Raising Debt Ceiling Overlooks Costs, Undermines Future

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Chris Mayer of The Daily Reckoning explains why raising the debt ceiling fails to fix the underlying credit problem in Washington.  His key points:

  • The precise reason why raising the debt ceiling (a common practice in Washington) was so controversial is because the only way for the government to pay its obligations (debt) is for it to take on more debt.

“[R]aising the debt ceiling is not a magic cure-all for America’s debt problems. Raising the ceiling just gives the U.S. Treasury permission to borrow more money. It does that by issuing Treasury bonds and notes — in effect, they take out loans, promising to repay the bondholder the principle plus interest.

Here’s the thing, though — right now, the only way the government can repay its existing debt obligations is to take on more debt!…It’s sort of like using credit cards to pay your mortgage.” 

  • In August alone, the government will need to raise over $650 billion to avoid a shutdown – $500 billion to pay bond holders for matured U.S. Treasuries and another $159 billion to cover the expected monthly deficit.
  • Over the next four years, the government will need to pay bond holders over $3 trillion from additional matured securities.
  • The essential worry in Washington was that failing to raise the debt ceiling would impede the government’s ability to continue “rolling over” its debt (taking out debt to pay for debt).  The implication for the debt-ceiling issue is not cutting government spending in the future, but figuring out how to pay for programs already committed to such as entitlements.
  • A default would surely have resulted in a credit downgrade for the U.S., causing interest rates on U.S. Treasuries to increase.  This worry still persists among investors, so even in the absence of a credit downgrade, major holders of U.S. debt such as China and Japan may demand higher yields on their investment, which means higher borrowing costs for the U.S.

“[A]s more investors worry about America’s financial health, they will need more incentive to buy its notes and bonds. Convincing them to take on the risk will require a higher interest rate.”

  • Higher borrowing costs for the U.S. government will ripple out into the economy, making borrowing costs for everyone increase, impeding lending, job creation, and any chance at a recovery.

“Higher Treasury rates will create a ripple effect, forcing other interest rates up, too. Suddenly, the cost of borrowing money goes higher for everyone, which will encourage more saving than spending.”

The full article can be found here.

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Defense Cuts Not Part of Elite Neoconservative Agenda

The Pentagon, looking northeast with the Potom...

The Pentagon (Wikipedia)

Google “defense cuts” and what do you get?  A myriad of articles from various sources arguing for or against cuts to the DOD. Some espouse the familiar line that cuts will damage American jobs, while others hold the myth that defense spending is crucial in maintaining our role as global police state.

According to CNN, the FY 2012 budget increases the National Security budget, including an extra $4 billion for the Defense Department and a 1% increase for the State Department.  The Wall Street Journal reported the opposite, namely that defense outlays are targeted at $671 billion, which is less than that requested for FY 2011 and spent in FY 2010 – $708 and $691 billion respectively.  So why the conflicting report from two major news sources?  It’s all in the numbers and how you crunch them.

The Center for American Progress reported that the projected $78 billion cuts first proposed by Defense Secretary Gates are attributable to “management and acquisition reforms,” that will not impact the defense budget until 2016.  In other words, these cuts in defense are simply cuts in spending growth only.  The implication of this is subtle, yet, fundamentally important for understanding Washington politics.  2016 is a long way off for a politician, and America may have a new President and/or Secretary of Defense with new priorities.  In short, if these discretionary cuts in spending growth do not happen, who will the voters have to hold accountable?  Possibly no one.  The reality is cloaked by smoke and mirrors.  According to Benjamin H. Friedman:

Neither Obama nor Secretary Gates has ever proposed cutting actual defense spending. In the unlikely event that the administration’s new five-year spending plan holds up, the non-war portion of Pentagon spending will cost taxpayers $2.918 trillion from fiscal year 2012 to 2016, rather than last year’s proposed $2.994 trillion, a reduction of 2.5 percent. We will still spend more on the non-war Pentagon budget, even adjusting for inflation, than we did in the prior five years, which was the most ever. Some cut.

