Debt

Rivlin-Domenici calls for $1.1 trillion in defense cuts over the next nine years, through a five-year nominal freeze and growth with the economy.  For a summary  visit The Will and The Wallet at the Stimson Center.  For a blog entry go to DOD Buzz.  More to come.   the debate is heating up!

The results yesterday bring a big change, but not the change observers think when it comes to the defense budget. 

For the defense committees, ideology will rear a powerful head, and the rhetorical and political battles over DADT, Afghanistan, the New START treaty,  missile defense, China, Iran, and the Middle East will all provide powerful headlines and verbal fisticuffs. 

But when it comes to budgets, the departure of Ike Skelton and the arrival of the Republicans at the helm of authorizing and appropriating committees simply mean "business as usual." 

The new leadership in defense supports high defense budgets; the old one did, too.  They will lobby for earmarks for their pet rocks and their districts; the old ones did, too.  Tea Party preferences on earmarks won't be likely to stop the old guard.

But there is a difference.  It is outside the defense world and the defense committees, but very rooted in the policy preferences of the new conservatives.  They want smaller government, and they want it now.  They want lower taxes, and they want them now.  They want a balanced budget, now. 

At 2:15 PM yesterday, the Federal Open Market Committee made a big symbolic move, announcing it would buy Treasury debt in the 2-year to 10-year range to keep its $2 trillion of securities holdings constant. Otherwise, the portfolio of agency and mortgage-backed debt would have run off at $10 billion to $20 billion a month as homeowners prepay mortgages. Although that would have been a miniscule tightening of monetary policy, the Fed acted to support economic recovery. It is also the first step toward future inflation. The Fed is already bumping into its self-imposed limit on purchasing no more than 35% of any Treasury issue. With no signs of major deficit reduction from Congress yet, the Fed may have to buy a lot more Treasury debt in 2011 and beyond.

That was the title of today's luncheon talk to the National Economists Club by Urban Institute Fellow and former Deputy Assistant Treasury Secretary Gene Steuerle.  A video and slides will be posted here.  These are the main points he made.

This morning, House Democratic leaders released summaries of the $275 b. of tax cuts and $550 b. of spending they plan to pass by the end of this month.  Committee markups are planned for just after Inauguration Day, and House passage is expected the following week.  House Republican Leader John Boehner (R-OH) issued a statement describing the Democratic plan as "disappointing" because it creates over half a trillion dollars of "questionable" spending and lacks enough tax cuts.

Another stimulus bill is necessary, but much depends upon how stimulative it really is.  A year ago, Congress and President Bush quickly enacted a $168 b. income tax rebate which does not seem to have done much to stimulate the economy.  The bulk of it paid down debt or was saved.  Now we're trying again with everything but the kitchen sink thrown in.