23 July, 2011

U.S. Debt-Why It Matters

Channeling my inner Douglas Adams, this is part 4 in my 3 part series on the debt.

You can find the previous 3 parts at the links below:

Part 1: “U.S. Debt-How We Got Here
Part 2: “U.S. Debt-The Economy
Part 3: “U.S. Debt-Where Do We Go Next?

Most of this post has appeared in various places elsewhere in this blog. Think of this one as a summary.

We have raised our debt limit over 100 times since it’s inception. There have been a few battles over raising it, but nothing like what we’re seeing this year. And we’ve never had the credit agencies breathing down our neck like this before. So, why are we hearing so much about credit agencies lowering our credit rating? What’s got them in a tizzy?

There are two things that make this time different.

The first is our current debt level. As I type this, it is 98.14% of our GDP, according to USDebtClock.Org. That’s the 12th highest in the world. It’s also the largest in the world, in terms of actual dollars. In fact, it’s almost 25% of the world GDP.

98% is exceptionally bad. As I’m sure you’ve heard, it’s only been that high once before in the country’s history, and that was right after WWII. However, that number was so large because of our enormous investment in defense during WWII. Once we cut defense spending to reasonable levels, it was not that hard to bring our debt levels down to manageable levels. But as the figure below shows (h/t The Foundry), in terms of GDP, the defense budget now is already at near historic lows. We won’t be able to handle the debt crisis merely by cutting defense.

But the problem isn’t just where we are now. It’s the projected growth in our spending, particularly from entitlements and interest on the debt,  that has the credit agencies so worried. I’ve shown this graph before:

The only way we can keep the size of our interest payments down is to keep the size of our debt down. So, really the problem is entitlements spending vs. revenue. We’re going to have to bring down costs or “increase revenue” as you’ve heard. Actually, the problem isn’t an “or”. We have to do both, as I will show. Now, I define “increase revenue” correctly. When I say that, I mean that the IRS needs to bring in more revenue. There are a number of ways that can happen, but the easiest way is to grow the economy. Think of it as fishing. You just need to cast a bigger net. The liberal plan is to make the holes in the net smaller or to keep casting the net over and over in the same place (eliminate loopholes, raise taxes on those already paying). Both of those might work, but they aren’t going to work as well as using a bigger net.

The reason that Speaker of the House John Boehner (R-OH-08) lost his patience with President Barack Obama (D-USA) is over this very issue. The Democrats and the President have put various long term budget frameworks out for review over the last few months. I’ve reviewed some of them earlier. The others are more of the same. But none of them do much in the way of entitlement reform. This is the same problem with the Gang of Six plan that was released this week. And, if we’re to believe the rumors and leaks from the debt talks, that’s been true of every idea that’s come from the White House. All of the plans we’ve heard primarily try to solve our long term issues from increasing tax revenue.

So, the second reason the credit agencies are breathing down our neck is the number 20.9.

That number represents the highest tax revenue as percentage of GDP that we’ve ever had. In fact, William Kurt Hauser, economist, suggests that no matter what we do to the tax code, the best we can really do is 19.5% over any kind of extended period (actually, the average from 1946-2007 was even lower, 17.9%). This is known as Hauser’s law. The obvious effect of this is that if you know you’re going to end up with about 18-19% GDP for tax revenue, and you want more revenue, you’re going to have to increase GDP. This is basic and simple math. Something apparently beyond the capability of most liberals.

But anyway, the best ever was 20.9%.


I admit, I’m not totally sold on Hauser’s law. I believe that it might be possible to have tax revenues exceed 21% of GDP. In fact, it seems likely that one way to get there would be to continue to shrink GDP. That would not be a desirable way, however.

Every single plan suggested by the Democrats or left leaning think tank that I have seen has revenue goals exceeding 23%. From now on. Some exceed 24%. I’ve seen one that was very close to 25% for the majority of its lifecycle.

So, here’s the thing. I’m not stating that it’s impossible to exceed 20.9% (many do, in fact, say that, but I’m willing to keep an open mind). But I am stating unequivocally that it’s insane to expect exceed 20.9% for any kind of extended period, when we never have.

The credit agencies aren’t stupid. They see our debt forecasts. They see the revenue forecasts. They know Hauser’s law, and they know that it’s always been true. They know the revenue forecasts are wrong. They know the debt is going to be worse than forecast.

Any plan from our government that projects revenues at greater than 20.9% (and probably even a good 2 points less than that) is going to be summarily rejected by Moody’s and S&P.

And even growing the economy isn’t good enough. Here’s another chart from The Heritage Foundation:

It shows that by 2050, all of available tax revenue will be going to pay for entitlements. This comes from the CBO, and has somewhat optimistic economic growth assumptions. The credit agencies have charts like this one too. And they know that these economic growth assumptions are optimistic. So, not only do they know we’re not likely to have tax revenues exceed 20% of GDP, they know what will happen if we don’t fix our spending when that doesn’t happen.

So, like any plan that include insanely optimistic revenue projections, any that include insanely optimistic GDP growth, or any that don’t include entitlement reform, will also be summarily dismissed by the credit agencies. All of the liberal plans suffer from at least one of these problems, usually all three.

That’s why it’s different this time. And until everyone involved understands that’s why it’s different, the odds of avoiding a credit rating downgrade don’t look good.

July 23, 1903

Ford Motor Company sells its first car, a Model A to Ernst Pfenning of Chicago Illinois.

Unlike the later Model T, you could get the Model A in any color you liked, as long as it was red.

The original Ford Model A is the first car produced by Ford Motor Company, beginning production in 1903. Ernst Pfenning of Chicago, Illinois became the first owner of a Model A on July 23, 1903. 1,750 cars were made from 1903 through 1904. The Model A was replaced by the Ford Model C during 1904 with some sales overlap.

The car came as a two-seater runabout or four-seater tonneau model with an option to add a top. The horizontal-mounted flat-2, situated at the amidships of the car, produced 8 hp (6 kW). A planetary transmission was fitted with two forward speeds and reverse, a Ford signature later seen on the Ford Model T. The car weighed 1,240 lb (562 kg) and could reach a top speed of 28 mph (45 km/h). It had a 72 inch (1.8 m) wheelbase and sold for a base price of US$750 (equivalent to $18300 today). Options included a rear tonneau with two seats and a rear door for $100, a rubber roof for $30 or a leather roof for $50.

