a budget. The ball was now in the House of Representatives court. It also did its mandated job, producing a budget, on time, passed it, and it was presented to the Senate. It was here the process again broke down.
The Senate, again still controlled by the democrats, refused to create a budget. It has not done its committee work to produce one, nor did it use the house budget as a vehicle for amendment to create a budget. It simply voted down the house budget on a party line vote, and then proceeded to unanimously vote down the President’s budget. The Senate Democrats again have made the political calculation, for the same reasons, to attempt to force the country to run on continuing resolution for the next fiscal year. They are not doing the job the Senate is expected to do.
An adult does the hard tasks, and takes responsibility for the effort and results. A child ignores its responsibilities, and then tries to hide from its consequences. The House in this case was the adult, the Senate was the child. The republicans did their job in the House, the democrats in the Senate were the child, unwilling to do the difficult tasks.
What does an adult do, when a job must be done, but because of childish ways of other adults, the job is not being done? In the private world, people are fired, or new associations are made, or an enterprise fails. However, in a Constitutional derived government, made up of three branches, which one is the Congress which is divided into a House and Senate, with no authority of one over the other, those remedies are unavailable. Unfortunately, in this case, only by creating a crisis, could the House force the Senate to act, to force the Senate to face its responsibility. Is a crisis pleasant experience, no. Are there downsides to a crisis, yes. But are there upsides, definitely yes. The country is on an unsustainable path. And inaction will only further that path. Action now is necessary to alter that path. And with a Senate, with a democratic party, bent on inaction, crisis becomes the only forcing mechanism.
The debt ceiling crisis was difficult, the compromises were painful, but the trade-offs of inaction, allowing the simple increase in the debt, putting off changes to another time was worse.
Political disagreements exist, but one thing is certain, the Republican effort during this crisis was not childish.
Ed Hanson
Was the Republican effort in the debt crisis political pandering? Highly charged words.
Professor Hamilton wrote in part about the politics of raising the debt ceiling; “It was this extreme childishness and political pandering of the Republican position that bothered me the most. You cannot instruct the Treasury to spend more than it takes in and also prohibit it from borrowing. And I do believe that this was a very costly bit of grandstanding.”
The Constitution created the House of Representative to be the legislative branch most responsive to the citizens of the country. Therefore the terms of the Representatives are the shortest in government, just two years. The founding fathers through the Constitution gave the citizens their greatest power to quickly change the direction of government in the House. While most elections are not “change of directions’ elections, there have been three in recent years, 1994, 2006, and 2010. The voters acted, dissatisfied with the direction government in each of these elections. But more than that, the voters expect their Representatives to act in the direction of mandate.
The two principle and national mandates of the 2010 election were to stop new and increased taxation rates, and to reduce the long term budget imbalance. The citizen elected the house to act those mandates.
But what is the House to do, if the Senate through inaction, is capable of thwarting that mandate and the the actions to fulfill that mandate. In a Constitution Republic, it often means, and currently does mean, crisis politics. A crisis being the only available mechanism to force action from the Senate.
And since a crisis is the only currently available mechanism to force action from the Senate, to force the Senate to face the wishes of the electorate, to fulfill the promises made in the campaign for action, and to exert the wishes of the electorate; the House Republicans acted.
This is not political pandering. Only a person who believes elections are just a political exercise, a process to be endured every two years, and then conveniently ignored, would say so. No, this is not pandering, but the right of the people through their Representative, to exert their right of citizenship. Rather than use supercharged words like ‘pandering’, greater effort should be directed at those parts of government which by the political expedient of inaction, do not respond to the citizens. Rather than criticize the crisis, criticize the broken parts of Government that is not doing its job. Criticize the Senate, and its democrat leaders, until they again allow the normal processes of legislation and budget to work. Than the difficult politics of crisis will become unnecessary.
Responding to a national mandate, is not pandering, it is a basic foundation of Constitutional government.
JDH
Ed Hanson: Thank you for your thoughtful comments and explanation. By “pandering” I referred to the process of denying Treasury the authority to spend for August, claiming that this prohibition in no way prevented the Treasury from making particular key payments such as debt redemption and Social Security, and yet providing neither legal instruction nor public acknowledgment of the specific payments that were not to be made.
CoRev
2slugs does it again! He changes the subject to the Treasury and not himself, then claims “… you think Treasury doesn’t know what they’re doing.” then argues on his changed Anyone, I mean anyone, here think I was talking about Treasury when I was talking about understanding the SS check outlay process?
The only people here who do not understand the process is you and Dr Hamilton who appear to think the Treasury does not know how to manage cash flow, especially when paying/borrowing from TFs.
Moreover, you want me to model how Treasury operates its cash flow? Wha… why???? You also think we need to believe Bernanke and Geithner with this: “Treasury …. And since their hair was on fire about the 2 Aug date don’t you think you should have believed them?” Nope!
You seem to be politically naive and ideologically driven. That ideology has been on review for the past four+ years. Few are impressed, except those who are ideologically challenged.
