Congressional negotiators are trying to craft a budget deal by mid-December. Fareed Zakaria’s Global Public Square asked twelve experts what they hoped that deal would include. My suggestion: it’s time to fix the budget process:
Odds are slim that the budget conference will deliver anything big on substance. No grand bargain, no sweeping tax reform, no big stimulus paired with long-term budget restraint. At best, conferees might replace the next round of sequester cuts with more selective spending reductions spread over the next decade.
Those dim substantive prospects create a perfect opportunity for conferees to pivot to process. In principle, Congress ought to make prudent, considered decisions about taxes and spending programs. In reality, we’ve lurched from the fiscal cliff to a government shutdown to threats of default. We make policy in the shadow of self-imposed crises without addressing our long-run budget imbalances or near-term economic challenges. Short-term spending bills keep the government open – usually – but make it difficult for agencies to pursue multiyear goals and do little to distinguish among more and less worthy programs. And every few years, we openly discuss default as part of the political theater surrounding the debt limit. ( Continue… )
The Council of Economic Advisers just released an interesting paper examining the macroeconomic harm from the government shutdown and debt limit brinksmanship. To do so, they created a Weekly Economic Index from data that are released either daily or weekly (and weren’t delayed by the shutdown). These data include measures of consumer sentiment, unemployment claims, retail sales, steel production, and mortgage purchase applications.
The headline result: They estimate that the budget showdown cost about 120,000 jobs by October 12.
Looking ahead, I wonder whether this index might prove useful in identifying future shocks to the economy, whether positive or negative. As the authors note:
"In normal times estimating weekly changes in the economy is likely to detract from the focus on the more meaningful longer term trends in the economy which are best measured over a monthly, quarterly, or even yearly basis. But when there is a sharp shift in the economic environment, analyzing high-frequency changes with only a very short lag since they occurred can be very valuable."
P.S. I am pleased to see CEA come down on the right side of the ”brinksmanship” vs. “brinkmanship” debate.
RECOMMENDED: Five ways US debt default would affect you
Eugene Fama, Lars Peter Hansen, and Robert Shiller won the Nobel Prize in Economics Monday for their work studying asset prices. In one sense, they are a motley trio: Fama is famous for emphasizing efficient markets, Shiller for emphasizing investor psychology and inefficient markets, and Hansen for high-tech econometric techniques that are used well beyond finance. The unifying theme is their shared interest in understanding the predictability, if any, of asset prices.
The Royal Swedish Academy of Sciences posted an accessible summary of their work. Here’s the intro:
There is no way to predict whether the price of stocks and bonds will go up or down over the next few days or weeks. But it is quite possible to foresee the broad course of the prices of these assets over longer time periods, such as, the next three to five years. These findings, which may seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller. ( Continue… )
Since the day of Alexander Hamilton, the United States has never defaulted on the federal debt.
That’s what we budget-watchers always say. It’s a great talking point. One that helps bolster the argument that default should not be an option in Washington’s latest debt limit showdown.
There’s just one teensy problem: it isn’t exactly true. The United States defaulted on some Treasury bills in 1979 (ht: Jason Zweig). And it paid a steep price for stiffing bondholders.
RECOMMENDED: Government shutdown quiz
Terry Zivney and Richard Marcus describe the default in The Financial Review (sorry, I can’t find an ungated version):
"Investors in T-bills maturing April 26, 1979 were told that the U.S. Treasury could not make its payments on maturing securities to individual investors. The Treasury was also late in redeeming T-bills which become due on May 3 and May 10, 1979. The Treasury blamed this delay on an unprecedented volume of participation by small investors, on failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules."
The United States thus defaulted because Treasury’s back office was on the fritz in the wake of a debt limit showdown.
This default was temporary. Treasury did pay these T-bills after a short delay. But it balked at paying additional interest to cover the period of delay. According to Zivney and Marcus, it required both legal arm twisting and new legislation before Treasury made all investors whole for that additional interest.
The United States thus did default once. It was small. It was unintentional. But it was indeed a default. ( Continue… )
Want to buy a bitcoin?
If you click over to Mt. Gox, the most famous bitcoin exchange, one unit of the crypto-currency will set you back $145. But at Bitstamp you would pay only $129. (At time of writing; prices can change quickly.)
Mt. Gox traders are thus paying a 12% premium for their bitcoins.