22 July, 2011

July 22, 1937

The United States Senate stands up to a power hungry President, and votes down the Judicial Procedures Reform Bill of 1937, which would have added six more justices to the Supreme Court. President Franklin D. Roosevelt (D-USA) wanted to do this, so he could pack the court with justices sympathetic to his plans.

The Judicial Procedures Reform Bill of 1937,[1] frequently called the court-packing plan,[2] was a legislative initiative proposed by U.S. President Franklin Roosevelt to add more justices to the U.S. Supreme Court. Roosevelt's purpose was to obtain favorable rulings regarding New Deal legislation that had been previously ruled unconstitutional.[3] The central and most controversial provision of the bill would have granted the President power to appoint an additional Justice to the U.S. Supreme Court, up to a maximum of six, for every sitting member over the age of 70 years and 6 months.

During Roosevelt's first term,[4] the Supreme Court had struck down several New Deal measures intended to bolster economic recovery during the Great Depression, leading to charges from New Deal supporters that a narrow majority of the court was obstructionist and political. Since the U.S. Constitution does not limit the size of the Supreme Court, Roosevelt sought to counter this entrenched opposition to his political agenda by expanding the number of justices in order to create a pro-New Deal majority on the bench.[3] Opponents viewed the legislation as an attempt to stack the court, leading to the name "Court-packing Plan".[2]

Any similarities between this my bringing up this event and the events of today in the U.S. House of Representatives are entirely coincidental.

21 July, 2011

July 21, 1918

The only attack on the American mainland during World War I occurs: the Attack on Orleans. The German U-boat U-156 opens fire on the town of Orleans, MA and merchant vessels. Several boats are sunk, but there are no fatalities.

Under Richard Feldt, on the morning on July 21, 1918, SM U-156 was positioned off of Nauset Beach, located in Orleans, Massachusetts. She was armed with two torpedo tubes and 18 torpedoes as well as two 105 millimeter deck guns, with 1672 shells. U-156 then surfaced and opened fire on the town with her deck guns, then with both torpedoes and her deck guns, the 140 foot tugboat, Perth Amboy, surrounded by four wooden barges.

Men from the nearby Coast Guard station rushed up to their looking tower to see what all the commotion was about. One of them called Chatham Naval Air Station to inform them of the ongoing U-boat attack. Reuben Hopkins, a Coast Guard veteran of the engagement, reached the tower rail in time to see an enemy shell explode over the tugboat. The tug was quickly sunk and U-156 then started firing upon the barges. Escaping from the now burning Perth Amboy and barges were 32 merchant sailors and civilians, including the captain's wife and children.

Reuben Hopkins remained behind as other men went to rescue the tugboat survivors who were coming ashore in lifeboats. Soon, Curtiss HS-2L and R-9 seaplanes arrived to bomb the U-Boat but the ordnance dropped either were duds or failed to hit the target and the warplanes had to fly back to Chatham, Massachusetts to reload. That ended the engagement.

July 21, 2011 5:57 AM EDT

The final landing of Atlantis.

Live streaming by Ustream

19 July, 2011

U.S. Debt–Where Do We Go Next?

This is the third part of my series on the U.S. debt. Part 1, “U.S. Debt-How We Got Here”, can be found here, and part 2, “U.S. Debt-The Economy”, can be found here.

For months now, I’ve been detailing the issues with our debt problem. And explaining that it’s worse than most people are saying. In the last two posts, I showed that while the economy has had a major impact on our debt the last couple of years, the Democrats still own the problem. They can try to pretend otherwise, but the numbers don’t lie.

The previous two posts were chock full of facts. I will attempt to maintain the same evenhandedness here, but it’s true that when talking about the next steps, I’m entering the realm of speculation. Still, hopefully I’ll back up my speculation with enough supporting facts. That’s for you to decide.

There are a number of possibilities from here, so I’ll hit the significant ones one at a time.


The first is the one that the Democrats and the President keep bringing up, “default”. Unless they have come up with a new definition for the word “default”, my understanding is that means “not paying one’s creditors”. So, let’s just put that one to bed right now. The U.S. government will take in approximately $172B next month. Interest on the debt will amount to $29B. Last I checked 172 > 29. So, we’re not going to default. Anyone who says that is a danger is either dangerously misinformed, or lying. Yes, I’m talking to you, Mr. President.

However, I do think that in such a situation, the credit agencies would likely downgrade our credit rating, regardless of an actual default occurring. No, a downgrade in our credit rating is not the end of the world, but unless the downgrade is very short-lived, it makes the job of solving our problems that much harder.

Do nothing

Once we take the option of default off the table, then we can examine the option of doing nothing. I don’t believe that’s possible mathematically or economically. And it’s certainly not possible politically.

This study by the “Bipartisan” Policy Center does show the danger of doing nothing. First, we have to quickly and drastically pick some winners and losers. Second, no matter what winners and losers we pick, we will be victim of the natural ebb and flow of cash. If you’ve ever worked for a company that’s under fiscal constraints, you know what that’s like. Yes, you have plenty of money at the end of the month to meet all your obligations, but the problem is that the cash coming in isn’t always ahead of your obligations going out. Third, due to our shortfall in revenue discussed in the previous post in this series, we’d be forced to make some very hard choices. We simply can’t pay everyone, and we’re not even very close on the “essentials” list. As the Weekly Standard article linked above points out:

The BPC study found that the United States is likely to hit the debt limit sometime between August 2 and August 9. “It’s a 44 percent overnight cut in federal spending” if Congress hits the debt limit, Powell said. The BPC study projects there will be $172 billion in federal revenues in August and $307 billion in authorized expenditures. That means there's enough money to pay for, say, interest on the debt ($29 billion), Social Security ($49.2 billion), Medicare and Medicaid ($50 billion), active duty troop pay ($2.9 billion), veterans affairs programs ($2.9 billion).

