An Imminent Spending Blitz (?) and the Debt Ceiling
About Two and a half months ago, Mike Norman pointed out that when Federal spending and tax collections in fiscal 2012 were compared with those for the same calendar date in 2011, data from the Daily Treasury Statements (DTS) showed that 2012 Federal spending was lagging behind 2011 spending by $433 Billion; while 2012 tax revenue was running ahead of 2011 by $45 Billion. So, the Federal stimulus for the macroeconomy in 2012 was $478 Billion less than it was in fiscal 2011 at a comparable time in the fiscal year, or looking at it another way, we can say that the 2012 fiscal drag produced by the Government was $478 B more in 2012 than at a comparable time in 2011. Given these numbers, and the continued reluctance of banks to lend for business expansion, the slow down in the economy and continued high unemployment are exactly what one would expect.
In a sense, austerity, has already come to America, courtesy of the Obama Administration, because the $109 B per month in deficit spending it has averaged so far this year is too small to do more than support slow growth, even though it corresponds to an annual deficit of almost $1.3 Trillion.
is a Spending Blitz Coming?
I checked the DTS again on June 21st, because I was curious about where the fiscal drag was relative to last year and also to see where the debt ceiling vs the debt subject to the limit was. I found that the closing balances on June 20th showed that Federal spending had caught up a bit with 2011 and was now behind by $412 B. However, tax revenues compared with 2011 had increased by $66 Billion. So, at almost 9 months into fiscal 2012, the total fiscal drag compared to 2011 was still at $478 B, almost as if someone was managing spending against revenues so that deficit spending would not increase in the 3rd quarter.
So this raises the question: what will happen in the 4th quarter of FY 2012 and the first quarter of FY 2013? Will the Administration suddenly ramp up Federal deficit spending, so that there is a massive deficit spending shock delivered to the economy over the next four months?
Let's go to the DTS again for June 20, 2012:
-- Statutory Debt Limit: 16,394,000 in millions
-- Total Public Debt Subject to the Limit: 15,737,388 in millions
The difference or space between current debt subject to the limit and the debt ceiling is: $657 Billion with a little more than 4 months left until the election. In addition, there was another $140 B in operating cash in the Treasury general Account as of June 20th. Adding the two together, we see that the President has almost $800 B in head room before he reaches the debt ceiling, and amount comparable to the size of the Recovery Act of 2009.
So, the President can increase deficit spending to $170 B per month, provided Congress has already appropriated the money, an increase of $65 B per month for the next 4.3 months, and still have about $70 B in deficit spending to spare for November and December, before Geithner has to start juggling things to prevent default. In other words, the Administration can probably deficit spend at an annual rate of $2.0 T for the next 4.3 months in a blitz that can perhaps reduce U-3 unemployment quite a bit below the 8% level, a reduction that is probably enough for him to win going away in November.
So, 1) I think President Obama has been holding back 2012 deficit spending a good bit, probably thinking that if he can spend the money in July, August, September, and also in October, then he can see the U-3 numbers go substantially below 8% and also talk about a trend toward a stronger recovery but 2) I still don’t think he’ll get close to the debt ceiling until the middle of November.
The Debt Ceiling: What Will Happen?
On the question of what will happen in a debt ceiling crisis this time around, I think that depends on whether we come to the ceiling in October or November. The analysis I just did suggests that the President can make sure it will be in November, but If something goes out of control and it is October, then I think the President may go out of character and use the 14th Amendment, or the Trillion Dollar coin, or even Beowulf's latest consols idea (which the President may prefer because it can be seen as a slick, merely technical solution taken to get around the debt ceiling) to avoid giving away stuff on key entitlements. He won’t want seniors going to the polls and voting disproportionately for Romney, or progressives staying home, because he gave away SS and Medicare, and other important “discretionary” programs like Head Start, rolled over on defense spending, and accepted tax cuts for the rich without a fight. He also really doesn’t want a Republican Congress next time, even if he wins himself, because then, they’ll try to impeach him.
So, he’ll fight this time if it’s in October. If it’s in November, the much more likely occurrence, however, then, if he wins the election, I think, he’ll do kabuki, make some BS statements, and do something in the Bowles-Simpson framework, but with more in spending cuts and less in tax increases than progressive Ds say they want.
Judging from his past behavior, I think he’ll start negotiating from Bowles-Simpson, go down from there, and then end up with a “compromise” that’s much worse from the viewpoint of progressives than even Bpwles-Simpson. He’ll do this especially, if the Rs win control of Congress. But even if the Ds win both Houses, I think he’ll still do it, because I believe his vision has always been to get rid of the New Deal as much as he can, and to implement neoliberalism more fully.
If Romney wins, finally, I still think that Obama will try to broker a deal based on Bowles-Simpson in the lame duck, and will probably call Romney in to bring some of the Republicans over on tax increases. So, given all the possibilities I think it’s November for the crisis and then a settlement using Bowles-Simpson or some variant of it, and that the middle and working classes, women, seniors, and the vulnerable will take another big hit from the austerians, while the rest of us experience the lost decade, or even more if we can't get rid of the neoliberals before then.
What He Should Do?
What President Obama should do is to take the whole debt ceiling issue off the table right now, and for the foreseeable future by minting the $60 T proof platinum coin, and follow up by paying down the debt subject to the limit drastically, and pressuring the Rs with massive stimulus bills that won’t involve any “deficits” in the sense of a gap between revenue and spending. I’d like to see the Rs oppose massive spending to get the economy going, or Medicare for All, when the money to pay for these is already in the Treasury General Account (TGA). Good luck with that!