Daily Archives: July 20, 2017

[Urgent Note: David Stockman warns that the nations economy and a massive debt ceiling hangs in the balance as Wall Streets peak bull stocks carry on. The economist is on a mission to send his new bookTRUMPED! A Nation on the Brink of Ruin and How to Bring It Backoutto every American who responds, absolutely free.Click here for more details.]

Its all over now except the shouting about Obamacare repeal and replace, but thats not the half of it.

The stand by Senators Lee and Moran was much bigger than putting the latest iteration of McConnell-Care out of its misery. The move rang the bell loud and clear that the Imperial City has become fiscally ungovernable.

That means there is a chamber of horrors coming. With it, an endless political and fiscal crisis that will dominate Washington for years to come. Its cause is deep and structural.

The founders, in fact, were small government de-centralists and non-interventionists. Thats why they agreed to Madisons contraption of redundant checks and balances.

Aside from ruthlessly ambitious Alexander Hamilton, the founders wanted a national government that was hobbled by levels of hurdles and vetoes. They wanted a government that could act sparingly and only after thorough deliberation and consensus building.

And that made sense. After all, most believed that the 10th amendment was the cornerstone of the Constitution. Neither Washington or Jefferson envisioned the political and fiscal burdens of running an empire.

It is our true policy to steer clear of permanent alliance with any portion of the foreign world. That was George Washingtons Farewell Address to us.

The inaugural pledge of Thomas Jefferson was no less clear in stating, Peace, commerce, and honest friendship with all nations-entangling alliances with none.

So when Woodrow Wilson embarked the nation on the route of Empire in April 1917 and FDR launched the domestic interventionism of the New Deal in March 1933, the die was cast. It was only a matter of time before the disconnect between a robust Big Government and the structural infirmities of Madisons republican contraption resulted in a deadly impasse.

The Fed has now backed itself into a corner and is out of dry powder. Even its Keynesian managers are determined to normalize and shrink a hideously bloated balance sheet. The current account has no basis in sustainable or sound finance.

The time of fiscal reckoning has come. With the financial sedative of monetization on hold, bond vigilantes will soon awaken from their 30 year slumber.

First up is the imminent debt ceiling crisis. Republicans will never reach agreement on a bill to raise the debt ceiling by at least the $2 trillion that would be needed to get through November 2018. Thats because the Freedom Caucus conservatives would never agree to a clean debt ceiling bill. By agreeing to such a measure, they would betray the fundamental reason they went to Washington.

The Washington Post reported that sentiment exactly this morning in comments from Freedom Caucus Chairman Mark Meadows:

Meadows said that he recently attended a meeting of eight of the most conservative Senate and House lawmakers about how to handle the debt ceiling and that not once did they consider the idea of backing Mnuchins proposal for a clean debt-ceiling increase.

The end game is quite clear. After several false starts, the Trump White House will be forced to turn to Democrats for votes to raise the debt ceiling but it will come at a price.

Not only would Trump be forced to bailout Obamacare with subsidies to insurance companies to keep rates out of double digits and coverage on state exchanges from collapsing, but it would also mean setting aside his vaguely outlined domestic agenda.

That would include dropping the sweeping domestic spending cuts contained in the Administrations budget and settling for a modest tax plan constrained by revenue neutrality.

Even if Trump were to agree to a quid pro quo with Democrats to get votes for a debt ceiling increase, it would soon be surpassed by a far bigger consequence. It would be the complete implosion of any functioning Republican majorities on Capitol Hill.

Thats because a White House deal with the Dems on the debt ceiling would amount to giving the GOP rank and file release from party discipline ragged as it already is on fiscal matters going forward. White House complicity in Obamacares rescue would be considered an unforgivable betrayal.

The Donald has almost no real friends in the Imperial City among the ranks of the seasoned political pros who run the Congressional GOP. After a debt-ceiling-for-Obamacare-bailout deal with the Dems, he would have no friends at all. The President would then be completely beholden to political enemies.