That leaves you with about $39 billion to fund (or not fund) the following:

  • Defense vendors ($31.7 billion)
  • IRS refunds ($3.9 billion)
  • Food stamps and welfare ($9.3 billion)
  • Unemployment insurance benefits ($12.8 billion)
  • Department of Education ($20.2 billion)
  • Housing and Urban Development ($6.7 billion)
  • Other spending, such as Departmens [sic] of Justice, Labor, Commerce, EPA, HHS ($73.6 billion)

The decision to prioritize payments would fall on the Treasury department, and Powell points out it would be chaotic picking and choosing who gets paid (in full or partially) and who doesn't. 
Powell notes, however, that Congress made sure during a budget standoff in 1996 that Social Security recipients would not be affected. “In 1996, during an impasse, [Treasury Secretary] Bob Rubin gave the Congress notice that he would be unable to pay the March ’96 Social Security payment. Congress immediately—and I mean, immediately—passed a law that allowed the Treasury to borrow money specifically for that purpose and exempted that borrowing from the debt limit.” While the U.S. wouldn't default on its debt, Powell argues that failure to raise the debt ceiling could spook the credit markets and lead to higher rates. But that's a risk many Republicans are willing to take if the alternative is accepting a rotten deal.

And there’s no doubt that the stock market would not like that choice at all. There would definitely be at least a short term economic hit. I’m not sure how long it would last, but we’re teetering on the brink of a recession already. Beating up on a fragile economy is not a wise thing to do.

But the political damage is likely even worse. Jazz Shaw nails it in a piece at the Green Room @HotAir.

The spending decisions will take place under the watchful eye of the bean counters who are all on Team Obama.

What does that mean? Here’s where we get into the prognostication. While I have absolutely no way to confirm this right now, I would bet you dollars to donuts that there is a person (or, more likely, team of people) in the White House right now who are coming up with a list of bills coming due. True, some will be looking at the things that have to be paid. But more importantly, there is a list of bills that could conceivably not be paid, and those will be based on the ones that cause the greatest possible political damage. Think of it as Plan Nine from the DNC.

Yes, the Democrats will decide which bills to pay and which not to pay. And every time one doesn’t get paid, they’ll be on TV blaming the Republicans. Kiss the White House goodbye in 2013. Kiss the Senate goodbye. Maybe lose the House too, depending on how long it drags on.

So, let’s agree that we don’t want to go down that road.

Next, we have a couple proposals from the GOP that appeared in the last 10 days or so that have virtually no chance of getting a signature from President Barack Obama (D-USA), and a “proposal” from the One Himself.

The McConnell Plan

First, there’s the plan from Senate Minority Leader Mitch McConnell (R-KY), which has more holes in it than I can count. Here’s the best summary I’ve found, from Jamie Dupree:

  • Congress would first pass a new law that authorizes the President to approve an increase in the debt limit in three steps before the 2012 elections - currently, the Congress approves debt limit changes.
  • President Obama would have to send up budget cuts that matched the level of debt limit increase, but it would not require their immediate approval
  • Lawmakers could then vote on a "Resolution of Disapproval" in order to block any such increase in the debt limit.
  • The President could then veto that "Resolution of Disapproval," if it gained a majority in both houses of Congress
  • Congress would then need a two-thirds supermajority to override that veto, or the debt limit increase would automatically occur.
  • The plan would allow for a debt limit increase of between $700-900 billion in three distinct requests by the President
  • Response to this from the right has been mostly negative, but here’s a contrarian view from The American Spectator:

    On the contrary, he is giving Obama the rope necessary on which to hang his presidency. Just because Obama could be given the authority to thrice raise the debt ceiling over the next twelve months doesn't mean he actually has to do so. But McConnell knows full well that Obama cannot help himself and has never met a government program he thought unworthy of borrowing more money to finance. McConnell is banking that Obama will raise the debt ceiling three times over the next year. And if Obama does so, it will ensure that the President's irresponsible fiscal policy remains in the spotlight through next year's presidential election and all the while Republicans remain free to object to his ways and means.


    Or let me put it this way. If the cost of giving Obama more power today results in Obama not having any power eighteen months from now, then wouldn’t it be a price worth paying? Let’s give him the rope.

    I understand this viewpoint, and I agree with the bolded section, but I’m not sure that’s how it would play out. Even if I did, there’s a bigger problem. As I keep hammering home, the credit agencies are not just concerned about our debt ceiling, but also about our rising level of debt. If we don’t at least try to address the debt issue itself, the credit agencies will give us a downgrade. Now, it’s true that in such a scenario, the President would have to take all the blame, and I don’t see how his Presidency could survive, but that’s not a path I’m willing to follow. It’s possible that I’m being too pessimistic here. But I think that if this is the scenario we end up with, next year is going to be a bumpy one.

    The President’s “Plan”

    The next option to address is the President’s plan. I find myself in the position of the CBO, in that I’m trying to score a speech. While the President has given 4 press conferences over this during the last few weeks, he’s been remarkably non-specific about his ideas (actually, that’s not remarkable at all—he did the same thing during the healthcare debate). However, given what I’ve been able to pick up from leaks and from House Speaker Boehner’s (R-OH-08) remarks, the President’s “plan” is heavy on tax increases and while it may have some budget cuts, they’re pushed as far back in the 10 year plan as he can get them. In fact, that’s apparently one of the reason for McConnell’s plan. He asked how much there was in cuts for next year under the President’s plan and got the response $2 billion. It was then he determined that the President is still not serious about his issue and decided we needed a fall back plan.

    Anyway, the prospects of the President’s “plan” appear dim. I’m not sure it would even satisfy the credit agencies, and certainly could not pass the House without major changes. Speaker Boehner has been adamant that there will be no new taxes in any bill passed by the House. He may be willing to give a little on loopholes, deductions, and credits, depending on what he gets in exchange for them. However, he may even have trouble selling that one to the new House freshman and to the Tea Party base. With the cuts pushed back so far, it’s easy to believe they won’t even happen, in any event, and as I have said repeatedly, it is impossible to get out of this situation with only tax increases. Entitlement reform is a necessity.

    However, we have that same problem to some degree with all the plans. Everyone is doing a ten year plan and they’re all backend loaded. But some are worse than others. The President’s appears to be the worst. I say, “appears” because I still can’t find concrete details. If I’m wrong, let me know & I’ll update the post.

    Cut, Cap & Balance

    The third option is the House GOP plan, “Cut, Cap, & Balance”.

