Shutdown Newsletter #2: October 2013
The government shutdown is ongoing, approaching a full two weeks in as I write this, but the direction of the debate is changing and I wanted to update you on it. Congress still hasn’t reached agreement on reopening the government, but facing the reality of needing to raise the debt ceiling by Thursday of next week, the issues of shutdown and debt ceiling have now merged.
The most recent proposal brought forth from the House Republicans to the White House is a temporary funding of the government through December 15th and a raise in the debt ceiling until November 20th. In the intervening six weeks a series of negotiations would begin on how to cut our spending in the upcoming years. This hopefully would include negotiations on tax reform and entitlement programs, which sets the stage for a change in the larger financial framework of this country. This sounds great, though in practice promising future negotiations in exchange for short term spending concessions can be risky. Congress rarely negotiates in earnest without a deadline.
While everything is in flux and no one can predict exactly what will happen up here next, I think something will begin to move in the next twenty four hours. I’d love to get your thoughts on what should come next – and regardless of what that might be, here are two things to think about.
One, negotiation is part of the legislative process and certainly part and parcel to the American way. Republicans in the House have not been able to get their message out on this front due to the President’s larger microphone across this country and due to the media’s filtering process, but negotiation is still a very legitimate consideration given that over the last 35 years there have been 53 debt limit increases, and every one of them was negotiated except for the handful of years where debt increases were automatic and therefore not debated. The same holds true of every one of the 17 government shutdowns over the last 35 years – all were negotiated. In every instance whether there were Democratic or Republican presidents, Senates, or Houses – every time there was negotiation over the course of these disruptions, not after as the president is now insisting. Therefore I do think that Harry Reid’s and the President’s position over the last ten days has been an untenable one – though certainly a winning political formula. In this vein, the president’s bias towards unilateral action has been a point of objection for me over the past week as I went to the floor last Thursday and Friday and spoke on this front on any number of media outlets.
Two, the problem remains spending. A short term extension of the debt ceiling, which would be a “clean” debt ceiling raise, does nothing to address the $17 trillion we already owe, or the growth of government spending. To create a larger compromise on the issue of the debt ceiling and our rampant spending, we need to look more carefully at entitlement spending. In 2011, the raising of the debt-limit was accompanied by the Budget Control Act, which earlier this year began to make cuts in discretionary spending that will total $1 trillion over the next nine years. But as Paul Ryan mentioned this week in his Wall Street Journal Op-ed, the Congressional Budget Office estimates that entitlement spending will grow by 79% over the next ten years while discretionary spending, which are the only areas the sequester cuts affect, will grow by only 17%. In order to attack the real problem of our spending, we need to address the area of spending that is growing the most. In fact, in just twelve years the federal government will only have enough revenue for entitlement and interest spending. For a long term debt ceiling agreement, we need to look more carefully at entitlement spending and enact gradual changes that will make spending more sustainable. While these negotiations open the door for some real reforms for entitlement programs, the danger is that they will not do enough. To pick up more thoughts on the spending issue, you might find my op-ed that was in the Island Packet interesting. To highlight how important it is to do enough, take a look at the chart below. It shows the debt ceiling is impacting the both the debate in Washington as well as the financial markets.
The upward slopping top line is for 1 month Treasury bills, which are typically pretty low, but as the initial downward trajectory of the curve indicates, the have now jumped up above the interest rates for 1 year Treasury notes. This isn’t normal and here’s why: if I borrow $100 from you today and promise to give it back to you tomorrow with a little bit of extra change, there’s not a whole lot of risk on your part that the $100 is going to be worth less the next day. But if I take $100 from you today and promise to give it back to you in a year, there are more risks. I could die, move to a different country and forget to pay you back...or at minimum you could have done any number of things with that $100 that could have made you money besides giving it to me. So you’re going to want more than just a few pennies of interest to take on those risks, so the interest rate charged generally goes up the longer you loan your money.
When 1 month Treasury bills are paying out more than 1 year Treasury notes, it shows that there’s a “blip up” in short term lack of confidence and is called “an inverted yield curve.” People are saying there is more risk now than later...and that’s inversion of the yield curve.
What’s interesting is that some of this “blip up” is arguably coming as a result of the administration’s media tour. This is the same thing they did at the time of the sequester, arguing for all kinds of horrendous consequences for the American public...and even ending for the first time since World War II public school tours at the White House on account of lack of funding. The President and Treasury Secretary have been making the current media rounds with the President even saying “that the markets ought to be concerned.” Really? Don’t the markets determine for themselves what they ought to be concerned about? Does it really take Washington telling them? And when you have two of the biggest recipients of the federal bailouts summoned to the White House to say the same, most folks I’ve talked to are suspicious about this.
So I’d make no mistake, the debt ceiling is a huge deal, but for the very opposite reasons than the President is suggesting. It highlights the larger importance of getting our financial house in order so we can pay the bills. Too many in the Administration and the Senate are focused on effects rather than root causes, and this curve is yet another reminder of the ways in which I think we need to focus on the root cause of getting our financial house in order. If not, this interest rate curve is set to rise for every one of us – in very harmful ways.
The bottom line is that there is a lot of back and forth going on right now in Washington. I’d love to hear your thoughts on the current storms: the impasse over the Continuing Resolution, the Affordable Care Act, and the debt ceiling. I sit here on a Friday afternoon writing this, and anticipate votes over yet another weekend. We’re that much closer to a possible resolution but the question remains whether it will be good or bad for the taxpayer and future generations. I’ll keep you posted as I know more.