The nave notions about bipartisanship and working with Democrats held by the White House inner circle of economic advisors will then come into play. As far as we can tell, both Secretary Mnuchin and chief economic advisor Gary Cohn (and son-in-law Jared Kushner) are lifelong Democrats. They are individuals who have no fiscal policy principles whatsoever except doing whatever is necessary to keep the stock market rising.

They would likely lead the Donald into a fatal debt deal with the Dems based on the doctrine that the credit of the U.S. must be preserved at all hazards. By doing so, the Wall Street/Washington establishments fifth column in the White House will bring about the final defenestration of what is left of Trumps presidency.

The astute leader of the Freedom Caucus made the devastating political cost of such a maneuver crystal clear. In recent commentary on the impending crisis, referring to Mnuchins campaign for a clean debt ceiling bill, he explained there is no such thing as 50/50 GOP/Dem coalition to pass a debt ceiling bill.

The minute the White House starts making concessions, the GOP bench will jump off the ship in droves. It will then become an overwhelmingly Democrat vote show:

Hes certainly in the minority in the administration, said Rep. Mark Meadows (R-N.C.), chairman of the House Freedom Caucus. The problem is, yes, you could get a clean debt-ceiling, but it would be 180 Democrats in the House with 40 or 50 Republicans, and thats not a good way to start.

Before Trump is forced into a surrender, there will be the same vote count maneuvering in GOP caucuses of both Houses. Similar to what preceded the GOP collapse of their seven-year crusade against Obamacare, such maneuvering may even lead to one or more small increases in borrowing authority.

The more likely case, however, is that the Treasurys cash which now stands at $168 billion will run-out before they get to a stop-gap debt ceiling increase. That would cause the Treasury to unleash the nuclear tool of spending prioritization and allocation of incoming revenues to the highest uses (debt service, social security payments and military payroll).

Again, the Washington Post story hit exactly what is coming:

One former Treasury official, speaking on the condition of anonymity to discuss sensitive agency deliberations, said officials are now brushing up on options in the crazy drawer.

In past administrations, Treasury officials have designed plans to prioritize payments to government bondholders so that if the government runs short on cash it could avoid defaulting on U.S. debt.

Such a scenario would be very difficult to manage because some bills would either be delayed or not paid making it necessary to prevent an actual default. Prioritizing payments could lead to a spike in interest rates and a stock market crash, analysts have said.

Thats an understatement, if there ever was one. Prioritization and unpaid bills piling up in the Federal agency drawers will cause a thundering shock in both Washington and Wall Street.

Congress would ring with stories about unpaid contractors, delayed grant distributions, furloughed Federal employers, closed national parks, and endless more.

If theres any lesson from the 2008 crisis, its that entitled elites and robo-machines on Wall Street do not cater to a Congress thats not doing their bidding. That became clear when the stock market dropped by upwards of 800 Dow points during the fifteen minute interval when the first TARP vote was being tallied (and voted down).

The non-compliance with Wall Street demands for protecting the credit of the U.S. at all costs and the sight of political disarray in Washington will come as a shock. It will cause panic on Wall Street and an even greater headache for the Donald.

Thats because Trump has trumpeted the 18% rise of the stock market averages since Nov. 8 as an endorsement of his Presidency. Instead, he shouldve punctured the bubble on Day One by demanding Yellens resignation and blaming the crash on the Fed and its enablers.

Having taken the easy strategy of embracing the stock market bubble, Trump will soon face a double whammy of unfair blame. He soon will be blamed for the debt ceiling crisis that he inherited; and nailed for causing the third major stock market crash of this century. Even though it was fostered by a rogue central bank that he has not addressed, let alone subdued.

The WaPo story provides the growing atmospherics, but the real countdown is in the Treasury numbers. Last year the Treasury collected only $595 billion between July 14 and the end of the fiscal year on Sept. 30.

Last years collections during the back 78 days of the fiscal year amounted to $7.6 billion per calendar day. This figure might reach $8 billion per day this year based on the 4.4% year-to-date lift in total tax collections.

Under that math, Washington has now spent $2.6 trillion through the end of May, or about $11 billion per calendar day. So call the cash burn rate $3 billion per day, and compute the inception of crisis as follows.