That spread seems to violate a fundamental economic law. When transaction costs are low, identical items should trade at nearly identical prices. Otherwise, arbitrageurs would step in to buy cheap and sell dear until the price gap narrows.
But that isn’t happening. ( Continue… )
It’s debt limit season again. Treasury will soon exhaust all the “extraordinary” (if familiar) measures it’s using to stay within the limit. By mid-October, Treasury will have just $50 billion on hand. Once that’s gone–maybe at Halloween, maybe a bit later–Uncle Sam won’t be able to pay all his bills or will be forced into doing something desperate like breaching the debt limit or minting platinum coins (kidding, mostly).
We seen this movie before. Sometimes it ends with major policy changes, such as the 2011 deal that spawned the sequester. Other times it leads to minor tweaks, such as the January 2013 deal that linked congressional pay to passing separate budgets through the House and Senate.
"Soon after President Dwight Eisenhower took office, his administration began signaling the need for additional borrowing authority. But conservatives were not convinced. “For the Administration, this would be the easy way out of hard decisions,” warned the Wall Street Journal. “[T]o lift the debt ceiling for this ‘emergency’ need will make the whole idea of a debt ceiling meaningless. To impose a limit on the government’s debt and then to change it the moment it begins to squeeze makes of the whole thing a trick for fooling people.” ( Continue… )
The balanced budget amendment introduced by Senate Republicans yesterday contains a striking error. As written, it would limit federal spending much more than they claim or, I suspect, intend (I said the same back in 2011, when this first came up).
Requirement to Balance the Budget. With limited exceptions, the federal budget must be balanced.
Presidential Requirement to Submit a Balanced Budget. Prior to each fiscal year, the President must submit to Congress a balanced budget that limits outlays to 18 percent of GDP.
18 Percent Spending Cap. With limited exceptions, Congress must limit outlays to 18 percent of GDP.
That 18 percent figure is in line with average tax revenues over the past four decades, but well below average spending, which has been about 21 percent.
RECOMMENDED: 3 views on best way to curb US debt
On Wednesday, the House will vote on a bill to delay the upcoming debt limit showdown. The bill includes no spending cuts, no tax increases, and no platinum coins of unusual size. Instead, it will “suspend” the debt limit through May 18 to give lawmakers time to pass a budget in each chamber. To give them extra incentive, it also includes a new twist: If they fail to pass a budget by April 15, it will withhold their pay.
Here are five things you should know about the bill.
1. The bill doesn’t just suspend the debt limit, it raises it.
Section 1(a) of the bill suspends the debt limit through May 18. You might think that the current limit would go back into effect on May 19. And it would, except for section 1(b) which increases the debt limit to reflect new debt issued between now and then.
The bill thus increases the debt limit by an amount to be determined later. That unusual structure lets lawmakers tie the debt limit increase to a specific date, rather than an amount. It also means they get to increase the debt limit, presumably by several hundred billion dollars, without having to expressly vote for such an amount. It’s a less transparent, and therefore less painful, way to increase the debt limit. ( Continue… )
“Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit.”
So R.I.P. platinum coins of unusual size.
The administration has previously ruled out another oft-discussed debt-limit safety valve, overriding the limit based on the 14th amendment. So “Plan B” discussions will now move to two other alternatives that have been bandied about: prioritizing payments or, as Ed Kleinbard suggested the other day, issuing scrip like California did a couple years ago. Of course, issuing scrip *is* prioritizing payments, but with the added feature (or complication) of a written, transferable IOU.
Policy wonks are debating whether a trillion-dollar platinum coin would be a clever or insane way for President Obama to play hardball with Republicans in the upcoming debt limit battle. Here’s what you should know about this crazy-sounding idea:
1. A legal loophole gives the Treasury Secretary apparently unlimited authority to mint platinum coins.
Treasury is forbidden from printing money to cover government deficits. Treasury must issue debt, while the Federal Reserve independently controls our nation’s monetary printing press.
RECOMMENDED: Top 10 richest Americans
That is exactly as it should be. But there is an arcane exception for platinum coins. To serve coin collectors, Treasury can issue platinum coins of any denomination. That creates an intriguing loophole: Treasury could bypass the collector market and mint a trillion-dollar platinum coin. By depositing it at the Federal Reserve, Treasury could keep paying bills after we’ve fully exhausted our borrowing limit. ( Continue… )