CoRev
Dr JDH said: “I referred to the process of denying Treasury the authority to spend for August, claiming that this prohibition in no way prevented the Treasury from making particular key payments such as debt redemption and Social Security, and yet providing neither legal instruction nor public acknowledgment of the specific payments that were not to be made.”
I hope you are just brain challenged this early morning and/or have misspoken, and do not actually believe what I high lighted. Treasury was about to be restricted from “new borrowing” (not rolling over debt in nearly all its forms.) Treasury was able to spend any and every dollar it received in revenues after that ceiling (and the concomitant accounting tricks) was reached.
Don’t forget to watch those stock and flow issues. 😉
JDH
CoRev: Quite so. The Treasury has been spending approximately $100 B more each month than it takes in as revenue. The consequence of a binding ceiling therefore amounts to denying the Treasury the authority to spend approximately $100 B each month of the sum that the Treasury is otherwise instructed to do under existing legislation. My problem is with claiming that this prohibition in no way prevented the Treasury from making particular key payments such as debt redemption and Social Security, and yet providing neither legal instruction nor public acknowledgment of the specific payments that were not to be made.
CoRev
Dr JDH said: “My problem is with claiming that this prohibition in no way prevented the Treasury from making particular key payments such as debt redemption and Social Security, and yet providing neither legal instruction nor public acknowledgment of the specific payments that were not to be made.”
Specific payments were TBD by the Executive Agencies. Their approval steps would have done the heavy lifting in prioritizing payment well in advance of sending to Treasury.
As for debt redemption and SS payments, we’ve beaten SS payments to death. If you actually do not understand how they work in reality and not the text books, refer back to the SSA Actuary Stephen Goss interview. http://hotair.com/archives/2011/07/13/video-social-security-chief-actuary-confirms-a-decision-to-withhold-checks-would-come-from-the-treasury/
Even he could not keep a straight face.
Also, for debt redemption, the bulk of that would have been handled by debt rollover. That doesn’t mean that differences in maturing and redemption amounts might still exist after rolling over maturing treasuries over. There would have been no solution for the periodic interest payments difference on non-matured treasuries and the above mentioned negative differences but to pay from existing revenues.
To think Treasury does not understand how to manage cash flow, redeeming SSTF bonds in advance of need, and/or rolling over debt as it matures is a crazy proposal to me. We talked about the “accounting tricks” Treasury has used, and these actually are not part of them as they would be considered normal cash flow management functions.
Ricardo
Jonathan,
Your reading comprehension leaves something to be desired. Never have I supported austerity. Your comment about the UK makes obvious that you do not understand growth. I have been criticizing the UK for years because of their anti-growth posture. The are severly cutting government spending without any replacement of the cuts. They have also significantly raised the VAT tax from 17.5% to 20%.
The results of the UK policies could be seen all weekend as riots shook the island. What you are seeing is the normal results of socialism. When there is an active private sector people can go from job to job or start their own business. But when the only job is a government job and you get laid off there is only one recourse. Protest your former employer, the government, by rioting in the streets and demanding the government do something. This unrest was no surprise at all.
colonelmoore
A little late to the game in commenting, I notice that JDH responded thoughtfully to Ed Hanson who wrote a more detailed response than the one that I wrote in response to “Assessing the damage.”
As for his framing of the term pandering, he said that Republicans did not want to lay out which bills they wanted Treasury to pay first. That is not correct. Republicans issued a bill in both houses instructing Treasury what payments to prioritize. Both houses could have passed this at the last minute. The reason that it did not make it to a floor vote is that it was not needed.
Professor
I never considered non-payment of current Social Security payments a real risk. Obviously per your interviews, you did.
My thought on the issue derived from the analysis of Law professor Michael McConnell of the law regulating the Social Security fund. It can be found at:
Contrary to the President, Social Security Checks Are Not At Risk
In a nut shell, the Fund holds $2.4 trillion in U.S. Treasury bonds which the Treasury, by law, must honor when presented. These bonds are part of the current US debt. As these bonds are ‘cashed in’, its effect is to lower the total debt a corresponding amount below the debt ceiling, allowing the Treasury to sell additional bonds for the money to pay the fund. In other words the transactions are a wash and will not change the size of the national debt.
What is it you are seeing that I am not? Why would Social Security payments be in immediate danger?
In other words the transactions are a wash and will not change the size of the national debt.
You are confusing the balance sheet with the income statement.
It is a cash flow issue. If the government doesn’t have the cash, it can’t redeem the trust bonds. And it can’t get the cash because it is currently forbidden to borrow.
This is the same problem that a business can have that forces it into bankruptcy, even though the balance sheet looks okay. In 2008 the commercial paper market collapsed. Businesses need cash to make payroll and buy supplies. Even if they have lots of orders and no debt, then need to be able to borrow to keep their business running day to day.
Anonymous-
If you read the link you would see that redemption of the bonds reduces the debt, allowing an equal amount of borrowing without raising the level of debt.
Not to mention that the government gets enough cash to cover the SS benefits and the debt and military pay. The terrorists in the Democratic party were using no SS benefits to scare the elderly. The Republicans refused to give in to this extortion and stared them down.
