Next Tuesday, we will see the new budget projections by the Congressional Budget Office (CBO). It is difficult if not impossible to predict what CBO will say in a new projection. However, there have been some regularities over the years, and there may be a potential trap this time around.
Like the stock market, budget projections tend to overshoot at turning points – in this part of the cycle, appearing (with the wisdom of hindsight) too pessimistic for too long, and then snapping back fairly sharply. In terms of the economy and the budget, we haven’t had a turning point so much as a deep funk. The economy has carried the extraordinary weights of a massive housing overbuild, a once-in-a-lifetime (we pray) financial crisis, and precisely adversely timed near-identical symptoms in much of the rest of the developed world. There is some chance that as the roots of growth begin to strengthen (this week’s largely inventory- and government-driven GDP report notwithstanding), CBO’s forecast will begin to anticipate faster economic growth that will show a similar measure of apparent optimism in the budget numbers over the next few years.
And at the same time, the turn-of-the-year fiscal-cliff bill – the American Taxpayer Relief Act (ATRA) – will show a meaningful improvement in the “current policy” – as opposed to the “current law” – budget projections. The distinction, which is important mostly to people who do not have lives (some of whom may read this blog), has been for the last decade mostly whether the temporary 2001 and 2003 tax cuts were assumed to be continued (current policy) or to expire (current law). The current law baseline is the official headline number mandated in the Budget Act. However, budget wonks, recognizing that the expiration of all or even most of those tax cuts was unthinkable, watched the current policy outlook much more closely. And the expiration of even the small portion of those tax cuts omitted from the ATRA will improve that picture.
I was fortunate enough to be invited to a breakfast with House Budget Committee Chairman Paul Ryan (R-WI) earlier this week. You may have seen some stories on that conversation, primarily in the Wall Street Journal, whose David Wessel and Gerald F. Seib organized the event. (A transcript is available to those with Wall Street Journal access in two parts, here and here.) A couple of takeaways for me:
Some press reports, including an editorial in the Washington Post, had suggested that House Republicans had foresworn the old “Boehner Rule” – which dictated that there be $1 of spending cuts for every $1 increase in the debt limit. The Post said that this change was highly meritorious, because there could be serious consequences if the debt limit were subject to such uncertainty. However, Chairman Ryan made clear that the Boehner Rule is alive and well, even though it may temporarily be suspended. Chairman Ryan saw two potential ways forward – that is, toward significant deficit reduction, in fact a balanced budget in ten years. One would be bipartisan cooperation, which he did not rule out but saw as unlikely. The second was the use of rolling “fiscal cliffs,” including the expiration of continuing resolutions for annual appropriations, deadlines for sequesters, and applications of the Boehner Rule for short-term increases in the debt limit.
No one is satisfied with the “fiscal cliff” legislation that was born at the turn of the year. Specifically, the federal government’s financial obligations are not satisfied, and a new budgetary booby trap has been set; there is no question that the ballooning public debt must be addressed again in short order.
So what happens next? How do we get out of this bleak place?
Washington policy watchers are caught in an intellectual vice – or actually, three of them simultaneously. To sketch out a “grand bargain” on the basis of the behavior of the last decade and a half is totally unrealistic. But without an unrealistic, fundamental change of Washington behavior, this potentially malignant problem does not get solved.
An opinion column from Friday’s Wall Street Journal painted a sanguine picture of the potential collision of the United States Treasury with its statutory debt ceiling. The column, entitled, “The Myth of Government Default,” by David B. Rivkin, Jr., and Lee A. Casey, can be found here if you have an Internet account with the Journal, but just in case I will offer the following brief excerpt:
Contrary to White House claims, Congress’s refusal to permit new borrowing by raising the debt ceiling limit will not trigger a default on America’s outstanding public debt, with calamitous consequences for our credit rating and the world’s financial system. Section 4 of the 14th Amendment provides that “the validity of the public debt of the United States, authorized by law . . . shall not be questioned”; this prevents Congress from repudiating the federal government’s lawfully incurred debts… Should Congress fail to increase the debt ceiling as much as the president wants, the effective result would be major government spending cuts, with payments on public debt excluded.
Allow me to provide a slightly more elaborate and general summary of this argument as it circulates in the Washington ether. Admittedly, this argument is somewhat less measured and nuanced than that presented by Rivkin and Casey.
Some believe that failure to increase the statutory debt ceiling would cause the federal government to default, which those persons contend would entail serious ill effects, this argument goes. However, in fact, even if the debt limit is not increased, the federal government need not default, which is defined accurately as the failure to service or redeem in a timely fashion its outstanding debt instruments. The courts have held that servicing the debt, which is mandated by the Constitution, has rightful precedence over paying other obligations, which are sanctioned by mere laws. So the correct policy choice today is to refuse to increase the debt ceiling, and thereby to win political leverage in the debate over the budget – which can be achieved at no risk of a financial market event.
I see three major problems with this argument.
Everyone has his take on the legislation that emanated from the fiscal cliff “negotiations.” Here is mine.
First, I see a lot of over-analysis and over-judgment. There are grounds on which to give the various pieces extreme grades. But the clearest conclusion of all is that this game ain’t over. Saying that there is too much in tax increases relative to the spending cuts (or vice versa) is a little like dissing the sausage before all the scraps are ground, much less stuffed into the casing. We know that there will be at least two more rounds. March Madness will bring the expirations of the postponement of the sequester and of the continuing resolution appropriating funds for federal agencies, plus the exhaustion of the Treasury Secretary’s “extraordinary measures” to get around the debt limit. And because the Congress and the President cannot possibly solve the big problem in these two short work months, there will be at least one more round after that. There will be more bites at the sausage, as unappetizing as it may be.