    1. Cut – The bill provides specific numbers to limit both discretionary and mandatory spending for FY12. These numbers would drive further Congressional action this year or else force a Presidential sequester. (I explain a sequester below.) The intent of this section is to force Congress and the President to cut spending immediately.
    2. Cap – The bill would establish a new enforceable limit on total federal spending as a share of the economy. The new caps are designed to phase federal spending down to just below 20% of GDP by FY17 and then hold it there through the end of a 10-year budget window in FY21. Put more simply, this is a new enforceable aggregate spending cap.
    3. Balance – The bill would increase the debt limit by $2.4 trillion after the House and Senate have passed a Balanced Budget Amendment (of a certain type).
    What is a sequester?

    A sequester is an automatic across-the-board proportional spending cut written into law and implemented by the Office of Management and Budget (OMB). It is usually combined with some kind of budget target and designed as a backup measure to force legislative action to hit that target.

    Keith Hennessey discusses the sequester in more detail in the linked post. Sequesters are great in theory, but awfully hard to pass.

    By the time you read this, CCB may have already been passed in the House. Generally, I like the bill. I think it’s exactly what the credit agencies are looking for. If it weren’t for our complete inability to get Congress to pass reasonable budgets, I’d be opposed to the balanced budget part of it. I’m more in favor of limited debt tied to GDP. There’s some data that suggests that small debt, particularly when owned by the citizenry, not foreign governments, is good for the economy and good for the citizenry. In case you haven’t noticed by now, I’m generally in favor of things that are likely to be good for the economy, and opposed to those that are not. And I tend to think about things in terms of 5-50 years out, not 6-18 months. I’m not convinced a BBA is good for the economy long term. I just think it’s likely better than the insane spending we’re doing now.

    But I digress. Back to the bill.

    Since it’s a budget bill, it won’t need 60 votes to make it through the Senate, merely 51. I think it could possibly get all 47 Republicans. But the White House has already signaled a veto in its future. However, despite all the bluster from Obama, he doesn’t really want to veto this bill. He knows doing so will not make him look good. He’d much rather it never reach his desk. The White House will be reminding Senate Majority Leader Harry Reid (D-NV) and the rest of the Democratic caucus of that quite emphatically.

    It won’t pass the Senate. Not without major changes, i.e. the kinds of changes that would make it unlikely the House would pass the amended version. This bill hasn’t even been voted on by anyone and it’s already dead. (Note: while writing this, the bill passed the House)

    This bill is going nowhere. I like it, but it’s a waste of time, and it’s the wrong time to be doing things that are wastes of time. However, it’s not symbolic. The point of this bill is not to get it passed. The point is to force the other side to do something. And, from that perspective, it’s a huge success. So, maybe it’s not a waste of time after all.

    The Gang of Six

    Suddenly today, the Gang of Six popped up again, with their own bill. So, that’s next on the possibility list. The Gang of Six presented it with apparently the support of 50+ Senators. Of what we’ve seen so far, this is the most likely bill to pass the Senate. Many other questions remain unanswered, though. Does it do what’s necessary to keep the credit agencies happy? Will the House pass it? Will the President sign it? Is it a good bill?

    From what I can tell, the preliminary answers are maybe, maybe, maybe, and probably not. Nice definitive answers, eh?

    Here’s the executive summary (h/t Kaiser Health News):

    This bipartisan, comprehensive, and balanced plan consistent with the recommendations of the Bowles-Simpson fiscal commission that will:

    • Slash our nation’s deficits by $3.7 trillion/$3.6 trillion over ten years under CBO’s March 2011 baseline, or $4.65 trillion/$4.5 trillion under the original fiscal commission baseline (which used the President’s 2011 budget request as the starting point for discretionary spending).

    • Stabilize our publicly-held debt by 2014.

    • Reduce our publicly-held debt to roughly 70% of our economy by 2021.

    • Impose unprecedented budget enforcement.


    The plan uses a two-step legislative process: (1) an initial bill that makes immediate cuts; and (2) a process for a second bill to enact comprehensive reform and put our nation on a stable fiscal path. The plan would:

    Immediately implement aggressive deficit reduction down payment

    • Cut deficits by $500 billion.

    Dramatically cut discretionary spending

    • Cut nonsecurity and security discretionary spending over 10 years.
    • Maintain investments that encourage economic growth, strengthen the safety net for those who truly need it, and preserve a strong national defense.

    Carefully strengthen the solvency of our most important entitlement programs

    • Spend health care dollars more efficiently in order to strengthen Medicare and Medicaid while maintaining the basic structure of these critical programs.
    • Fully pays for SGR (the “doc fix”) over 10 years.

    Fundamentally reform our tax code

    • Reduce marginal income tax rates and abolish the $1.7 trillion Alternative Minimum Tax.
    • Encourage greater economic growth.
    • Enhance the competitiveness of American businesses and workers against global competition.
    • Reform spending through the tax code to eliminate investment distortions and tax gaming.
    • Change the debate about taxes in America from rate levels and carve outs to competitiveness, fairness and growth.
    • If CBO scored this plan, it would find net tax relief of approximately $1.5 trillion.

    Strictly tighten the government’s budget processes

    • Impose spending caps and security/nonsecurity firewalls.
    • Sequester accounts at the end of the year to recoup any excessive spending by Congress.
    • Restrict the use of emergency designations that circumvent the spending caps.
    • Prevent Congress from exceeding the caps by requiring a stand-alone resolution subject to a 67-vote threshold, in order to isolate that vote to increase the deficit from any other policy items.

    Reform Social Security for future generations

    • Ensure 75-year solvency of Social Security and provide for a decennial review of the program to ensure it remains solvent.
    • Reform Social Security on a separate track, isolated from deficit reduction – any savings from the program must go towards solvency.