Anon, what you say assumes the treasury has no cash on hand, which is simply not true. It is still a recipient of somewhere between 170 to 200 billion a month. The Treasury honors the claim from the SS trust, as it must by law. It immediately, and in all reality, simultaneously, replaces the cash outflow to the fund by selling new bonds that it now has room for under the ceiling.
No new debt is created. Only a change from special Treasury bonds of SS to perhaps ordinary Treasury bonds held by the public. The ceiling would not be breached.
I encourage everyone to read my analysis, “The Debt Ceiling Debate, Global Crisis, and Savage Austerity,” at
http://revcom.us/a/241/raymond-lotta-debt-ceiling-debate-en.html
Comments are welcomed.
Professor,
The reaction of the markets was not just “shrapnel” from the debt ceiling debate. A reaction this strong is decisive. You seemed to come close but you missed the message from the market.
The message was that investors accepted the deal as confirmation of support for US debt. Bonds purchases soared because investors saw that our government would do anything to continue expanding and paying debt.
But just as clearly the message was that the debt deal was a severe blow to the private sector. Investors saw that there was no change to the policies that have given us a massive debt and deficit, and investors know that the only place there are resources to cover this largess is to take from private sector producers.
The market showed confidence in government debt but a total destruction of confidence in the ability of the private sector to maintain itself.
But sadly, if the investor is right about the private sector then the source of support for government securities will dry up and we will have a crash in both.
The US outlook is not good.
I am confused. First, this is all digital. SS turns digitally to Treasury and says here’s some of my bonds. I want to redeem them digitally please. This is part of the debt total, so returning the bonds lowers the debt total owed, and thus automatically frees up, dollar for dollar, the exact same amount the SS redemption reduces the debt. In other words there’s space created under the debt ceiling. Debt the same, the redeemed bonds are turned to digital cash (and soon real cash to SS recipients).
I can’t find the supposed ‘cash flow’ issue. I can find a spending problem, but not one associated with existing Treasuries, or in SS case a special type of Treasury.
Not to belabor the issue, but what stops the Treasury from refinancing debt? Rates are very, very low right now. Wouldn’t it be wise to do so for Treasuries on the books right now with higher interest coupons? These higher couponed Treasuries are now trading at a significant premium in the secondary market, so Treasury could refinance them thus lowering the interest rate burden–and they could at the same time issue longer dated Treasuries using the premiums received to extend duration. That would reduce the overall risk of maturity mismatch as well.
When does the Econbrowser recession indicator get updated?
Ed Hanson Anonymous has it exactly right. McConnell was making the same mistake that poster CoRev kept making. Treasury had been doing exactly what McConnell suggested ever since last May. But you can only play that game as long as opening day cash on hand is large enough to cover the SSTF bonds presented to the Treasury that morning. Treasury is constrained and can only redeem bonds up to the dollar value of Treasury’s cash on hand, and that fact of life limits the amount of new borrowing space that Treasury can create each day.
May, June and July are traditionally above average in terms of Treasury receipts, but August is usually below average in receipts but average in disbursements (Treasury has a web page on the seasonality of receipts and disbursements). So Treasury knew August was going to be challenging, and they knew 3 Aug would be especially challenging because they did not anticipate closing the books on 2 Aug with enough cash on hand to redeem all of the SSTF bonds likely to be presented on 3 Aug. Treasury receipts and disbursements are lumpy. If the next day’s disbursement lump is greater than the overnight receipts, then the game Treasury was playing comes to an end. It’s kind of a Ponzi scheme and like all Ponzi schemes can only work so long.
I don’t know what’s in the water at Stanford and Hoover. Those guys and gals have been saying a lot of really stupid things lately.
KevinM: This is updated with each new advance GDP release, most recently last Friday when it rose to 14.4%. It is always calculated for the previous quarter (in this case, 2011:Q1) in order to allow for data revisions and trend recognition.
“I don’t know what’s in the water at Stanford and Hoover. Those guys and gals have been saying a lot of really stupid things lately.”
Not just there, but here. There aren’t enough hours in the day to correct the amount of stupidity that qualifies as informed comments at econobrowser these days. Just sayin’.
By the way, the two year zero coupon inflation swaps closed near 1.5% today, down nearly 50 basis points for the week. (Not a voice of confidence on the debt deal.)
Ed Hanson Anon, what you say assumes the treasury has no cash on hand, which is simply not true. It is still a recipient of somewhere between 170 to 200 billion a month.
True, but irrelevant. What counts is the cash onhand on a given day, not the value of receipts over the whole month. If Treasury starts the day with $10B cash onhand and SSTF presents them with $11B in bonds, Treasury can only redeem $10B. That does create $10B in new space; however, that new space is not instantaneously available. And of course it still leaves you with $1B in unredeemed SSTF bonds. Treasury’s ability to redeem SSTF bonds is constrained to the opening day’s cash on hand.
I can count on Ricardo to get things backwards. The idea he’s espousing is that more contraction, more austerity will generate confidence and that confidence will then generate more economic activity. I suppose a commenter who takes the name Ricardo is going to use Ricardian supply-based models as his take-off, though nothing much in his comments suggests he really understands them.
