No Runny Eggs

There’s been a lot of numbers and rhetoric tossed about on what the debt deal (shortened to The Deal, not because I like it, but because it makes the phrase stand out) does and doesn’t do. However, I don’t believe anybody has done an exploration of the absolute effect is. It’s high time to do so.

Baselines matter

First, the base from which the reductions are to be needs to be established. While that base has been established to be a “modified” version of the March 2011 Congressional Budget Office extended-baseline scenario, a quick review of which is part of the CBO’s review of the President’s FY2012 budget proposal.

The extended-baseline scenario assumes the CBO’s estimates, based on current law and not necessarily current policy, of direct spending (which, among other things, ends the Medicare “doc fix”) and revenues (which, among other things, assumes that all of the Bush tax rates expire at the end of 2012 and the Alternate Minimum Tax is no longer “indexed” to keep middle- and lower-income Americans from being caught in that trap), and that every top-line category of discretionary spending that does not explicitly end in FY2010 is increased at the rate of inflation.

The bottom line on that is that, on $39.03 trillion in revenue and $45.77 trillion in outlays, there would be $6.74 trillion in deficit spending. However, there are a couple of “wrinkles” that were added to that in the baseline used.

Normally, that would include spending on what used to be known as (and is still called by the Republicans on the House Budget Committee) the Global War on Terror. However, every entity, from the White House to the House of Representatives to the Senate Democrat leadership, agrees that, instead of spending $1,589 billion over the next 10 years as the extended-baseline scenario calls for, $545 billion will be spent. While the CBO excluded the entirety of that at the request of Congress as it is not part of this bill, I will add the $545 billion back in, using the House budget spending by year, as there is no difference year-to-year between the President’s and the House of Representatives’ budgets.

Also, the CBO, at the request of Congress, has figured in the effects of the final FY2011 continuing resolution. That is another $122 billion reduction in spending.

Taking the full effect of those modifications into consideration, the federal government would take in $39.03 trillion in revenue, spend $44.60 trillion, and run a 10-year deficit of $5.57 trillion.

There are a couple of other “baselines” that one could choose. The President’s budget, according to the CBO, would take in $36.70 trillion in revenue, spend $46.17 trillion, and run a 10-year deficit of $9.47 trillion. That budget already includes all of the modifications above.

An “Alternate Fiscal Scenario” from the CBO, which assumes various spending and revenue options, including those outlined above, are affirmatively extended rather than allowed to expire or otherwise not happen and last outlined in percentage-of-GDP form in June, would also need to be adjusted by the above adjustments. Once that is done, it would presume $35.05 trillion in revenues, $46.81 trillion in spending, and $11.76 trillion in deficits.

Meanwhile, the House budget, which keeps all of the Bush tax rates, indexes the AMT, and does some further tax cuts, envisions $34.87 trillion of revenues, $39.96 trilion of spending, and $5.09 trillion of deficit spending. Like the President’s budget, it already includes all the modifications above.

The first 2 years – $63 billion in scorable deficit reduction versus the “adjusted” CBO baseline

Like the CBO, I cannot and will not attempt to score the effects of a potential $1.2 trillion in “trigger” cuts, $1.5 trillion in “commission” cuts, or adoption of a Balanced Budget Amendment. However, I have actually read the bill, and the discretionary spending caps are, unlike the $1.2 trillion-$1.5 trillion in “additional cuts”, actual hard numbers, not nebulous percentages or “reduction” numbers”. Therefore, actual bottom-line spending comparisons can be made against any base. As the CBO used an adjusted version of their March 2011 baseline, I added the (all-but-)agreed-to spending levels on the GWOT to do so.

Using the adjusted CBO baseline, there would be, between FY2012 and FY2013, $5.65 trillion in revenue, $7.34 trillion in spending, and $1.69 trillion in deficit spending. Adopting The Deal l would knock the spending down to $7.28 trillion and deficits down to $1.63 trillion.

By way of comparison, the President’s budget would have $5.44 trillion in revenue, $7.51 trillion in spending, and $2.07 trillion in deficits. That’s an additional $233 billion in spending and $438 billion in deficits versus The Deal.

The House budget would have $5.39 trillion in revenue, $7.09 trillion in spending, and $1.69 trilllion in deficits. While spending in the House budget would be $190 billion less than The Deal and $253 billion less than the adjusted CBO baseline, the deficit would be slightly higher than The Deal and insignifiantly less than the adjusted baseline as, instead of the Bush tax rates expiring at the end of 2012 (1/4th the way through 2013) and the AMT “indexing” not happening, both would continue as they have the past 8 years.