In fact, the baseline defense budget of $553 billion excludes funding foreign wars.  The wars in Iraq and Afghanistan will add $118 billion.  This, coupled with a 1.6% increase in defense spending resulting from the Republican-proposed continuing resolution for FY 2011 (to begin in March when the current resolution expires) will balloon the defense budget for FY 2012 to well over $700 billion.  This is 20% of the entire federal budget and accounts for over half of all discretionary spending.

So after all this talk of spending cuts, according to Brett Arends every American household will hold not only $125,000 of the national debt, but what is equivalent to a $7000 defense tax.  Not many would call that a fiscally responsible budget that matches the rhetoric coming from Washington since the midterms last year.  The following excerpt from Klein’s article in the Washington Post  raises an interesting question concerning that rhetoric versus the reality behind the curtain.  He states:

The military made out quite nicely in the 2012 budget proposal. The administration is cutting $78 billion from the Defense Department’s budget — known as “security discretionary spending” — over the next 10 years. That’s a bit of a blow, but compare it to the $400 billion they’re cutting from domestic discretionary spending — that’s education, income security, food safety, environmental protection, etc. — over the next 10 years. And keep in mind that the domestic discretionary budget is only half as large as the military’s budget. So if there were equal cuts, the military would be losing $800 billion….

If this is a fiscally responsible budget, then cutting $500 billion — forget $800 billion — from the Defense Department would’ve opened room for much more domestic investment. It also could’ve gone to pay down the debt. As it is, we’re pumping that money into sustaining a fighting force that’s orders of magnitude larger than anything retained by any other country. The theory implicit in that decision suggests that the fight to win the future might be rather different than the Obama administration is letting on.

My emphasis

So what is missing?  The general voice coming from Washington speaks of using fiscal responsibility to “win the future,” yet, pressures to increase defense spending at the cost of domestic programs such as education and research and development won out again.  To understand this, one must first understand the elite neoconservative philosophy that dominates not only our foreign policy, but our domestic spending.  Much of it is leftover propaganda from the post 9-11 Bush-Cheney years and amounts to an America bent on global military hegemony.  Immediately preceding 9-11, the Project for a New American Century issued a report that called for a sustained defense budget of at least 3.5 to 3.8 percent of GDP with an annual increase of $15 to $20 billion. The report states, “The program we advocate [is] one that would provide America with forces to meet the strategic demands of the world’s sole superpower” (p. 75).  It established four primary objectives for U.S. military forces:

1. defend the American homeland;

2. fight and decisively win multiple simultaneous major theater wars;

3. perform the “constabulary” duties associated with shaping the security environment in critical regions;

4. transform U.S. forces to exploit the “revolution in military affairs” (p. iv)

Moreover, it opens with the following: “This report proceeds from the belief that America should seek to preserve and extend its position of global leadership by maintaining the preeminence of U.S. military forces” (p.iv).  The project’s statement of principles is as follows:

•we need to increase defense spending significantly if we are to carry out our global
responsibilities today and modernize our armed forces for the future;

• we need to strengthen our ties to democratic allies and to challenge regimes hostile to our interests and values;

• we need to promote the cause of political and economic freedom abroad;

• we need to accept responsibility for America’s unique role in preserving and extending an international order friendly to our security, our prosperity, and our principles.

This elitist rhetoric is still very much alive in Washington politics today: increases in defense spending, challenging other sovereign regimes, spreading democracy abroad, building an International Order.  Of course, none of this is possible without military spending.  Chairman of the House Armed Services Committee Buck Mckeon stated,  “A defense budget in decline portends an America in decline.” It is worth noting that his top 4 campaign contributors for 2009-2010 were Lockheed Martin, Northrop Grumman, Boeing Co and General Electric, all beneficiaries of the elite neocon agenda.  The result is defense spending reaching a new high of nearly 5% of GDP in 2010.  Defense Secretary Robert Gates concedes that “the military needed to prepare for an era in which defense dollars don’t flow as freely.”  However, he immediately reverts back to the neocon philosophy that makes defense spending sacrosanct.  The debate, he said, was “becoming increasingly distant from strategic and operational reality—distant, in other words, from the real world.”  Whose real world, the elite neoconservative that believes American prosperity rests on government controlled defense contracts instead of domestic stability, or the middle school teacher trying to pay back student loans while juggling a second job?