Where is the evidence for this belief? Where is the evidence that confidence will generate this economic activity? Why would suppliers produce more? Why would they hire more?
Consider then – not him, because he won’t listen – the British results. They are well on the road Ricardo espouses. Each economic report is getting worse. Even with relative devaluation of the pound, manufacturing fell off. This austerity program was specifically sold using this confidence idea. It isn’t working. The British government is now looking at changing course because more contraction in spending now looks, in the light of actual results, like it will actually contract the economy.
The idiocy of the argument is that contraction is somehow good. Like we’re pruning a garden in Chauncy Gardner speak. These are people’s lives, not plants.
Ed: The Treasury honors the claim from the SS trust, as it must by law. It immediately, and in all reality, simultaneously, replaces the cash outflow to the fund by selling new bonds that it now has room for under the ceiling.
You can’t just magically wave your hands and say that cash from new bonds simultaneously replaces redemption cash. The Treasury has to schedule an auction and they can’t schedule an auction if the debt limit prohibits it from doing so. If you had ever run a business you would know that you can’t just print hot checks and plan on it cancelling out at the end of the month or quarter when you get your receipts. That’s a cash flow problem. A debt limit throws a wrench in the works.
I see logic is starting to out weigh 2slugs’ lumpiness argument. 😉
Anon and Slugs
If your point is that there is no quick fix to the runaway spending by the Federal government, then we have an area of agreement.
Your point that the US could not redeem and reissue current bonds held by SS under the old debt ceiling simply is unconvincing.
But the political scare tactic of threatening Social Security payments is simply shameful. It never was the immediate difficulty in outlays. If either of you would have said that it would hasten the day when SS no longer could sustain promised benefits, I suspect a good case could be made. But, such Ponzi schemes always have a habit of crashing before anybody expects.
Respectfully, still waiting for Professor Hamilton to respond.
CoRev Not just my “lumpiness argument,” but also Ben Bernanke’s. The argument about the lumpiness of Treasury’s daily receipts and disburements constraining Treasury’s ability to create new borrowing space is the same argument Bernanke gave to the National Press Club a few months ago.
When will the scales drop away from the eyes of the liberal posters on this blog including its two principals? AAA downgrade of America to AA+ has happened precisely because of Keynesian spending desires on the part of most (not all) of those who post here, even more economists in liberal academia, the Democratic side of the aisle in Congress, and the current White House. Otherwise fiscal conservatives (read House GOP) would have cut $4 trillion over the next 10 years and the rating would still be AAA.
The reaction to the watertight logic of the above is predictable. The ground will shift in an eyeblink and you’ll hear a thundering: “We should have raised taxes to get to $4 trillion.” And with that said the ball moves a bit further downfield, and the issue can be reframed closer to the core of it all: “Just exactly what is wrong with raising taxes to cut the debt and keep our AAA rating? What is unfair (get that word unfair) about one unit of higher taxes and 3 units of spending cuts to get to 4?” To which I reply: Why don’t you go ask any of America’s 30 million businesses (also known as job providers) who are manifestly sitting on their hands and not hiring, because they – smart industrious men and women that they are – see all these powerful forces arrayed against them and poised like vultures to swoop down and take away a larger slice of the returns on the effort. And regulate them more, etc. etc.
Ed Hanson: Actually the U.S. Treasury ran up against the statutory ceiling in May, and had been keeping the process going in the subsequent months through a series of accounting maneuvers. My understanding is that those devices would have been exhausted by the Social Security payments needed for August 3, and that this fact was the basis for naming this date as the deadline.
It has always been my position that there existed other maneuvers and possible legal strategies that the Treasury could have (and, in all likelihood, would have) implemented on Aug 3 had the deadline been missed. I am skeptical of your particular proposed strategy for the cash-flow reasons given by other responders above, but perhaps that is one of the things that might have been attempted.
I have heard this argument that referring to Social Security, debt repayment, and soldier pay was a scare tactic, because there would have been adequate revenues to cover these three items. But if not these, what was President Obama supposed to cut? The law provided no guidance.
I understand your concern about my reference to Social Security as unnecessary politicization of the issue. I used this example not to scare people but instead to make the point concrete. We are supposed to deny somebody payments that legislation has required them to receive. Who is it supposed to be?
There was no proposal on the table to deny $100 billion in August payments to people previously authorized by Congress to receive them. Perhaps you have an ideal plan or strategy, or perhaps you have a preferred set of accounting games you wanted the Treasury to begin to play. But none of these were actually on the table, and indeed, where we would find $100 billion in spending cuts for August 2011 alone has still not been seriously proposed by anyone.
It was this extreme childishness and political pandering of the Republican position that bothered me the most. You cannot instruct the Treasury to spend more than it takes in and also prohibit it from borrowing. And I do believe that this was a very costly bit of grandstanding.