    The plan would be implemented through an open, aggressive two-step legislative process led by committees of jurisdiction and involving the American people by:

    Enacting a $500 billion down payment that would secure immediate deficit savings, while establishing a fast track process for the committees in Congress to specify further savings

    • Impose statutory discretionary spending caps through 2015.
    • Implement numerous budget process reforms.
    • Shift to the chained-CPI (a more accurate measure of inflation) government-wide starting in 2012, along with the following specifications for Social Security: (1) exempt SSI from the shift for five years, and then phase in the shift over the next five years; and (2) provide a minimum benefit equal to 125% of the poverty line for five years. (According to CBO, the shift to chained-CPI would result in the annual adjustment growing, on average, about 0.25 percentage points per year slower than the current CPI.)
    • Repeal the CLASS Act.
    • Enact concrete policy changes that lock-in additional savings, including freezing Congressional pay and selling unused federal property.
    • Require GAO and the Department of Labor to report to Congress on establishing a more effective unemployment insurance trigger.

    Enacting a comprehensive deficit reduction plan that includes discretionary and entitlement savings as well as fundamental tax reform

    • Require committees to report legislation within six months that would deliver real deficit savings in entitlement programs over 10 years as follows:
        • Finance would permanently reform or replace the Medicare Sustainable Growth Rate formula ($298 billion) and fully offset the cost with health savings, would find an additional $202 billion/$85 billion in health savings, and would maintain the essential health care services that the poor and elderly rely upon.
        • Armed Services would find $80 billion.
        • Health, Education, Labor, and Pensions would find $70 billion.
        • Homeland Security and Government Affairs would find $65 billion.
        • Agriculture would find $11 billion while protecting the Supplemental Nutrition Assistance Program.
        • Commerce would find $11 billion.
        • Energy would find $6 billion and may propose additional policies to generate savings that would be applied to the infrastructure deficit or to reduce the deficit.
        • Judiciary would find an unspecified amount through medical malpractice reform.
    • Require the Finance Committee to report tax reform within six months that would deliver real deficit savings by broadening the tax base, lowering tax rates, and generating economic growth as follows:
        • Simplify the tax code by reducing the number of tax expenditures and reducing individual tax rates, by establishing three tax brackets with rates of 8–12 percent, 14–22 percent, and 23–29 percent.
        • Permanently repeal the $1.7 trillion Alternative Minimum Tax.
        • Tax reform must be projected to stimulate economic growth, leading to increased revenue.
        • Tax reform must be estimated to provide $1 trillion in additional revenue to meet plan targets and generate an additional $133 billion by 2021, without raising the federal gas tax, to ensure improved solvency for the Highway Trust Fund.
        • If CBO scored this plan, it would find net tax relief of approximately $1.5 trillion.
        • To the extent future Congresses find that the dynamic effects of tax reform result in additional revenue beyond these targets, this revenue must go to additional rate reductions and deficit reduction, not to new spending.
        • Reform, not eliminate, tax expenditures for health, charitable giving, homeownership, and retirement, and retain support for low-income workers and families.
        • Retain the Earned Income Tax Credit and the Child Tax Credit, or provide at least the same level of support for qualified beneficiaries.
        • Maintain or improve the progressivity of the tax code.
        • Establish a single corporate tax rate between 23 percent and 29 percent, raise as much revenue as the current corporate tax system, and move to a competitive territorial tax system.
    • Require the Budget Committee to report legislation within six months that would:
        • Extend discretionary caps and enforcement mechanisms through 2021.
        • Ensure Congressional action to reduce the deficit if the debt-to-GDP ratio after 2015 has not stabilized.
        • Review total federal health care spending starting in 2020 with a target of holding growth to GDP plus one percent per beneficiary and require action by Congress and the President if exceeded.
        • Achieve program integrity savings of $26 billion in entitlement programs to curb fraud, abuse, and other wasteful spending government-wide.
        • Create a working group to provide updated budget concepts for CBO and OMB.
    • Provide expedited floor consideration for a consolidated bill meeting these instructions:
        • If any committee fails to report entitlement program savings, impose across the board cuts to programs in that committee’s jurisdiction as necessary to achieve the required savings. To protect programs that benefit low income families, exempt from across the board cuts those most in need.
        • Allow a group of at least five senators from each party to introduce a resolution in lieu of the non-reporting committee.
        • If a resolution receives 60 votes on the floor, those recommendations will be added to the comprehensive bill.
        • If the Senate does not agree to those recommendations, the comprehensive bill cannot come to the floor under the special procedures established in the first (down payment) bill.
        • Bar substitute floor amendments that upset the revenue/spending balance or any amendments that make the deficit worse, but place no other limits on debate or the substance of amendments.
        • Allow the Majority Leader and Minority Leader to limit debate and the number of amendments, or impose other substantive restrictions by agreement, so that the Leaders can manage the bill with a process that satisfies 60 Senators and the process cannot be held up by a small group on either side. If the Leaders cannot agree, the bill is considered under the regular order.
        • Hold any such comprehensive bill that receives 60 votes at the desk pending consideration of the Social Security bill.

    Enacting Social Security reform if the comprehensive deficit reduction plan has passed

    • Consider Social Security reform, if and only if the comprehensive deficit reduction bill has already received 60 votes.
    • Reform must ensure 75-year solvency of the program and provide for a decennial review to ensure it remains solvent. Any savings from the program must go towards solvency, not deficit reduction.
    • If Finance fails to report Social Security reform meeting the instructions, allow a group of at least five senators from each party to introduce a resolution with recommendations that meet the committee’s instructions.
    • Bar substitute amendments that worsen the solvency of Social Security.
    • Combine any qualifying Social Security reform bill that receives 60 votes on final passage to the comprehensive bill at the desk before being sent to the House as a single bill.
    • Vitiate the vote on the deficit-reduction bill if the Social Security reform bill does not receive 60 votes.

    There’s good and bad here. It’s hard to say whether the good outweighs the bad. Which is the first bad thing about it…

    This is awfully complex. Complex is not good. Complex allows people to hide things. Complex allows people to claim they’re lowering taxes while actually raising them. Complex may allow people to claim they’re addressing the debt issue while they aren’t really at all. And it’s not just complex by accident. It’s deliberately complex. In fact, complexity is mandated by the bill!

    That line about an “aggressive plan that involves the whole Congress” caused at the very least, 100 Senators to get on the phone with their staffs telling them to start adding in their pet projects. This bill is going to be ugly when it’s finished.

    It claims it will lower the marginal rates, lower the corporate tax, and get rid of the AMT. Those are all good things, and will spur economic growth. The summary seems to imply that tax revenue growth will come primarily from economic growth. But it doesn’t say so explicitly. And it definitely doesn’t say that it will come exclusively from economic growth.