That makes 50-60 days of cash left, at most. Then comes the first great fiscal temblor of the new era.

The first round of prioritization and allocation will only be the precursor. It will come when Senator Schumer stands with a hapless Donald Trump in the Rose Garden announcing that the debt ceiling will be increased enough to get through the November 2018 election. Perhaps the Wall Street robo-machines will then be reprogrammed, finally.

At that point there will be no dip to buy. The political and fiscal crisis will become a permanent disaster in the Imperial City and the dip on Wall Street will become an extended cavern.

As all school boys know, the original Waterloo decisively changed the course of history.

So will this one.

Regards, David Stockman forThe Daily Reckoning

Read the original post:

The Imperial City's Fiscal Waterloo - Daily Reckoning

After years of hysterical warnings about budget deficits under former President Barack Obama, Republican congressional leaders suddenly seem to have shed their concern for the deficit. In The Atlantic, Russell Berman questions whether deficits still matter to Republicans under President Donald Trump.

While this changing approach to budget deficits is certainly hypocritical, it continues a consistent pattern of selectively using fiscal hysteria as a weapon to attack programs for low- and middle-income Americans. A recent article by this author for Harvard Law and Policy Review defines fiscal hysteria as exaggerating the impacts of deficits and debt, thereby underestimating the extent to which the United States can afford to solve problems facing the American people. While fiscal hysteria does not actually lead to sustainable fiscal policysince it tends to be deployed selectively for political gainit does lead to policies that enrich those at the top at the expense of everyone else.

The upcoming debate over the budget resolution for fiscal year 2018 will test whether hypocritical fiscal hysteria works to sell an unpopular agenda to lawmakers, the media, and the public. While this budget will likely include false claims that a looming fiscal crisis forces Congress to cut programs for working families, another motivation for passing this budget appears to be tax cuts for the wealthiest Americans.

The empty rhetoric of hypocritical fiscal hysteria can be debunked by exposing the reality of the policy agenda behind that rhetoric. But even when fiscal hysteria is expressed consistently instead of hypocritically, it still exaggerates fiscal problems in ways that enable those who would use fiscal hysteria hypocritically as a political weapon. Instead of indulging fiscal hysteria, the federal budget should be assessed with a clear-eyed understanding of the underlying fiscal strength of the United States.

The House Republican budget warned of a looming fiscal crisis when Obama was president, but now Speaker of the House Paul Ryan (R-WI) will not even commit to preventing further increases in the budget deficit as a result of passing his partys agenda. After years of insisting on balanced budgets, the congressional majority made no attempt to balance the budget in the budget resolution they ultimately passed for FY 2017, which laid the procedural groundwork for repeal of the Affordable Care Act (ACA). Instead, the budget adopts the spending and revenue levels projected under current lawthe same projections that were supposed to lead to a fiscal crisis under President Obama.

In 2015, when Obama was president, the Republican-controlled Congress passed a budget resolution that created a fiscal rule against legislation that increases deficits. But the FY 2017 budget resolution waives that rule for ACA repeal. Sen. Rand Paul (R-KY) voted against the FY 2017 budget resolution due to its deficits, but it still passed with the support of every other Republican senator.

Tax cuts for the wealthy areby farthe biggest budget busters on the agenda. According to the nonpartisan Tax Policy Center, the tax plans proposed by President Trump and House Republican leaders would both cost several trillion dollars over a 10-year period and disproportionately benefit the highest-earning 1 percent of Americans. The House Republican plan is particularly skewed towards the wealthy, with the top 1 percent receiving an eye-popping 99.6 percent of the benefit once it is fully implemented in 2025.

While Congress may not care about budget deficits when it comes to cutting taxes for the wealthy, this does not mean that fiscal hysteria is gone forever. After Congress finishes debating whether to take health insurance from tens of millions of Americans, expect fiscal hysteria to come roaring back as Congress looks to cut the budgets of everything else, such as Social Security, student loans, nutrition assistance, and affordable housing.