2slugs, please explain the lumpiness in terms of cash flow management? Here’s a hint from the current auction schedule. Note the approximate weekly schedule: http://www.treasurydirect.gov/RI/OFAnnce
Your argument relies on Treasury not having learned how best to manage cash flows around that ole lumpiness issue, and your inability to believe the math of Total Debt, and Debt held by the public.
Dr JDH, I am shocked to hear you confirming the president’s lie about SS checks after saying this: “I couldn’t agree more. Too many of my colleagues pay too little attention to how markets and institutions actually function. The profession and our ability to offer constructive policy advice are seriously impoverished as a result.” From this article: “Relevant economics” here: https://econbrowser.com/archives/2011/07/relevant_econom.html
After your comment about too little attention, we can add US Government operations to the list of subjects, and thus understanding. Sounds like confusion over stock and flow to me. 😉
Well, now S&P has downgraded U.S. debt. Creditworthiness is determined by two factors — ability to pay and willingness to pay. No one has ever question the ability of the U.S. to pay its debts, which are denominated in its own currency. However, we now have to question its willingness to pay debts already incurred, thanks to the Republicans. Republicans are quite simply crazy. They provide nothing but obstruction and destruction.
Dr JDH said: “My understanding is that those devices would have been exhausted by the Social Security payments needed for August 3,…” Note my prior comment!
The pandering was evident and extensive from both sides. Your acceptance of one over the other is OK, but political.
Soon we sill see more of the I hate/am disappointed/will not vote for/will not vote rhetoric from the Obama supporters. Here’s a potential reason:
sammy
Libs are turning on Obama. Why? Here’s a theory:
Consider the results thus far of the Obama presidency:
Two million-private sector jobs have been lost.
Unemployment jumped from 7.8 to 9.2 percent with a simply terrible 2011 first-quarter economic growth rate of just 0.4 percent.
A record 1 in 7 Americans is on food stamps.
Gasoline prices more than doubled, from $1.83 to $3.74 per gallon.
National debt increased 35 percent, to $14.5 trillion, or $137,000 for each taxpayer.
National unfunded liabilities increased 47 percent, to $114.9 trillion, or a cool $1 million for each taxpayer (and this does not yet include Obamacare).
America is on the verge of losing its AAA credit rating.
If you are a liberal, there are two ways of looking at this: you can conclude that liberalism is a failed ideology, or that Barack Obama isn’t as smart as you thought. It’s no surprise that most liberals prefer the latter choice:
So, as the liberal presidency of Mr. Obama becomes increasingly indefensible, the liberal is faced with an unthinkable dilemma: acknowledge the fundamental failure of his collectivist liberal philosophy, which tends toward socialism, or blame its failures on a single man whom, until just recently, the liberal deified.
http://www.powerlineblog.com/archives/2011/08/obamas-fall-to-earth.php
3 days ago, 6:56:28 PM
I don’t remember if I said so here, but I have said else where that we conservatives thank Obama for showing the rest of America how actually bad were liberal policies. With Obama you have implemented many of those policy/political dreams you have had for generations, and they have not only proven to be bad, but horrid.
That’s the liberal policy/Debt Ceiling aftermath. What you liberal Dems fail to see is this: http://www.youtube.com/watch?v=8SGyVNippvA
Don’t push them/us any further. Elections are coming soon!
CoRev Note the approximate weekly schedule
I don’t know about your world, but here on planet Earth “weekly schedule” is not the same as “instantaneous.” As as I said above, the kind of scheme proposed by McConnell required the ability to instantaneously auction off new debt as soon as space was opened up.
You keep thinking that you have some special revelation about total debt and debt held by the public. Newsflash: we all understand that when Treasury redeems an SSTF bond that creates new debt space exactly equal to the value of the redeemed SSTF bonds. We all understand that. And Treasury understands it too, which is why they had been doing exactly the kind of thing you are talking about ever since last May. Treasury’s point was that the game was up on or about 3 August.
JDH It has always been my position that there existed other maneuvers and possible legal strategies that the Treasury could have (and, in all likelihood, would have) implemented on Aug 3 had the deadline been missed.
Possibly. And Treasury later revised the drop dead date to the 10th of August after some more maneuvers. But we were always talking about playing around at the margins. Sooner or later (and more likely sooner) Treasury was going to hit an absolute wall.
JBH…not to be confused with JDH. Sounds to me like you got your information from last night’s Fox News intepretation of the S&P decision. Did you actually read what S&P said? Doesn’t sound like it. S&P was pretty clearly blaming the political process, and by that they meant the refusal of Republicans to consider tax increases down the line as part of the solution. I like to watch Fox News when these kinds of events come along because it’s entertaining to see how they consistently botch things. And last night they did not disappoint.
Can those who refuse to consider a 3:1 spending cut/tax increase solution (or any tax increase for that matter) explain why central banks and their corporate masters around the world universally recommend both spending cuts and tax increases for any country with a deficit problem? If tax increases are “job killers” and yield less revenue, why is Germany demanding that Ireland increase its corporate taxes? Why is the ECF demanding that Greeks collect more tax revenue? Why is it that everywhere else in the world tax increases are an acceptable adjunct to spending cuts in addressing unsustainable deficits? Or is this part of the American Exeptionalism conservative meme?