    There are also a couple phrases in the summary that make me very nervous. The first is “reform spending through the tax code”. I’ve mentioned before that I find this phrase worse than Orwellian. The second is “maintain or improve the progressivity of the tax code”. Just reading that sends shivers down my spine. The fact that it comes with no explanation of exactly what that means makes me want to go hide all my money in a coffee can in the back yard.

    Worse, this plan is a two phase process. So, there will be two bills. One that makes some quick cuts. And increases the debt limit by some amount. The same amount? I don’t know. It doesn’t say. Then a second, bigger bill, some time later, that will do all the heavy lifting. Will there be another increase in the debt limit then? Or is the entire debt limit increase in the first bill? I don’t know. It doesn’t say. If it’s all in the first bill, the idea is DOA in the House. And, frankly, should be DOA in the Senate too. Still, though, to get it through the Senate, it’s going to have to have Democrat support. That means that if they can craft something together that’s not DOA in the House, there might be enough Democrat support to push it through, even with the obvious Republican defections. It might  make it through the House then. But the President has threatened to veto anything that just comes with a small debt limit increase. Will he do so, knowing that this big “wonderful” bill is around the corner? I don’t know.

    Furthermore, there’s nothing in this plan regarding Medicare and Medicaid reform. Let me be blunt. Without that, it’s junk. If we can’t pass something with Medicare and Medicaid reform with this White House (and we probably can’t), then our goal should be to pass something as small as we can get away with, so we can really fix things in 2013. We shouldn’t be trying for some big “grand bargain”. The only person that wins that way is Obama. The remaining 311,802,074 people in the United States lose.

    So, the last unanswered question is whether this will satisfy the credit agencies. Again, the answer is that I don’t know. They killed the Greek plan precisely because it was too complex. In the Greek plan they were trying to make it so complex that no one would notice it amounted to a default. The credit agencies noticed. I worry that the same thing will happen here. We’ll craft this incredibly complex bill that does nothing to address the actual problems we have and the credit agencies will slap us in the face for it.

    Still, having said all of that, of the things that I’ve discussed so far, this seems to have the best chance of getting a Presidential signature and getting the credit agencies off our back for a while. That doesn’t mean it’s a good bill or that it should be passed.

    There’s one final option that should be considered. And I hit on it briefly in the last section.

    Pass a small bill now

    This is probably the best idea. And it had been gaining steam on the right over the last few days. Call it “calling the President’s bluff”. Frankly, CCB is targeted along these lines. But it should be even smaller than CCB. Pass a bill with targeted cuts and a matching debt limit increase that will get us through August, maybe even September. This would be fairly easy to write and would easily pass the House. Then force Reid and Obama to explain to the people why enacting that would be worse than not. They won’t be able to. They would be in an indefensible position.

    There are two problems with that scenario. Maybe three. First, it might not make the credit agencies happy. I keep hammering on that, but it’s a big deal. Unfortunately, I don’t see any way to make them happy before January 20, 2013. All we can hope to do is get them to remain at their same level of unhappiness until then. Second, the Gang of Six plan torpedoed this idea. It’s going to be hard to get momentum for this stopgap plan as long as everyone thinks a “grand bargain” is a possibility. Third, it still depends upon the intelligence of Reid and Obama. They may be just stupid enough to stop it.


    So, did I answer where we go next? No, not at all. Sue me. I’m feeling disgusted tonight. It seems apparent to me that there’s only one way to do the following:

    1. Pass the House
    2. Pass the Senate
    3. Get a Presidential signature
    4. Not regret what we’ve done 2 years from now
    5. Hopefully keep the credit agencies off our back for a while

    And that’s to pass something that will increase the debt limit enough to get us through about the middle of 2013. Whether we do that as one bill or several, I think that should be the goal.

    18 July, 2011

    July 18, 1969

    Political campaign specialist Mary Jo Kopechne dies in a car accident in Chappaquiddick. She was a passenger to Senator Edward Kennedy (D-MA). Kennedy escaped the vehicle, but left Kopechne behind to drown.

    Next, instead of reporting the issue to the authorities, he went back to his hotel and went to sleep, before complaining to the hotel owner at 3 am of being awakened by a noisy party.

    He didn’t report the incident until after the car and Kopechne’s body were discovered.

    According to Ed Klein of the New York Times, later in his life, Kennedy was fond of asking people, “Have you heard any new jokes about Chappaquiddick?”

    Classy guy. Lion of the Senate.

    According to his own testimony, Kennedy swam across the 500-foot channel, back to Edgartown and returned to his hotel room, where he removed his clothes and collapsed on his bed.[14] Hearing noises, he later put on dry clothes and asked someone what the time was: it was something like 2:30 a.m., the senator recalled. He testified that, as the night went on, "I almost tossed and turned and walked around that room ... I had not given up hope all night long that, by some miracle, Mary Jo would have escaped from the car."[15]

    Back at his hotel, Kennedy complained at 2:55 a.m. to the hotel owner that he had been awoken by a noisy party.[3] By 7:30 a.m. the next morning he was talking "casually" to the winner of the previous day's sailing race, with no indication that anything was amiss.[3] At 8 a.m., Gargan and Markham joined Kennedy at his hotel where they had a "heated conversation." According to Kennedy's testimony, the two men asked why he had not reported the accident. Kennedy responded by telling them "about my own thoughts and feelings as I swam across that channel ... that somehow when they arrived in the morning that they were going to say that Mary Jo was still alive".[15] The three men subsequently crossed back to Chappaquiddick Island on the ferry, where Kennedy made a series of telephone calls from a pay telephone near the crossing. The telephone calls were to his friends for advice and again, he did not report the accident to authorities.[3]

    He also issued this bull**** statement.