The “out” years – $855 billion in “scorable” deficit reduction – if The Deal holds

I will preface this that there is a significant amount of debt service savings from the reductions in spending on the GWOT that were scored in the two budgets that were not scored separately in even the CBO analysis of the Senate proposals. Judging by the CBO scoring of the Senate proposal versus the House proposals and The Deal, that is roughly $220 billion in reduced spending over the 10 years not reflected in either the adjusted CBO baseline or The Deal.

Also, the bulk of the $1.2 trillion-$1.5 trillion in additional deficit reduction, or any adoption of a Balanced Budget Amendment, will happen in this time frame. As noted above, that cannot be properly scored as yet.

With that said, the adjusted CBO baseline anticipates $33.39 trillion in revenues, $37.26 trillion in spending, and $3.87 trillion in deficits between FY2014 and FY2021. The Deal changes the spending to $36.41 trillion and the 8-year deficit to $3.02 trillion.

The President’s budget is a veritable blowout of spending, especially deficit spending. On $31.26 trillion of revenue, there would be $38.67 trillion of spending and $7.40 trillion of deficits.

While the House budget would continue to spend less at $29.48 trillion, its reduced expectation of revenue of $32.87 trillion would result in $3.39 trillion in deficits.

What about tax hikes?

While The Deal does not explicitly address taxes, I’ve got bad news for everybody (or at least everybody who thinks a non-WWII record level of revenues as a percentage of GDP in 2021 is a bad idea) on that front. Any attempt to either extend any part of the Bush tax rates beyond 2012 or keep “indexing” the AMT will be scored as a deficit increase. The back-of-the-envelope numbers on the various proposals are that the “scored” increase would be about $2.5 trillion for the Obama “hold those under $200K/$250K harmless” plan, $3.5 trillion for full extension of the Bush tax rates, and $4.2 trillion to continue the entirety of the current tax structure.

What about S&P and Moody’s?

Again, baselines matter. Unfortunately, neither S&P nor Moody’s appear to have mentioned from which baseline they wanted the “$4 trillion in deficit reduction”. It has been said that Cut, Cap and Balance, even before adoption of the Balanced Budget Amendment, would have met that. However, I have not seen any CBO score on that.

Moreover, up until the Congressional leadership decided to start talking to each other instead of with President Obama, it was widely assumed the $4 trillion that was being talked about was against the President’s budget and its $9.47 trillion 10-year deficit spending. The House budget, and the Cut, Cap and Balance bill that, after higher spending in FY2012 compared to that, used percentage-of-GDP spending levels based on that budget, would easily have cleared that hurdle.

Going against the President’s budget, The Deal, with $4.65 trillion in 10-year deficit spending, also would very easily clear that hurdle, even before the “trigger”/commission/BBA. Moody’s has already said they would maintain a negative outlook on the US soverign debt, while S&P is making noises that they will downgrade the debt. I have to wonder what more those credit rating agencies want.

Revisions/extensions (4:27 pm 8/1/2011) – I really need to proofread these opii. I corrected a typo.

I decided to revisit my conceptions on the inevitable DOOM! scheduled to arrive next Wednesday, and I’ve got bones to pick with, and promptly bat about the heads of, everybody. This is a bit longer than a typical Captain Tenneal monologue at the start of “MXC”, so if your ox hasn’t been gored, keep reading and it will be.

First things first, I’m still of the opinion that House Speaker John Boehner royally misplayed things. He really should have walked away once “Cut”, Cap and Balance (there’s a reason why one of those words is in scare quotes; more in a bit) got tabled in the Senate. However, had he felt the need to put a Plan B out there before either Senate Democrat Leader Harry Reid or President Barack Obama put a Plan A up in legislative form, here’s what he should have said (in more-diplomatic terms, of course):

You don’t want a Balanced Budget Amendment? Fine; we plan on getting enough conservatives here and across the Routunda to send it out to the states in 2013. You don’t want to deal with this again until 2013? Here’s how that’s going to happen. You pass our budget and the appropriations based on it, and we’ll pass a $2.0 trillion debt increase to get this into 2013. If you don’t like that, lots of luck, gentlemen. By the way, that means instead of spending $29 billion more than the CBO baseline adjusted for the effects of the current continuing resolution and beginning the wind-down of the Global War on Terror, we’ll be spending $98 billion less.