CoRev So Obama’s Presidency has proven that the liberal ideas of the Krugman/DeLong/Thoma axis are all wrong? Really? And here I thought Obama’s policies were designed to placate the clueless right wing? Here I thought he was dumbing things down in order to avoid filibusters. Silly me.
Here’s the actual history. Obama takes office and the economy is shedding jobs at a godawful rate. We now know that GDP was falling at an annual rate of 9%. The stimulus plan begins in 2nd quarter and the economy starts to level off. The economy is doing pretty well, not great, but pretty well in 2009Q3 and 2009Q4. Just as Keynesian economics predicted and just as you specifically denied would happen. And let’s be clear here…you were predicting that there would not even be a short term increase. And then, just as Krugman/DeLong/Thoma predicted in Jan 2009, GDP would begin to fall off in 2010 as stimulus dropped off and inflation would remain very low. So far things have played out exactly as predicted by Keynesian macro. And exactly the opposite of what you and others on the right were predicting. You were predicting high inflation. You were predicting that less government stimulus would increase GDP. So far we have exactly the opposite. Low inflation and less stimulus leading to lower GDP growth.
Yes, elections are coming and I worry. You and the GOP are preaching knownothing economics. There are a lot of uninformed voters out there who buy into this governments-are-just-like-households nonsense. Voters proved how stupid they were in 2010 and look at what we got.
BTW, that other GOP economic genius Eric Cantor just took another personal financial bath. He made a large bet/investment that Treasury interest rates would spike in August. He lost his shirt again. He made a similar short term bet against the stimulus in early 2009 and lost something like $40K on that investment. I on the other hand made exactly the opposite bet 4 weeks ago and I made about as much as Cantor lost. Economic geniuses you guys aren’t. So why do you keep listening to these fools who get it wrong every time?
Looks like econbrowser turns into a political discussion forum.
Maybe thats a fact not to avoid in playing high-level economics …
One of the guys above mentioned “AA+ instead of AAA is NOT because of ability, but because of willingness to repay debt”, well, all right, I would say: the charade in the last weeks turns out to be expensive for the US taxpayer. Does anyone really care.
Anyway, the game here in Europe to drive the stock market is even much more funny than the US theatre. Just say : Germany pays all.
Dear James, thanks for your link to Bloomberg TV.
Just saying : do not blink with your eyes before an interview, this body language shows unconfidence and nervousness. My hint for you to improve in such a stressful situation.
Johannes, this is our political funny season. It will get much worse as we get closer to the election. Separating economics from politics is nearly impossible.
2slugs, it must be difficult to realize so many of your basic beliefs are being disproved now that they are implemented.
You also said: “What counts is the cash onhand on a given day, not the value of receipts over the whole month. If Treasury starts the day with $10B cash onhand and SSTF presents them with $11B in bonds, Treasury can only redeem $10B. That does create $10B in new space; however, that new space is not instantaneously available.”
So you persist in your belief that Treasury does not know how to manage SS check outlays after these many decades. Weekly auctions are not for instantaneous needs, but to best manage cash flow, including the SS checks.
So much for lumpiness!
CoRev If you understood some math you might want to try and build a little model of how you think Treasury manages cash. Treasury certainly knows how to manage cash. And since their hair was on fire about the 2 Aug date don’t you think you should have believed them?
Frankly, your whole argument is just bizarre. You seem to be simultaneously claiming that Treasury knows what they are doing and must therefore agree with your viewpoint, and then at the same time you claim that there was no threat of not paying SS beneficiaries because (apparently) you think Treasury doesn’t know what they’re doing. Your thinking on this is completely muddled. Maybe it’s your tea time.
Your obvious confusion on this issue is exactly why I worry about the 2012 elections. Uninformed voters are always a threat, but uninformed voters who think they’re informed are the greater threat.
Professor Hamilton
I understand that the Treasury actually bumped up against the ceiling in May, and understand that the Treasury used what has become time tested accounting maneuvers to forestall the current funding crisis. I suspect as you hint that the Treasury may still had room to to shift the actual end day a little. But I no problem with the Treasury drawing the line in the sand in August to get the deal done. All said, but you may have misunderstood me. I never said that without raising the debt ceiling the government and country would be without crisis, only that current Social Security payments were not part of that potential crisis.
It is based on my reading of others and my understanding of current law. To reiterate; the Social Security trust holds over 2 trillion of special Treasury bonds that were were part of past debt. These bonds could and would be presented to Treasury as needs arise, and the Treasury by law must redeem them. It had the resources because as these bond were redeemed, it dollar for dollar reduced the current debt below the ceiling. This gave room for treasury to issue new bonds, again, dollar for dollar, to cover the outlay to the SS trust.
Would the Social Security trust do this, again by law, it is obligated to continue current benefits until the trust fund is exhausted, at which time the benefits are cut to current moneys generated by it payroll tax.