    On July 18, 1969, at approximately 11:15 p.m. in Chappaquiddick, Martha's Vineyard, Massachusetts, I was driving my car on Main Street on my way to get the ferry back to Edgartown. I was unfamiliar with the road and turned right onto Dike Road, instead of bearing hard left on Main Street. After proceeding for approximately one-half mile on Dike Road I descended a hill and came upon a narrow bridge. The car went off the side of the bridge. There was one passenger with me, one Miss Mary [Kopechne],[23] a former secretary of my brother Sen. Robert Kennedy. The car turned over and sank into the water and landed with the roof resting on the bottom. I attempted to open the door and the window of the car but have no recollection of how I got out of the car. I came to the surface and then repeatedly dove down to the car in an attempt to see if the passenger was still in the car. I was unsuccessful in the attempt. I was exhausted and in a state of shock. I recall walking back to where my friends were eating. There was a car parked in front of the cottage and I climbed into the backseat. I then asked for someone to bring me back to Edgartown. I remember walking around for a period and then going back to my hotel room. When I fully realized what had happened this morning, I immediately contacted the police.

    For his crimes, he received a two month suspended sentence.

    On July 25, seven days after the incident, Kennedy pleaded guilty to a charge of leaving the scene of an accident after causing injury. Kennedy's attorneys suggested that any jail sentence should be suspended, and the prosecutors agreed to this, citing Kennedy's age, character and prior reputation.[25] Judge James Boyle sentenced Kennedy to two months' incarceration, the statutory minimum for the offense, which he suspended. In announcing the sentence, Boyle referred to Kennedy's "unblemished record" and said that he "has already been, and will continue to be punished far beyond anything this court can impose".

    Kopechne’s birthday is next week. She’d be 71.

    U.S. Debt-The Economy

    This is part 2 in my series on the U.S. Debt. Part 1, “U.S. Debt-How We Got Here”, can be found here.

    In part 1, I explored the budgets for the last 5 years, and our exploding debt during the same time. It would be reasonable to criticize that post for not taking into account the effects of the economic downturn of 2008. This post will attempt to do that. If you like, you can think of this as “How We Got Here, Part 2”.

    First I’m going to examine revenue projections for 2009, 2010, and 2011. I start with the 2009 budget as it was the last one submitted before the financial crisis of September, 2008. Then I’ll look at the government cost for dealing with the financial crisis and economic meltdown. After that, we should have a good idea on how much that has impacted our debt. As before, all amounts are in billions of dollars.

    2009 Budget: (2011 & 2012 based upon current projections—2011 should be pretty close, fiscal year almost over)

    Year Projected Revenue Actual Revenue
    2009 2700 2105
    2010 2931 2165
    2011 3076 2174
    2012 3270 2628

    2010 Budget:

    Year Projected Revenue Actual Revenue
    2010 2381 2165
    2011 2713 2174
    2012 3081 2628


    2011 Budget:

    Year Projected Revenue Latest Projection
    2011 2567 2174
    2012 2927 2628


    2012 Budget:

    Year Projected Revenue Latest Projection
    2012 2627 2628


    You can see the continued downward forecasts in the later budget projections. Notice that revenues have been basically flat since 2009, and yet we’re still projecting over 20% revenue growth for 2012.

    In addition, looking at projected debt again, the 2009 budget projected a debt load of $11,432B at end of FY11. Our current debt projection for this FY is $15,476B, a difference of $4,044B.

    We are also still projecting 2012 revenue to be over $600B less than the projection given in the 2009 budget. This shows that the economic slowdown is still hurting us quite a bit, and likely will for several years to come. In addition, for the three years from 2009-2011, we are down $2263B in projected revenue, leaving $1781B to blame on “new spending”.

    That’s a lot of new spending over three years. It would be nearly $6T over ten years assuming the pace doesn’t accelerate. But that does include cost of stimulus, TARP, etc.

    So, how much did all of these cost?

    Well, if you believe President Barack Obama’s (D-USA) numbers, TARP has cost us basically nothing. Seriously, it’s in the tens of billions of dollars. A drop in the bucket on a budget of $3729B. According to the linked documents above, we spent $151B on TARP in 2009, and got back $110B in 2010, with a projection to get back $28B in 2011, and additional expenditures totaling less than $40B over the next 10 years.

    The math gets a bit fuzzier for unemployment & welfare dollars. From 2007-2009, projected growth for that was pretty large, about 10.65% annually. Projecting that forward, gives $398B for 2010 and $441B for 2011. Actual for 2010 was $571B, and my estimate for 2011 was $641B, a difference of $373B.

    The math gets even fuzzier when we talk about economic stimulus dollars. No one can really say how much has been spent. I chose to use the data on Recovery.Gov. It breaks the spending down by quarter.

    Quarter Ending Funds Disbursed
    9/31/2009 36
    12/31/2009 18
    3/31/2010 8
    6/30/2010 24
    9/31/2010 26
    12/31/2010 22
    3/31/2011 19


    There’s no data available for the most recent quarter yet, but based on the previous quarters, I think it’s safe to assume that it’s less than $30B. I’ll be generous and say $30B. That means the total spent on stimulus to date is $183B. Add in my generous figure for welfare, and a generous $50B for TARP, and the total is $606B (likely significantly smaller).

    That still leaves $1175B unaccounted for that we can safely call “new spending”. The calculated revenue shortfall from above was $2263. Add the $606B, and $2869B (71%) of our recent deficit woes are related to the economy.

    That’s quite a bit, and it shows that the economy is definitely the driving force behind our current debt ceiling crisis. But the fact that $1175B (29%) of this is new spending over the last three years, and is not directly attributable to economy is disturbing as well. If you split that up evenly over the three years, you get $392B, or 10.5% of this year’s budget. It’s unlikely that the amount is actually evenly split over three years. It’s more likely that it’s weighted towards 2011, and I’m pretty sure I could prove that, but I think I’ve put enough math in this post already.

    Let that sink in a moment. At least 10.5% of this year’s budget is new spending that was not projected in the original 2009 budget and is not related to our economic woes.

    As I keep saying, this is the problem that has the credit agencies so concerned. Yes, they’re worried that we’re going to hit our debt limit without some sort of resolution, but they’re more concerned that we are going to do nothing to address our exploding debt, and in fact seem content to make the problem worse.

    And that’s the subject of part 3 of this series, “Where Do We Go From Here”.

    17 July, 2011

    U.S. Debt–How We Got Here

    This is the first part in at least a 2 part series on our debt limit issues. I will get the second part out either later this evening or tomorrow.

    This little tweet set off a bit of a firestorm today. From Ken Gardner:

    debt limit increase

    This got the attention of Andrew Rosenthal, Editorial Page Editor of the New York Times.