The first version of the FY 2017 House Republican budgetwritten before the final version that was only passed to repeal the ACAadvocated trillions of dollars in spending cuts. The budget did not raise any new revenue from the wealthy or corporations, and 62 percent of its cuts hit programs for low- and moderate-income Americans. This budget advocated turning Medicare into a voucher program and making especially large cuts to Medicaid and nutrition assistance.

Fiscal hysteria was the tool to sell these unpopular cuts to the American people. The phrase fiscal crisis appears several times in the House Budget Committees paper advocating these cuts. The paper whips up fear of a fiscal crisis because the policies it advocates are extremely unpopular. A 2012 survey found that only 19 percent of the public supported similar cuts in an earlier budget authored by Rep. Ryan. In 2011, President Trump said the Ryan budget was political suicide for the Republican Party.

House Republican leaders appear poised to revive their plans for massive program cuts in an upcoming budget resolution for FY 2018. The only way to sell these cuts to the American people will be to use fiscal hysteria to claim that massive cuts are the only way to avoid a crisis.

The FY 2018 budget resolution should be evaluated based on the actual policies it is enablingand who benefits and suffers from those policiesrather than taking the rhetoric that will be used to sell the budget at face value. Even though the FY 2018 budget resolution will likely be full of fiscal hysteria when it comes to cutting programs for working families, it appears that this budget will also pave the way for deficit-increasing tax cuts for the wealthy. To pass a tax bill along party lines with 50 votes in the Senateinstead of the typical 60 vote thresholdCongress must first pass a budget resolution with reconciliation instructions for that tax bill.

Speaker Ryan and other congressional leaders claim that they support a revenue-neutral tax reform that repeals tax breaks to pay for lower tax rates, but their other statements make clear that this is a nearly meaningless commitment. These lawmakers are using egregious budget gimmicks to falsely claim that their massive tax cuts are revenue neutral.

One major gimmick in the House Republican tax plan is the so-called current policy baseline, which they are using to claim that cutting taxes by more than $400 billion over 10 years is still revenue neutral. This current policy baseline assumes that lawmakers will permanently extend tax breaks scheduled to expire under current law, which reduces the overall level of revenues that a tax plan would need to raise to be considered revenue neutral under this new baseline. By comparison, House Republican leaders are currently considering reconciliation instructions to cut programs for working families by $200 billion over 10 years, which is less than half the amount that the current policy budget gimmick will enable in tax cuts.

The FY 2018 budget resolution could pave the way for much larger cuts to programs for working families, but these will be used to cut taxes for the wealthy rather than to reduce deficits. Rather than including a reconciliation instruction for revenue-neutral tax reform, the reconciliation instruction could instead say deficit-neutral tax reform. While a revenue-neutral reconciliation instruction means that tax cuts must be financed by other provisions that increase tax revenuessuch as closing tax loopholesdeficit-neutral means that spending cuts could be used to finance tax cuts. A deficit-neutral reconciliation instruction opens the door to potentially unlimited spending cuts to pay for tax cuts.

In January 2017, Howard Gleckman of the Tax Policy Center speculated that Congress will eventually give up on the hard choices of tax reform, and instead simply pass tax cuts. Indeed, Rep. Mark Meadows (R-NC), chairman of the ultraconservative House Freedom Caucus, is pushing for deficit-increasing tax cuts.

There appears to be increasing support within the Trump administration and among congressional Republicans for using a particularly egregious budget gimmick to pass tax cuts that are technically temporary but last for 20 years or more. The rules for reconciliation prohibit increasing deficits in years that are outside the period covered by the budget resolution. The gimmick is to sunset the entire package after the budget resolution ends, and then after passing the tax cuts, push to make them permanent to prevent a tax increase when they expire as scheduled.

Congress passed tax cuts under former President George W. Bush using the same budget gimmick, but this would be even more egregious. While the Bush tax cuts were originally scheduled to expire after 10 yearswhich is currently the normal period for a budget resolutionSen. Pat Toomey (R-PA) and others advocate lengthening the budget resolution to cover a longer period such as 20 years to make the temporary nature of their tax cuts even more of a fiction.

