On Eve of Default, Debt Limit Talks Collapse

Summoned to the White House by the president Saturday, Congressional leaders left after only an hour but began issuing assurances that they would come up with a plan to avoid default. John Boehner expressed confidence that a major plan to cut $3 to $4 trillion from the national debt would be forthcoming. In like manner, Senate Republican leader Mitch McConnell vowed that “Congress is committed to working on new legislation that will prevent default while substantially reducing Washington spending”.

But nothing in these pronouncements made any mention of the reciprocal $1 trillion or so in revenue enhancements that had been part of the Grand Design of Boehner and the president before the house speaker walked out of

A Gallup poll shows that only 20%
think there should only be spending cuts.negotiations at the White House Friday saying, “There was no agreement…never an agreement and frankly not close to an agreement”. Both seemed to want to make history with a bold course correction for the United States.

Instead, with the nation at stake, we got petulance and rancor from both sides. So now there is every indication that the Republican Congressional leaders intend to present to the president an ultimatum: either sign for potentially huge cuts in non-defense discretionary spending, Social Security, Medicaid and Medicare — and forgot about revenue increases — or there will be no rise in the debt limit.

A strict party line vote in the House would move that forward, but the Democratic majority in the Senate would block it. And were it ever to reach his desk, the president would face insurrection within his party were he to relent to such a one-sided proposition.

Which takes us right back to where we have been for months: drifting toward the falls of default.

Strangely, pundits and the media, as if incredulous that this could be happening, continue to be optimistic that a deal can be reached before August 2 when the United States will otherwise tell the world that the check is no longer in the mail. On that date, by law, the government no longer has the authority to borrow the money it needs to meet the very same obligations Congress itself approved in seven spending resolutions.

Through the months-long negotiations, neither side has released details of their proposals and counter-proposals measured in trillions of dollars, but the source of Boehner’s anger was that “the White House moved the goal posts” by calling for last-minute revenue additions. “The only way to get that extra revenue was to raise taxes,” said the House Speaker, and taxes would violate the pledge made by virtually all Republicans to Grover Norquist (see related story).

The President and Boehner have met several times and at one moment hatched a Grand Bargain of up to $3.5 trillion in spending cuts and another trillion in deficit reduction through increased revenue from eliminating what were only vaguely referred to as “loopholes”. Obama finally became somewhat more specific saying he had offered more than $1 trillion of cutbacks in discretionary spending, including defense, and $650 billion of reductions to Social Security, Medicare and Medicaid.

Mr. Boehner said that $800 billion in revenue increases had been agreed to. The president has spoken only of examples such as eliminating rapid write-off of corporate jets (which would increase taxable corporate profits), and doing away with taxing the multi-million paychecks of hedge fund CEO’s at no more than someone earning $16,000 a year. But these anecdotal items clearly do not add up to $800 billion.

But then Mr. Obama pressed for $400 billion more, according to Boehner, presumably resuming his continuing drive to see rates raised from 35% to 39.5% for those with taxable incomes of over $250,000. “It is hard to understand why speaker Boehner would walk away from this kind of deal”, was the president’s verdict. “Can they say ‘yes’ to anything”?

But all of this took place in a parallel universe. Even if Obama and Boehner agreed to their Grand Bargain, given the intransigence of Republicans and their pledges to not raise taxes despite the country having run up $14.3 in debt, and given the obduracy of the Democrats who somehow think that Medicare in particular can go on unperturbed despite looming bankruptcy, they could never get the votes in Congress. The House and Senate are Thelma and Louise, speeding to the cliff edge.

Which leaves the Constitution. Couldn’t the president simply ignore Congress and, to avoid default, invoke Section IV of the 4th Amendment which states in no uncertain terms, that “the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned”?

With Zero Hour at Hand, a Total Impasse in Debt Ceiling Talks

Obama’s and Boehner’s Deficit Reduction Dream Collapses

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For a moment, there was a Grand Design, a proposal hatched by a President and the House Speaker to make history by slashing the national debt by some $4 trillion across 10 years while necessarily raising revenues by a reported $1 trillion.

But when John Boehner took the package back to the House, he was mugged by reality. A toxic mix of Tea Party members who refuse any form of tax increases, even those that close loopholes, as well as members from both parties fearful of the fallout from cutting programs, said they would not go along. The result is no progress in resolving differences, with the nation ever closer to August 2, the date after which it may no longer borrow to pay its debts. Closer even than that, because time is needed to draft and pass a bill before that date.

Yet all were saying that an agreement would be reached to raise the debt limit to avert massive disruption, suggesting there might be a back pocket agreement, a temporary fix to postpone the problem, just the sort of Band-Aid President Obama has all along refused.

Treasury Secretary Timothy Geithner evidently didn’t get that memo. On CBS’s “Face the Nation” July 10th, he showed no confidence in an agreement, speaking instead of the “catastrophic damage” we can expect. He made the consequences vivid when he said that the government issues 80 million checks a month to 55 million Americans.

It was startling a week earlier when word came that Messrs. Obama and Boehner were reaching for a paragraph in history by doubling down from $2 to $4 trillion the amount they sought to cut from government spending. Everything was on the table: Medicare, Social Security, defense. The result would have had an enormous effect in bolstering confidence in the dollar as the international currency as well as the credit worthiness of the United States. Instead, Mr. Boehner appears only to be able to sell something much more timid. The $1 trillion of revenue increases was an impossibility. The rigid, absolutist elements in Congress are still stonewalling even the symbolic revenue items the President had been seeking – the mere $130 billion is hardly a quid pro quo for the $2 trillion in cuts Republicans want.