    Well, Mr. Rosenthal isn’t entirely wrong here, but to say he’s stretching the truth is putting it mildly.

    Let’s get some historical perspective, shall we? In the chart below, all figures are in billions of dollars. I have added dollars allocated to the Global War on Terror to Defense for years that these were separated as different line items. Everything to the left of the Deficit column is what was budgeted. Deficit and Debt numbers are actual (except for 2011 & 2012 where they are obviously projected). Since the Democrats have been awful at preparing budgets under Obama, the numbers get harder to obtain starting in 2011. Links are provided, however.

    I chose the line items below because they’re the biggest line items on the budget. For fiscal year 2007, those columns account for almost 86% of the total budget.

    Year Total Social Security Defense Medicare Unemp & Welfare Medicaid & SCHIP Interest Deficit Debt
    2007 2730 586 549 395 294 276 244 161 8951
    2008 2900 608 627 386 324 209 261 459 9986
    2009 3107 644 671 408 360 224 260 1413 11876
    2010 3552 695 664 453 571 290 164 1293 13528
    2011 3820 730 708 491 641* 297 250 1645 15476
    2012 3729 761 671 485 711* 269 242 1101 16654


    * I’m estimating these based on growth patterns, as I don’t have the budgetary expertise to find the line items for them in the proposed budgets. I could probably figure it out, but it would take me a while, and I don’t really want to invest the time. I suspect that my 2012 line is quite a bit higher than the President’s proposed one, so if you want to take issue with me about that, fine.

    As an aside, look at the difference in deficit between FY07 and FY11. A 1000% increase. Nice.

    I started with 2007 as that’s the last fiscal year budget with a Republican President and Republican Congress. The Democrats have to take at least their fair share of the blame for 2008 and 2009, and own exclusive control over it from 2010 onwards.

    I included 2012, because the President wants any debt limit deal to cover fiscal year 2012.

    Now, let’s examine a table based upon the 2007 projections through 2011. The 2007 budget document only goes up to 2011, but that’s far enough to examine what interests us.

    Year Total Social Security Defense Medicare Unemp & Welfare Medicaid & SCHIP Interest Deficit Debt
    2008 2814 612 506 399 * 218 272 223 9841
    2009 2922 645 507 421 * 233 291 208 10437
    2010 3061 683 522 447 * 250 307 183 10983
    2011 3240 722 539 489 * 270 322 205 11537


    I didn’t even try to figure out the Unemployment and Welfare projections. If someone can tease these numbers out of the documents I linked, I’ll gladly update the post.

    There are a few points worth making here. First, only the “defense” column can arguably be defined as a GOP sacred cow. The others are all Democrat sacred cows. So, really it’s unfair in the extreme to lay much of our debt woes at the feet of the GOP. However, should you argue that they kept these programs going, so they have to accept part of the blame, you should go by the 2007 projections, as this is the last year the GOP was in control.

    Doing so gives a budget total difference of almost $600B for FY2011, and a debt difference of almost $4T at end of FY2011. And we project another $1T in debt in 2012, almost doubling the debt from the end of 2007.

    Yes, I know projections are always lowballed, but don’t even try to convince me that they were lowballed to the tune of $4T. I’m not that stupid, and I hope you aren’t either.

    So, Mr. Rosenthal is correct that the debt ceiling debate is about old programs, in that we’re not yet trying to raise the debt ceiling to handle the enormous debt load ObamaCare is going to bring or the near exponential growth currently projected for other entitlement programs. But Mr. Rosenthal was completely wrong in the other half of his statement, that most of this is the result of the GOP. Under the GOP numbers we’d still be $3T away from the current $14.3T debt limit.

    July 17, 1918

    Fearing that a rescue was imminent, the Tsar of Russia, Nicholas II, and his family are executed by the Bolsheviks while under house arrest in Ekaterinburg. Thus beginning a trend of nearly a century of Soviet rule marked by violence and death.

    Contrary to popular mythos, Grigory Rasputin was not involved, as he was already dead. And the daughter Anastasia was among the dead.

    The telegram giving the order to liquidate the prisoners on behalf of the Supreme Soviet in Moscow was signed by Yakov Sverdlov. Around midnight Yakov Yurovsky, the superintendent of The House of Special Purpose, ordered the Romanovs' physician, Dr. Eugene Botkin, to awaken the sleeping family and ask them to put on their clothes.[1] The Romanovs were then ordered into a 6x5 meter semi-basement room.[1] Nicholas asked if he could bring two chairs for himself and his wife. A firing squad appeared next and Yurovsky announced:

    Nikolai Aleksandrovich, in view of the fact that your relatives are continuing their attack on Soviet Russia, the Ural Executive Committee has decided to execute you...[1]

    Yurovsky then began to read the decision of the Ural Executive Committee (Uralispolkom), and Nicholas said "What?"[1] As weapons were raised, the Empress and the Grand Duchess Olga, according to a guard's reminiscence, had tried to cross themselves, but failed amid the shooting. Yurovsky reportedly raised his gun at Nicholas and fired; Nicholas fell dead instantly. The other executioners then began shooting until all the intended victims had fallen. Several more shots were fired and the doors opened to scatter the smoke.[1] There were some survivors, so P.Z. Yermakov stabbed them with bayonets because the shouts could be heard outside.[1] The last to die were Anastasia, Tatiana, Olga, and Maria, who were carrying several pounds (over 1.3 kilograms) of diamonds within their clothing, thus protecting them to an extent.[11] However they were speared with bayonets as well. Olga sustained a gun shot wound to the head. Anastasia and Maria were said to have crouched up against a wall covering their heads in terror until Maria was shot down, and Anastasia was finished off with the bayonets. Yurovsky himself killed Tatiana and Alexei. Tatiana died from a single bullet through the back of her head.[12] Alexei received two bullets to the head, right behind the ear.[13] Anna Demidova, Alexandra's maid, survived the initial onslaught but was quickly stabbed to death against the back wall while trying to defend herself with a small pillow she had carried that was filled with precious gems and jewels.[14] Military commissar Peter Ermakov, in a drunken haze, stabbed at the dead bodies of the former Czar and Czarina, shattering both their rib cages in a pool of blood