The Pete Davis Archives
Yesterday, House Speaker John Boehner (R-OH) ended his weekly news conference with:
If the House and Senate can't reach agreement on -- on the CR by March 4th, would you be willing to entertain a short-term CR at current levels?
We're going to do everything that we can to cut spending. We're hopeful that the Senate will take up the House-passed bill that comes out of here today, tonight, tomorrow morning, whenever it is. But we hope that they will move it.
But our goal here is to cut spending. But I am not going to move any kind of short-term CR at current levels. When we -- when we say we're going to cut spending, read my lips. We're going to cut spending.
I'm surprised he used "read my lips," because that's what President George H.W. Bush said to the Republican National Convention two years before cutting a deal to go back on his pledge not to raise taxes.
It's too early to cheer, but I would note these recent small early signs of bipartisanship.
You don't have to be a football fan to get pumped for this collision of political views. I'll be watching. Kickoff time is 6:25 p.m. Sunday, February 6. Hotline broke the story today.
With this evening's 83-15 cloture vote, the Senate signaled it will pass President Obama's Bush tax cut compromise tomorrow afternoon or evening depending upon how much of the 30 hours for debate is used. A top House staffer told me that one amendment on the estate tax will be considered when the House takes it up Wednesday afternoon or evening. No details were offered, but I would guess we're talking about replacing the Lincoln-Kyl $5 million exemption and 35% top rate with the 2009 $3.5 million exemption and 45% top rate. I'd be surprised if the Senate accepted that, so the question is how long will it take Congress to reach a compromise. It's a tough call. Most of my lobbyist friends expect the desire to get out of town will force final passage of the Senate version without the House amendment next weekend. I'm not so sure. Even if this Congress fails to reach a deal, the 112th Congress would pass the Senate version quickly after it convenes on January 5th.
Now that Senate Democrats fell 7 votes short of 60 yesterday on extending the Bush tax cuts only for those with incomes under $250,000 ($200,000 for singles) or under $1 million, the conventional wisdom says they will accept a two-year extension of the Bush tax cuts for everyone if unemployment benefits are extended too. That's supposedly what has tentatively been agreed upon in the bipartisan talks with the White House. I believe such a deal will be announced soon, but I remain skeptical about it chances for passing the Senate and the House. What's to stop a filibuster by Senator Bernie Sanders (ID-VT) or other liberal Democrats? Is there 60 votes for anything? Until next January, it will take 18 Democrats to vote with all 42 Republicans to reach 60. That's a lot of Democrats, many of whom are very much on the record as opposing an extension for those over $250,000. And what about the House, where Democrats have a 255D-178R majority? Are 39 House Democrats going to vote with all 178 Republicans?
Stan and I both know Washington commissions rarely achieve much, so expecting this one to reach an agreement supported by 14 of 18 commissioners seems unrealistic to me. I expect Erskine Bowles and Alan Simpson to admit as much at their 3:30 PM news conference this afternoon.
I'll be on Bloomberg TV tomorrow talking to Peter Cook about the likelihood that 14 votes won't be found Wednesday morning on the President's Fiscal Responsiblity and Reform Commission to support any broad deficit reduction proposal. There's just too much distance between Commission Republicans and Democrats on raising revenue and cutting spending. That doesn't mean the effort will be wasted. Far from it.
We're running deficits not seen since World War II, except the wars we're fighting aren't the main cause -- deep recession, costly stimulus, and runaway health costs are. After running surpluses for four years FY98-FY01, we ran deficits averaging 2.5% of GDP through FY08, 10.0% in FY09, and 8.9% in FY10 just ended. See Table F-2 on p. 127 of the CBO Budget and Economic Outlook. As the economy recovers weakly, the deficit will drop to 5% or 6% of GDP as revenues recover automatically and stimulus spending stops, assuming the Bush tax cuts, AMT relief, and the Doc Fix are extended permanently. That would leave us with a rapidly growing public debt and a weak economy that would be vulnerable to outside shocks, e.g. rising interest rates to finance the public debt and/or inflation, particularly for energy prices, which will rise as the dollar falls. Therefore, it is very important that we lower our deficits to the point where they are sustainable, where they aren't growing as a share of GDP. That would be about 3% of GDP.
Consensus is hard to find in Washington these days. There wasn't that much just before before this month's election, and there is a lot less after it. President Obama is willing to compromise on extending the Bush tax cuts and on cutting spending, but many Democrats won't follow his lead. Similarly, any deals by soon-to-be House Speaker John Boehner are likely to run afoul of newly elected Tea Party Republicans or of a filibuster by their compatriots in the Senate. It's going to be very difficult to find 60 votes in the Senate for anything controversial during the next two years. The middle has gone out of American politics, and the extremes work against compromise.
Failure to govern can be a good thing if the ship of state is on a safe and sustainable course, but it isn't. Here's my short list of unsustainable U.S. policies:
1. Record deficits
2. Uncertain tax policies
3. Runaway health care costs
4. Overextended military operations
5. Poorly defended borders and counterproductive immigration policies
6. Failing K-12 schools
7. Burdensome litigation
No, it's not the ocean liner. It's the Fed's second massive asset purchase, this time $600 billion of longer term Treasury bonds ($75 billion per month over the next eight months), just announced this afternoon. QE2 stands for "quantitative easing 2." QE1 was the Fed's somewhat forced purchase of $1.75 trillion of mortgage-backed securities during the depths of the financial crisis. Dropping interest rates to zero wasn't enough to avert the complete seizure of the lifeblood of the economy, its financial system, so the Fed put a lot of dollars in the hands of those financial institutions holding impaired housing assets. This Fed study found that it worked. Now that the economy is growing too slowly to lower the unemployment rate, and inflation remains low, the Fed decided today that QE2 was necessary to get more growth.
Is there a pot of U.S. multinational money parked overseas? Yes, approximately $2.3 tr. Will the U.S. government temporarily lower U.S. tax rates by 85% again, as it did in 2004, so those firms will bring roughly $565 b. of it home? No, at least not during the next two years, mainly because studies show the 2004 dividend repatriation didn't create many jobs here, and most of it went to buy back shares and to pay dividends. The Senate rejected it in early 2009. President Obama opposes it, and, even if the Republicans take Congress, they won't have enough votes to overcome a Senate filibuster or a veto.
Taxpayers will pay a very stiff price for allowing the government to over-encourage homeownership. Early this afternoon, the Federal Housing Finance Agency released estimates that through 2013, Fannie Mae and Freddie Mac will draw between $221 billion and $363 billion from the Treasury under three different economic scenarios. Since they were taken over on September 7, 2008, Fannie Mae and Freddie Mac have drawn $148 billion. Cleaning up this mess will take well beyond 2013, so these costs could rise higher.
Today, the National Retail Federation released a study by Ernst & Young and Tax Policy Advisers that analyzes a 10.3% narrowly based "add-on" value added tax to reduce the deficit by 2% of GDP. It estimated a $2.5 trillion reduction in retail spending over the next decade and an initial loss of 850,000 of which 700,000 would be lost permanently. That's the kind of scary analysis you want if you want to kill a proposal. I would note that any federal tax increase of 2% of GDP would have similar results, although with less impact on the retail sector.