I suppose it’s time to do the lengthy side note on why HR 2560 is “Cut”, Cap and Balance, with “Cut” in scare quotes. Nobody actually asked the CBO to score CCB, so that devolves to me. We start with the $1,225 billion limit on outlays for discretionary spending other than that on the Global War on Terror. The outlays on the GWOT, based on the $127 billion in budget authority for the same in both the President’s budget and the House budget, would be $118 billion. The “uncapped” portion of direct spending (what is often misleadingly-labelled “mandatory spending”), which consist of the majority of Social Security, Medicare, veterans benefits, and net interest, would come to $1,632 billion. The “capped” portion of direct spending is $681 billion. Add all that up, and it comes to $3,656 billion in total spending. Unfortunately, once the effects of the final FY2011 continuing resolution and the agreed-to-by-everybody GWOT spending are put into the March 2011 CBO baseline (or a net -$12 billion), the CBO baseline comes to $3,627 billion. That’s neither exactly Hertz nor exactly a cut.

On the other hand, the Cap part adopts as the spending ceiling the percentage of GDP the House budget would spend that year beginning with FY2013, that would a significant and immediate reduction of debt compared to the adjusted CBO baseline. In fact, the “short-term” FY2012-FY2013 deficit reduction would be somewhere north of $125 billion versus Boehner 1.0.2’s $63 billion, and be almost indisguishable to the House budget total 10-year deficit of $5.1 trillion, or a solid $1.5 trillion less than the $6.6 trillion in deficit spending indicated by said adjusted CBO baseline.

You may have noticed that is nowhere near the “$4 trillion in deficit reduction” the credit rating agencies want from an unspecified baseline, or even $2.5 trillion-$2.8 trillion in deficit reduction that a 1-to-1 ratio of debt-ceiling hikes to spending cuts call for. If you think that it’s possible to get the 10-year deficit from $6.6 trillion to $2.6 trillion, I wish you the best of luck, and then point you over to Wisconsin, Greece, France, and Portugal, where a whole lot of the populace (and in the case of the foreign countries, a majority of said populace) has been in a non-stop temper tantrum over far less cutting measures of austerity. It is, however, well over $4 trillion less in deficit spending than Obama’s budget, which envisions $9.5 trillion in deficit spending.

Back to the here-and-now beatings. I will, for the point of this post, ignore the fact that Boehner and McConnell were all-too-willing to return to permanent minority status before Obama decided he wanted it all, and go to Boehner 1.0.x. The first version was an unqualified disaster; even Reid’s all-defense-cuts plan, which won’t even be voted on until Boehner 1.0.3 receives the same cement burial that the House budget and CCB received, managed to create more scoreable cuts, and the scored cuts were less than the first phase in debt-ceiling increase. The second version was a minimum effort to beat Reid on the spending score, and it barely did both that and hit the 1-to-1 hikes-to-cuts ratio (against the toughest scorecard the CBO has in its files, no less) at the cost of the caucus and any semblance of bipartisanship, which “C”CB had. Of course, since it doesn’t automatically absolve Obama and Reid of having to deal with the debt ceiling again next year, it’s been declared dead-on-arrival, with Reid promising a tabling in 30 minutes (or the next one’s free). It also represented, even though it wasn’t voted on, the “ceiling” the House Republicans can possibly get.

At that point, Boehner had a choice of either bringing back the “Cap” or bringing back the “Balance”. He chose poorly from the negotiating standpoint – the BBA is a singular take-it-or-leave-it item, while the additional $1.4 trillion in identifiable deficit reduction in “Cap” is far more negotiable. At least Boehner managed to raise the ceiling a little bit, and probably more important, get the caucus back together.

One more thing – if we had a rational actor in charge of deciding which bills get paid once 8/3 rolls around without additional borrowing authority, I would be marginally less worried about the expansion of the default situation. That’s right; once Treasury Secretary Timothy Geithner had to start juggling accounts around and stop fully-funding the federal employees retirement system, we were in a default situation. The saving grace is that since there is enough cash available to pay all the actual bills, there was no real pain felt.

That will change soon, and can change at the drop of the hat (or in this case, the utterance of an order). Once that shell game is insufficient to keep the cash flowing, there is going to no longer be enough money to pay all the actual bills. While technically Geithner could likely keep up the shell game for a week or so beyond August 2, for political reasons, that is the drop-dead date.

The bad news is this is not a lack-of-appropriation shutdown, so beyond the Constitutionally-mandated servicing of the public debt, the entirety of the payments on federal obligations is up to the sole discretion of the executive branch. Yes, this includes the servicing of intragovernmental debt, which, if not fully-serviced, would be a technical default.

The ugly news is that the decision of whether or not to escalate the default situation is no longer in the hands of anybody in Congress. Once the calendar flipped over to 7/22, Obama gained the ability to bury any bill sent to him by Congress until after the 8/2 DOOM! date. The fact that he walked away from a deal that he and all four leaders of Congress had that would have given him almost every economic, and every political, element he could possibly want on that date tells me just about everything I didn’t want to know about how next week will play out.