Conclusion. Social Security checks were not part of this crisis. Other government outlays certainly were. The use of fear of no Social Security checks was strictly political. And I was upset when good thinking honorable people such as yourself took up that talking point, possibly without fully researching the laws in place that took Social Security off the table for the current crisis. Anyway, that’s my two cents.
Now the political side. Because these post will be long, I intend to break it into two parts. First what is childish, and then into what is pandering.
Professor Hamilton wrote in part about the politics of raising the debt ceiling;
“It was this extreme childishness and political pandering of the Republican position that bothered me the most. You cannot instruct the Treasury to spend more than it takes in and also prohibit it from borrowing. And I do believe that this was a very costly bit of grandstanding.”
Does a Congress have an obligation when after they have authorized spending above the level of revenue to increase the debt ceiling to ensure that the funding is available, the answer is yes. But was generating a crisis, either or both childish or pandering, the answer is no. And here, in my opinion, is why.
The year before the 2010, election, the overwhelming democrat majority refuse to do their Constitutional and legally mandated duty to produce a budget. Instead, they relied on a continuing resolution for funding the government, to continue its baseline spending, which automatically increases that spending further beyond revenues. A political calculation was made that no hard look at government expenditures would be made, because it was thought that hard decisions on particular parts of the budget might upset the democrat political base. And the political calculation was made that by use of a continuing resolution, rather than a budget process, it might avoid the general electorate from holding each elected official personally responsible for the huge deficit. The political calculation was wrong, the voters in part, seeing an irresponsible Congress, not doing its most important task, spank them in the election, sending new Representatives and Senators with a mandate to their job.
So what happened so far this year. The President presented a budget, that in my opinion and obviously all of the Senate, which simply was unrealistic for today’s economy. But the President had that prerogative, he did his mandated job of submitting a budget. The ball was now in the House of Representatives court. It also did its mandated job, producing a budget, on time, passed it, and it was presented to the Senate. It was here the process again broke down.
The Senate, again still controlled by the democrats, refused to create a budget. It has not done its committee work to produce one, nor did it use the house budget as a vehicle for amendment to create a budget. It simply voted down the house budget on a party line vote, and then proceeded to unanimously vote down the President’s budget. The Senate Democrats again have made the political calculation, for the same reasons, to attempt to force the country to run on continuing resolution for the next fiscal year. They are not doing the job the Senate is expected to do.
An adult does the hard tasks, and takes responsibility for the effort and results. A child ignores its responsibilities, and then tries to hide from its consequences. The House in this case was the adult, the Senate was the child. The republicans did their job in the House, the democrats in the Senate were the child, unwilling to do the difficult tasks.
What does an adult do, when a job must be done, but because of childish ways of other adults, the job is not being done? In the private world, people are fired, or new associations are made, or an enterprise fails. However, in a Constitutional derived government, made up of three branches, which one is the Congress which is divided into a House and Senate, with no authority of one over the other, those remedies are unavailable. Unfortunately, in this case, only by creating a crisis, could the House force the Senate to act, to force the Senate to face its responsibility. Is a crisis pleasant experience, no. Are there downsides to a crisis, yes. But are there upsides, definitely yes. The country is on an unsustainable path. And inaction will only further that path. Action now is necessary to alter that path. And with a Senate, with a democratic party, bent on inaction, crisis becomes the only forcing mechanism.
The debt ceiling crisis was difficult, the compromises were painful, but the trade-offs of inaction, allowing the simple increase in the debt, putting off changes to another time was worse.
Political disagreements exist, but one thing is certain, the Republican effort during this crisis was not childish.
Was the Republican effort in the debt crisis political pandering? Highly charged words.
Professor Hamilton wrote in part about the politics of raising the debt ceiling;
“It was this extreme childishness and political pandering of the Republican position that bothered me the most. You cannot instruct the Treasury to spend more than it takes in and also prohibit it from borrowing. And I do believe that this was a very costly bit of grandstanding.”
The Constitution created the House of Representative to be the legislative branch most responsive to the citizens of the country. Therefore the terms of the Representatives are the shortest in government, just two years. The founding fathers through the Constitution gave the citizens their greatest power to quickly change the direction of government in the House. While most elections are not “change of directions’ elections, there have been three in recent years, 1994, 2006, and 2010. The voters acted, dissatisfied with the direction government in each of these elections. But more than that, the voters expect their Representatives to act in the direction of mandate.
The two principle and national mandates of the 2010 election were to stop new and increased taxation rates, and to reduce the long term budget imbalance. The citizen elected the house to act those mandates.
But what is the House to do, if the Senate through inaction, is capable of thwarting that mandate and the the actions to fulfill that mandate. In a Constitution Republic, it often means, and currently does mean, crisis politics. A crisis being the only available mechanism to force action from the Senate.
And since a crisis is the only currently available mechanism to force action from the Senate, to force the Senate to face the wishes of the electorate, to fulfill the promises made in the campaign for action, and to exert the wishes of the electorate; the House Republicans acted.