And in the end, Congress may even ignore its own budget to pass tax cuts for the wealthy. The House of Representatives did this in an attempt to repeal the estate tax in 2015. First, the House passed a budget that called for maintaining federal revenues at the same levels as current law. The report for this budget stressed that it was a balanced budgetan accomplishment which it grandly described as a vision of governing, and of America itself. But this vision was immediately discarded when the House passed estate tax repeal legislation that cost $269 billion over 10 years, thus reducing revenues below the levels in the House budget resolution.

Speaker Ryan is a master at co-opting anti-deficit rhetoric to advance his agenda without being held accountable for the fiscal reality of the policies he supports. When George W. Bush was president, Rep. Ryan voted for tax cuts in 2001 and 2003, wars in Iraq and Afghanistan, and a Medicare prescription drug benefit. Lawmakers did not pay for any of these policies. During the Bush administration, large budget surpluses turned into deficits. Despite this history, the conventional wisdom has been that Speaker Ryan is a budget hawk, and that was how the Ryan budget was marketed to the American people.

Even when fiscal hysteria is expressed consistently and sincerely, it exaggerates the nations fiscal challenges in ways that play into the hands of President Trump and his allies in Congress. As economist Jared Bernstein says, Deficit hysteria often promulgated by those who are happy to cut taxes without making up the revenue loss has become a stalking horse for shrinking government under the guise of fiscal rectitude. Fiscal hysteria obscures the fact that the United States can support and expand its commitments and investments in working families, if lawmakers choose to do so.

Despite claims to the contrary during the Obama administration, the United States is not broke. Investors would not accept the current low interest rates on U.S. Treasury bonds if they were at all concerned about a looming fiscal crisis.

The United States has more than enough economic capacity to support existing programs such as Social Security and make new investments to strengthen and grow the middle class. In 2015, the Center for American Progress proposed a budget that would expand Social Security, invest $1 trillion in infrastructure, provide paid family leave, and support affordable college for all students. The plan did all this and more while significantly reducing the national debt as a share of the economy over the long term, primarily by ensuring that the wealthiest Americans pay their fair share of taxes and building on the successful work of the ACA to control health care costs.

According to the International Monetary Fund, the United States currently has the fifth-lowest tax burden among 35 advanced economies. This includes federal, state, and local taxes. Even if the federal government stabilized the debt as a share of the economy over the long term using only tax increases, the United States would still have the sixth-lowest tax burden among advanced economies. There is no fiscal imperative that forces lawmakers to dramatically scale back Social Security, Medicare, Medicaid, or other programs for low- and middle-income Americans.

The FY 2018 budget resolution will not be about deficit reduction, despite the likely rhetoric about a looming fiscal crisis. That rhetoric will only be used to justify cuts to programs that the authors of the budget resolution want to cut anyway. Hypocritical fiscal hysteria will not stand in the way of tax cuts for the wealthy.

If the authors of the FY 2018 congressional budget resolution claim that a fiscal crisis compels them to propose massive cuts to programs that provide health care, disability benefits, and nutrition assistance to working families, then they should be asked whether this alleged fiscal crisis also requires any new revenues from the wealthiest Americans or the largest corporations. If lawmakers really believe that there is a looming fiscal crisis, then why are tax cuts for the wealthy and corporations even on the table? Instead of repeating the empty rhetoric of the budget resolution, the focus should be on the actual policies it enables using reconciliationand any budget gimmicks that smooth the way for those policies.

At the core of the budget debateand tax reformis the question of who wins and who loses. Fiscal hysteria avoids that debate with false claims about a looming debt crisis, and it obscures an agenda that takes resources away from low- and middle-income Americans and gives them to those at the top.

Politicians use fiscal hysteria because it works. Until fiscal hysteria stops working, it will continue to help the rich get richer at everyone elses expense.

Harry Steinis the director of fiscal policy at the Center for American Progress.

Read more:

How Paul Ryan's Hypocritical Fiscal Hysteria Threatens Working Families - Center For American Progress