Which leaves the question of whether Obama will again cave in. He might not stand his ground because now he has gained a strategic win from the standpoint of pure politics. By giving the Republicans what columnist Paul Krugman calls “an anti-Corleone…an offer they can’t accept”, Obama can point to the huge deficit cuts he was willing to make, defusing the charges of his own deficit budgets. He can now paint the Republicans as the party of profligate spending when he hits the campaign trail for re-election in 2012.

Offering Entitlement Cuts, Obama Caves to Republicans

<|200||Hoping to grab history’s brass ring?>

By offering cuts in Social Security and Medicare, two things are apparent: the Republicans are dictating all the terms of the debt limit deal and Mr. Obama has put his presidency on the line.

There is no question that Medicare needs reform; the date when its funds will be exhausted is now set at 2024, five years sooner than earlier projected. That Obama is willing to confront the problem is a major turning point and praiseworthy to that extent. But just what is to be cut? And why Social Security now? The money owed to it by the government is not forecast to run out until 2037.

The tax concessions he has sought are mere crumbs — $130 billion versus the $2 trillion in budget cuts the Republicans have been demanding and which now, according to the Washington Post, could amount to $4 trillion across 10 years.

It is as if Mr. Obama has decided he cannot win, so maybe by doubling down he might win history’s kudos as a bold leader.

There’s the question of what will he get in return? Will Republicans yield on raising the tax rate on those earning over $250,000 a year? If Obama accedes to Medicare and Social Security cuts but does not slash $100 billion or so annually from the defense budget, if subsidies to oil and gas companies remain in place, and if those hedge fund managers are not made to pay standard taxes on their gargantuan take home pay, more symbol than substance but a source of voter outrage, Democrats will stay home next November rather than vote for him.

Just what will happen when the deal is proposed to Congress suggests a total impasse leading to default beginning August 2nd. We will see Democratic leader Nancy Pelosi standing athwart the House yelling “Stop!”, she having said in early June, “I could never support any arrangement that reduce benefits for Medicare” and calling the idea a “non-starter”. Democrats don’t hold the majority there, but fearful of facing enraged seniors back home, a good many Republicans may go along with that.

Another Tax Holiday for Corporations Is Gaining Traction

Capitalizing on the government’s need for money and 9% unemployment, U.S. corporations and their lobbyists are pressuring Congress for another deep discount deal to induce them to bring home the estimated $1 trillion in profits waiting offshore. The money is stranded there by this country’s 35% corporate tax rate, the highest of any country of size other than Japan.

Instead, how about 5.25%? That’s the breathtaking discount the corporations propose.

Cisco’s CEO John Chambers, in an op-ed piece in the Wall Street Journal last October, thought that the money could create 2 million jobs, but the opening position of a group of companies arguing for the tax holiday is that there can be no conditions restricting how the money is used.

Which brings us to the American Jobs Creation Act, signed by George W. Bush in October 2004, and which declared just such a tax holiday that the multinationals now want repeated. How did that play out?

That bill forbade the money be used for executive compensation, or dividends or stock buybacks. Corporations paid that no attention, did exactly that and, money being fungible, simply claimed that different money stashes had been used.

As for jobs, the purpose of the bill in 2004’s anemic job market:

Merck repatriated $15.9 billion in October 2005 and in the following month announced a plan to close plants and reduce its workforce by 7,000 jobs.

Pfizer eliminated 7,000 jobs in 2006 and announced another 10,000 in the following year.

Dell dangled a promise to build a $100 million plant in North Carolina, but later admitted it intended to build the facility anyway and spent $2 billion in a share buyback.

Instead of job creation, a study by the nonpartisan Bureau of Economic Research found that, of the $312 billion that flowed back to the U.S. under the Bush amnesty, 92% of the repatriated money went to shareholders (top management of companies are usually major shareholders) in the form of dividends or purchases of the companies’ own stock. By spreading the value of a company on fewer shares, a stock buyback increases the value of each share still outstanding. The program “did not increase domestic investment, employment or research and development.”

There are many arguments against declaring yet another tax holiday, beginning with rewarding corporations for moving millions of American jobs overseas which, to an extent, generated those profits. The claim that it would create jobs is even more dishonest that in 2004. Corporations are sitting on a $2 trillion cash hoard in the U.S. according to the Federal Reserve. They do not need overseas cash to create jobs. The principal driver of expanded demand for goods and services is what is lacking.

A bigger negative is that the 2004 program induced corporations to use accounting legerdemain to move still more profits overseas, thus reducing taxes here at home, in the hope that they would persuade Congress to declare a tax holiday once again, just as they are lobbying for now.

The real issue is the need for reform of corporate taxes. Few large corporations actually pay the 35% rate, but the high rate drives corporations to countries that offer much lower rates or no taxes at all, and to create enormous tax departments (975 on staff at General Electric per this New York Times exposé in March) to seek convoluted ways to circumvent the tax code.

Will this encore repatriation go forward? Corporations easily persuade Congress to do their bidding, but where does President Obama stand? He has spoken repeatedly of corporate tax reform – in all three State of the Union addresses! – yet he has done nothing.

(The message has changed from “ending the tax breaks for corporations that ship our jobs overseas” in 2009 to “simplify the system, get rid of the loopholes, level the playing field, and use the savings to lower the corporate tax rate for the first time in 25 years without adding to our deficit” in 2011).

The danger is that, having done nothing, having taken no initiative, Obama will cave in to another dreadful Congressional program that comes to his desk. He should block any amnesty plan for overseas profits that is not linked to overall corporate tax reform — reform that should consider wholly different ways to tax, a subject to be taken up separately here.

This time, the terms of any overseas profit repatriation that is appended to reform should set a higher rate than the ludicrous 5.25% and ban corporations from either increasing their dividend or buying back any stock for a period of a few years. The statutory penalty for violation? Forfeiture of the special rate and payment of the full 35%.