As Monty over at Ace of Spades HQ is fond of saying, we’re boned.

Warning; there will be f-bombs. I am that fucking pissed off.

If you missed The Morning Jolt from Jim Geraghty this morning, you missed your humbled correspondent being featured in the Addendum. I guess it’s time to expand on the tweet that put the closing charge in things:

(W)ait until 8/3 to introduce the Boehner plan – NOTHING will get signed by Obama before then. NOTHING!

It should have become crystal-clear when the White House-led debt ceiling talks broke off abruptly last Friday, after President Obama altered the terms of a deal that would have both cemented his re-election and permanently buried the GOP as the minority “half” of the bipartisan Party-In-Government, that he wants a default and what Monty over at Ace of Spades HQ succinctly calls DOOM!. It did become crystal-clear when Obama kept on blaming everybody but himself for the collapse while offering, to date, no plan. We could argue the “why”, but that would be a tinfoil-hat-swapping party (hint; the one-word explanation starts and ends with a “S”).

At that point, the Republicans had a rather strong opening position called Cut, Cap and Balance, one that already was voted out of the House. I’ll state right here and now that, even though I like it, it had no chance of actually becoming law. However, it, along with the equally-stalled House budget (which, while it did not address the debt ceiling and indeed would need about a $2.0 trillion increase in the debt ceiling to make it work through early 2013, addressed the larger issue of size and cost of government), stood as the only things that actually had any demonstrable support.

The first two fuck-ups actually predated the collapsed White House talks, one by a large margin. The continuing resolution to fund government through September 30 did absolutely, positively nothing to alter either the timing of the debt-ceiling crisis or the amount perceived to be necessary to get the next credit-card application date into early 2013. In fact, those of us who bitched about it not exactly cutting spending were told to shut up and wait for the debt ceiling battle. As I noted above, the House budget did change the latter slightly, but then again, that is as stalled and dead as Cut, Cap and Balance.

Senate Repulican “Leader” Mitch McConnell leaked the first Plan “B” (for Blame) – let Obama raise the debt ceiling on his own unless 2/3rds of Congress objects. It would have been, had it truly been a Plan “B” rather than Plan “Good, Solid B+”, an elegant trap for Obama. However, it was released weeks before the DOOM! date.

The third fuck-up was offering up $800 billion in tax hikes in those ultimately failed talks, presumably versus what the CBO calls the alternative fiscal scenario, which continues all current tax rates through 2021 rather than current tax law. News flash – by 2018, the taxes under that scenario already would be more than the 50-year (1951-2000) average of 18.06% of GDP, and then it would permanently be stuck at the even-higher 18.4% of GDP it reaches by 2021. That tax-pledge break would, had only Obama been savvy enough to accept it, have been strike three on fiscal matters for the GOP in the last 21 years, and functionally the same as the broken “No New Taxes” pledge from former President George H.W. Bush that was strike one.

The fourth fuck-up was McConnell and House Speaker John Boehner getting a “broad” agreement with Senate Democrat Leader Harry Reid that had only a nebulous $2.8 trillion “deficit reduction” number and no tax increases with with absolutely, positively no common baseline. Reid, who unlike either McConnell or Boehner, is at least someone who has a half-assed fucking clue on how to lead, played the Stupid Party “leaders” like a pair of bongo drums by claiming the $1 trillion in “savings” from reductions in expenditures in the Global War on Terror everybody else already agreed to as, ultimately, the major part of his “deficit reduction”.

The fifth fuck-up was Boehner going first on the basis of that agreement. Actually, I’ll call it two fuck-ups to make it an even half-dozen; going first, and going before Obama forces a default. Going first allowed Reid to put in just enough non-GWOT “deficit reduction” to beat Boehner in that category, at least with version 1.0.0. Boehner did put in a minimal amount of effort to beat Reid with version 1.0.1 (note to self; update the previous post with that minimal effort).

As I stated above, there is NOTHING, and I mean NOTHING, Obama will sign before he forces a default and DOOM!. It actually has been too late to avoid DOOM! since July 21st as Obama can sit on a bill for 10 days (plus Sundays) before he has to do something with it. Proof of that is that Reid, who has served his role as Obama’s roadblock well, declared Boehner’s version 1.0.0 plan dead-on-arrival.

All Boehner has done is make the “ceiling” the GOP can reach the Ohio Two-Step instead of Cut, Cap and Balance. By releasing it before anything the Democrats put forward either get to a vote or get to a head, he lost any chance of getting even that modest concession.