Thursday, July 28, 2011

Debt Limit as Incentive: A Modest Proposal

News stories on the debt limit controversy agree that Boehner's plan, which increases the limit by $900 billion, will require further action before the 2012 election, but that Reid's plan, which increases the limit by $2.4 trillion, will not. Obama would obviously like to push the debt limit issue to some date, any date, after the election. To an economist, that suggests a simple tactic to reduce government expenditure. 

Raise the limit by an amount that will require further action before the election unless Obama manages to substantially reduce federal expenditure, but which can be pushed past the election if he does. It will then be in Obama's self-interest to find ways of cutting federal spending, which is a better guarantee than any legislative promises that Congress can pass today and break tomorrow.

Of course, it is also an incentive to find ways of increasing tax revenue—but until the election, the Republican House is in a position to deal with that problem.

P.S. I note that Reid has gotten at least one thing right. I've been arguing for some time that one way of reducing the debt problem is by selling off government assets, the policy that Greece has been urged to follow. Reid apparently agrees, although his specific proposal is on too small a scale to help much with the current situation.

13 Comments:

At 6:14 AM, July 28, 2011, Blogger dWj said...

Incidentally, if we're to believe that the public mostly "blames the Republicans" for the lack of a current deal, I would think having this debate again before the 2012 election would help Obama and hurt the Republicans. Perhaps the parties involved don't believe that, or think that simply having the issue on the table hurts Obama more than embarrassing Republicans in general would help him.

 
At 6:22 AM, July 28, 2011, Anonymous Anonymous said...

My guess is that if a Republican is elected President in 2012 (which seems likely), Congress will make a 180 degree turn and go for stimulus rather than austerity. Reason being, Congress and the President will be able to agree on the form the stimulus should take (tax cuts), plus the party will benefit politically from lower unemployment going into the 2014 election.

 
At 10:28 AM, July 28, 2011, Anonymous Anonymous said...

Jack M. Balkin in a recent article on CNN proposed an additional solution to selling assets in the event of default. That being the government create two $1 trillion coins. Thoughts comments concerns? It doesn't sounds like a good idea to me.

 
At 1:50 PM, July 28, 2011, Blogger Milhouse said...

Raise the limit by an amount that will require further action before the election unless Obama manages to substantially reduce federal expenditure, but which can be pushed past the election if he does. The Boehner bill does that, whether it says so or not. After all, if 0bama manages to cut spending by enough, he won't hit the new ceiling next year, and thus won't need it lifted again.

 
At 4:50 PM, July 28, 2011, Anonymous Anonymous said...

Greece is being urged to do a lot of things which aren't to the benefit of Greeks. If Greece left the euro zone and repudiated its euro debt, then it would once again be sovereign and (at least in principle) able to act for the general benefit of the populace rather than narrow interests of creditors.

 
At 5:11 PM, July 28, 2011, Anonymous Anonymous said...

Damn clever idea.

 
At 7:16 PM, July 28, 2011, OpenID hudebnik said...

If individual lawmakers think it's more in their political interest to repeat the current alpha-male posturing game shortly before the election than to actually cut spending or deficits, we could then be in the ironic position of the President trying to cut deficits more quickly, and Republicans in Congress refusing in order to force another dramatic showdown.

I agree with Anonymous that once the Republicans are in power, they will abruptly lose interest in deficit-cutting -- which is no fun for incumbents -- and concentrate instead on tax cuts, with a few targeted spending increases. It remains to be seen how many of today's deficit hawks will stick to their principles and split with the Republicans at that point.

 
At 12:50 AM, July 29, 2011, Blogger Ricardo Cruz said...

Anonymous writes: "If Greece left the euro zone and repudiated its euro debt, then it would once again be sovereign"

I was under the impression that in Greece the amount of budget going into interest payments is lower than the amount of budget being financed by deficit borrowing. The harsh measures their creditors (the IMF) are asking from them to keep lending them money is a joke if you compare with the measures they'd have to come up with, on their own, to close the deficit.

 
At 10:29 AM, July 29, 2011, Anonymous Anonymous said...

"The harsh measures their creditors (the IMF) are asking from them to keep lending them money is a joke if you compare with the measures they'd have to come up with, on their own, to close the deficit."

If they re-introduced their own currency, then they would not need euros. Real wages would fall, but the government would not face any financing constraint.

 
At 10:37 AM, July 29, 2011, Blogger Ricardo Cruz said...

Anonymous: fair enough, that's a good point. I have no idea how tolerable the inflation would be, but given their unemployment rate (16%) some inflation for a few years, while they take the time to reduce spending and increase taxes, would probably do them good.

 
At 11:45 AM, July 29, 2011, Blogger $9,000,000,000 Write Off said...

To an economist,

Can you imagine a lawyer saying, "To an attorney, evidence is important to proving a theory"? Or a truck driver saying, "As a professional driver, its important to signal before making a left turn"?

One irritating tic of economists is to assume unmerited originality. Academic economics often appears to simply translate old notions and common sense into mathematical models (e.g., public choice); interesting to its participants for sure, but of uncertain marginal utility to English speakers. (I'm generalizing on the public expressions by economists that I've run into.)

In Anathema, one of the schools of Avouts was dedicated to disproving all modern claims of originality. That's a cool idea.

 
At 3:46 AM, July 30, 2011, Anonymous Debt Sucks said...

Who would believe that the party of massive deficit creation in this debate?

http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms

 
At 9:32 AM, July 31, 2011, Blogger Milhouse said...

Who would believe that the party of massive deficit creation in this debate?

http://en.wikipedia.org/wiki/National_debt_by_U.S._presidential_terms


A dishonest way of classifying things, since the budget is created and entirely controlled by Congress, not by the president. Also, it's dishonest to use projected deficits rather than actual ones; when writing about last weeks' weather, do you rely on the forecasts from the day before each day, or on the reports from the day after?

The last budget passed by Congress during Clinton's administration may have projected a surplus, but the actual balance sheet for that year shows a deficit. It's also dishonest to attribute FY2009's budget to Bush, since it includes massive spending increases proposed by Obama and passed by a D Congress.

 

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