Sunday, July 31, 2011

Debt Ceiling Update

by Bill McBride on 7/31/2011 12:18:00 PM

The final vote will probably be on Tuesday to maximize camera time ...

From the WSJ:

The White House and negotiators for congressional leaders of both parties are pushing for a deal that would raise the nation’s borrowing limit in tandem with deficit reduction in a two-stage process that could result in as much as $3 trillion in spending cuts over the next decade, lawmakers said Sunday.

The terms of the second phase – which would link further borrowing leeway to a potentially far-reaching overhaul of the tax code, defense spending and the major old-age safety net programs – are still not decided, leaders of both parties said in appearances on Sunday morning news programs.
The details sketchy are still sketchy, so it is difficult to tell how much of a drag this plan will be on the economy.

On a personal note, I think most Americans (and most politicians) do not understand the U.S. budget. This reminds me of the housing bubble - it seemed obvious to many of us, but most Americans (and most politicians) missed it completely. As an example, the "Balanced Budget Amendment" is obviously bad policy, yet politicians aren't ridiculed for supporting it. Immediate cuts with a 9.2% unemployment rate are bad policy, but that appears to be what is going to happen. I wish I was a better writer ... but I'll try to explain why these are policy mistakes in the months ahead.

Update: here is what I wrote in the comments:
I get really frustrated with politicians comparing the Federal budget to a family budget. The government does not have a capital budget, so if they spend money on R&D or roads, that is just included in the budget.

If a family buys a car with 5 year financing, they usually just budget the monthly payments. If they budgeted like the government, they'd have to include the entire purchase of the car the year it was bought (same with a house - they'd have to enough to pay cash to buy the house).

Some people compare to the states too. Hey the states are supposed to have balanced budgets. But states have separate capital and operating budgets. I think people just don't understand.
...
A politician can say "We should have a balanced budget". It sounds good, but why aren't they challenged about operating vs. capital budgets? And about business cycle spending (obviously revenue falls during a recession - and spending increases)?

What they really want is a balanced operating budget over the business cycle. You can't put that in the Constitution. It requires effective government and constant vigilance.

Of course in 2001, when the politicians were concerned about paying off the debt too soon, that nonsense went mostly unchallenged too. Very frustrating.

I need to think about how to explain it. "Balanced budget" sounds so good, and is so wrong.

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