An interesting lesson you would think Washington had learned by now is the primary factor in the Soviet Union’s downfall. Any Stern makes the point that economic weakness can and has been an Achilles heel.

Russia’s competition to succeed militarily at the expense of its domestic economy is cited as a key factor in its demise. In the end it was not a lack of military prowess, but rather economic weakness, that accelerated the collapse of the Soviet Union.

Now nearly 20 years later that lesson is seemingly ignored in our economic thinking represented in this year’s budget proposals.

 

Everyone who is awake knows that defense spending accounting for over half of all discretionary spending, 54%, is not conducive to any degree of domestic stability short of dependence on government.  Benjamin H. Friedman states the misconstrued dilemma most eloquently: “Strategy is a product of our making, not a landscape we passively confront. National security threats to Americans are quite limited in historical context, and mostly avoidable.  A less activist stance would avoid the peril we now increase by having defense commitments in so many unstable places.”

Amidst Budget Cuts, Defense Department Akin to its Own Economy

Seal of the United States Department of Defense

Image via Wikipedia

Amidst a $17.4 billion cut in labor, health, and education, an undisclosed senior defense official responded to criticism of the Defense Department‘s fiscal accountability by playing a familiar line of reasoning.  He stated, “What’s being suggested is just not practical for an entity of our size and complexity.  We’re not just some company; we’re more akin to our own economy.  This is not an argument about our accounting procedures.  It’s an argument about priorities.”  In 2008, banks were too big to fail so the government bailed them out.  The decision was based from fear and claims on ignorance, namely that the trillions of dollars of toxic assets on the books of numerous banks could not be traced. Consequently, allowing a single troubled bank to go under as the free-market would naturally dictate, might cost millions of jobs and destroy the economy.  This fear mongering among big banks, prominent politicians, the media, and our own Treasury Department led to the US government spending our future earnings on a life raft that was destined to sink.  The Troubled Asset Relief Program (2008) and the American Recovery and Reinvestment Act (2009) cost roughly $1.5 trillion.  Yet the economy produced only 36,000 jobs last month,  the worst growth figure since the end of the third quarter last year,  and unemployment is still at 9% .

The aftermath of such lavish stimulus spending is of course budgetary cuts.  Perhaps the US military industrial complex feels vulnerable.  Since 2001, US military spending has increased nearly 60% in real terms.  Moreover, defense spending accounted for 45% of global arms production in 2007, the highest since the end of World War II. Over the last decade (1999-2008), defense spending has increased as a percentage of GDP from 3% to 4.3%, partly as a result of waging multiple campaigns in Iraq and Afghanistan. And according to the Heritage Foundation, it reached nearly 5% in 2010.  However, other areas of the US economy have not faired nearly as well.  Education is just one example, which has taken a huge hit in federal funding, having its appropriations cut from just over $1 billion in 2006 to $68.5 million two years later.  And with entitlement spending and interest payments on the debt increasing yearly, Congress may have no choice but to cut defense spending.

That said, perhaps the “too big to fail” argument is now entering the public sector as a last-ditch effort to stave off defense cuts.  As the Defense Department is too big to be held accountable, even the consideration of budget cuts should pass them over because they are incapable of producing an expense report.  I find it hard to believe that the defense department is incapable of balancing its checkbook.  Rather, I find it likely that they desire to remain behind the curtain.  Huffington Post’s Amanda Terkel reported on a recent defense audit, whereby the Pentagon paid $285 billion to over 100 contractors engaging in fraudulent behavior with taxpayer money.  An additional $270 billion was paid to 91 contractors involved in civil fraud, and $682 million was paid to some involved in criminal fraud.

Such indiscretion with taxpayer money, coupled with the argument from complexity rationale – “too big to count”- is leading some to question the efficiency of defense spending.   Senator Tom Colburn, R-Okla., commented: “I will continue to push for a budget freeze of all base budget nonmilitary personnel accounts at the Defense Department until it complies with the law regarding auditable financial statements.”