This is not political pandering. Only a person who believes elections are just a political exercise, a process to be endured every two years, and then conveniently ignored, would say so. No, this is not pandering, but the right of the people through their Representative, to exert their right of citizenship. Rather than use supercharged words like ‘pandering’, greater effort should be directed at those parts of government which by the political expedient of inaction, do not respond to the citizens. Rather than criticize the crisis, criticize the broken parts of Government that is not doing its job. Criticize the Senate, and its democrat leaders, until they again allow the normal processes of legislation and budget to work. Than the difficult politics of crisis will become unnecessary.
Responding to a national mandate, is not pandering, it is a basic foundation of Constitutional government.
Ed Hanson: Thank you for your thoughtful comments and explanation. By “pandering” I referred to the process of denying Treasury the authority to spend for August, claiming that this prohibition in no way prevented the Treasury from making particular key payments such as debt redemption and Social Security, and yet providing neither legal instruction nor public acknowledgment of the specific payments that were not to be made.
2slugs does it again! He changes the subject to the Treasury and not himself, then claims “… you think Treasury doesn’t know what they’re doing.” then argues on his changed Anyone, I mean anyone, here think I was talking about Treasury when I was talking about understanding the SS check outlay process?
The only people here who do not understand the process is you and Dr Hamilton who appear to think the Treasury does not know how to manage cash flow, especially when paying/borrowing from TFs.
Moreover, you want me to model how Treasury operates its cash flow? Wha… why???? You also think we need to believe Bernanke and Geithner with this: “Treasury …. And since their hair was on fire about the 2 Aug date don’t you think you should have believed them?” Nope!
You seem to be politically naive and ideologically driven. That ideology has been on review for the past four+ years. Few are impressed, except those who are ideologically challenged.
Dr JDH said: “I referred to the process of denying Treasury the authority to spend for August, claiming that this prohibition in no way prevented the Treasury from making particular key payments such as debt redemption and Social Security, and yet providing neither legal instruction nor public acknowledgment of the specific payments that were not to be made.”
I hope you are just brain challenged this early morning and/or have misspoken, and do not actually believe what I high lighted. Treasury was about to be restricted from “new borrowing” (not rolling over debt in nearly all its forms.) Treasury was able to spend any and every dollar it received in revenues after that ceiling (and the concomitant accounting tricks) was reached.
Don’t forget to watch those stock and flow issues. 😉
CoRev: Quite so. The Treasury has been spending approximately $100 B more each month than it takes in as revenue. The consequence of a binding ceiling therefore amounts to denying the Treasury the authority to spend approximately $100 B each month of the sum that the Treasury is otherwise instructed to do under existing legislation. My problem is with claiming that this prohibition in no way prevented the Treasury from making particular key payments such as debt redemption and Social Security, and yet providing neither legal instruction nor public acknowledgment of the specific payments that were not to be made.
Dr JDH said: “My problem is with claiming that this prohibition in no way prevented the Treasury from making particular key payments such as debt redemption and Social Security, and yet providing neither legal instruction nor public acknowledgment of the specific payments that were not to be made.”
Specific payments were TBD by the Executive Agencies. Their approval steps would have done the heavy lifting in prioritizing payment well in advance of sending to Treasury.
As for debt redemption and SS payments, we’ve beaten SS payments to death. If you actually do not understand how they work in reality and not the text books, refer back to the SSA Actuary Stephen Goss interview. http://hotair.com/archives/2011/07/13/video-social-security-chief-actuary-confirms-a-decision-to-withhold-checks-would-come-from-the-treasury/
Even he could not keep a straight face.
Also, for debt redemption, the bulk of that would have been handled by debt rollover. That doesn’t mean that differences in maturing and redemption amounts might still exist after rolling over maturing treasuries over. There would have been no solution for the periodic interest payments difference on non-matured treasuries and the above mentioned negative differences but to pay from existing revenues.
To think Treasury does not understand how to manage cash flow, redeeming SSTF bonds in advance of need, and/or rolling over debt as it matures is a crazy proposal to me. We talked about the “accounting tricks” Treasury has used, and these actually are not part of them as they would be considered normal cash flow management functions.
Jonathan,
Your reading comprehension leaves something to be desired. Never have I supported austerity. Your comment about the UK makes obvious that you do not understand growth. I have been criticizing the UK for years because of their anti-growth posture. The are severly cutting government spending without any replacement of the cuts. They have also significantly raised the VAT tax from 17.5% to 20%.
The results of the UK policies could be seen all weekend as riots shook the island. What you are seeing is the normal results of socialism. When there is an active private sector people can go from job to job or start their own business. But when the only job is a government job and you get laid off there is only one recourse. Protest your former employer, the government, by rioting in the streets and demanding the government do something. This unrest was no surprise at all.
A little late to the game in commenting, I notice that JDH responded thoughtfully to Ed Hanson who wrote a more detailed response than the one that I wrote in response to “Assessing the damage.”
As for his framing of the term pandering, he said that Republicans did not want to lay out which bills they wanted Treasury to pay first. That is not correct. Republicans issued a bill in both houses instructing Treasury what payments to prioritize. Both houses could have passed this at the last minute. The reason that it did not make it to a floor vote is that it was not needed.