However, the final results could go either way.  While defense cuts are still viewed as a symbolic form of American hegemonic appeasement by many, some see the deficit as a threat to national security.  Chairman of the House Armed Services Committee Buck Mckeon says, “A defense budget in decline portends an America in decline.”  He also stated that he would “oppose any plans that have the potential to damage or jeopardize our national security.” This fiscal philosophy could lead America down a familiar road, one that has characterized our philosophy behind foreign aid since the decolonization of the British Empire sixty years ago – spending money without transparency and accountability toward efficient outcomes is simply throwing good money after bad.

Open-ended statements like Mckeon’s are building concern that modest reductions may not make the cut.  The Washington Bureau’s Carolyn Lockhhead points to a deficit commission headed by former Republican Senator Pete Domenici (NM) and former Clinton budget chief Alice Rivlin.  The commission reported that the deficit is on track to hit $1.5 trillion this year, pushing the debt to nearly 90% of GDP by 2020. Consequently, interest payments will cost $1 trillion, nearly 28% more than the entire Pentagon budget.

The lesson is this.  Mandatory spending programs such as Medicare and Social Security will only rise, and everyone is well aware that we are to the point of no return.  That is, these programs will dramatically increase in costs sooner rather than later.  This is not a time for ideological partisan politics.  It is a time to use sound reasoning and judgment to move America back to the table of solvency.  The Pentagon’s budget accounts for roughly 50% of domestic spending.  This, coupled with a nearly $1 trillion interest payment will effectively squeeze out other important domestic spending programs such as education, law enforcement, energy, and agriculture, all of which contribute to a growing workforce and a more promising future for Americans.  If we refuse to cut spending now while we still have an opportunity to do so prudently, we may be forced to do so in the near future in an atmosphere of panic.

UPDATE:

If you recently tried to find my first quote reading, “What’s being suggested is just not practical for an entity of our size and complexity.  We’re not just some company; we’re more akin to our own economy.  This is not an argument about our accounting procedures.  It’s an argument about priorities,” I apologize for it not being there.  It seems as though POLITICO has moved the original post from its primary page.  I responded to them with the following comment:

I find it discouraging that you will simply omit part of your post, replacing it with a message of appeasement that has little or no value in public discourse.  I recently used a quote from you in my blog post, only to come back to the site the next day to find it missing.  The quote was as follows:

–A senior defense official: “What’s being suggested is just not practical for an entity of our size and complexity.  We’re not just some company; we’re more akin to our own economy.  This is not an argument about our accounting procedures.  It’s an argument about priorities.”

The statement was replaced with the following update:

–UPDATE — Pentagon Press Secretary Geoff Morrell: “We acknowledge that the Department has a legal obligation to achieve fully auditable statements and we are committed to doing so by the congressional deadline of 2017. In fact, we have already established a clear governance process (CMO in the lead with CFO and DCFO overseeing day-to-day management) and are spending more than $200 million per year to achieve our short and long term goals towards fully auditable statements. Secretary Gates has been personally briefed on these efforts and supports the plan.”

Perhaps the statement has been moved.  If so, I would like the link, as I must provide the sources for my writing.  I find it difficult to stomach that a professional organization engages in deliberate omission, so I will give you the benefit of the doubt.  However, replacing such a statement like this that characterizes our government’s lack of transparency and inadequate fiscal policies with a statement that simply places your readers on the bench is quite disheartening.

It is your responsibility to account for what you publish, so please repost the original statement along with the update so that Americans can continue engaging in meaningful and constructive dialogue.

Sincerely,

Jeremiah Dow

So there it is.  If POLITICO’s post is still not fixed, try this link.  It seems as though they kept the original post in the POLITICO Forum.  If you Google the entire quote, you will pick up the link above along with Randy Forbes’ Facebook page.

A Second Update (02/24/11)

The following video from the Cato Institute’s Christopher A. Preble makes the case better than I can.  Notice his emphasis on a common statistic used – defense spending as a percentage of GDP.  Important to realize is that such figures negate inflationary effects.  When accounting for these, U.S. military spending is much higher than the government reports.  Mr. Preble also reiterates my point above concerning cuts being only a decrease in spending growth, not a decrease in dollars spent from the previous year.

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