Senate passes historic bill tying cuts to debt deal; Obama set to sign it
** FILE ** The U.S. Capitol is seen just after the House voted to pass debt legislation on Capitol Hill in Washington, on Monday, Aug. 1, 2011. (AP Photo/Jacquelyn MartinHemmed in by the looming threat of an historic government default, the Senate on Tuesday passed a $2 trillion-plus debt extension and sent it to the White House, where President Obama was poised to sign it later in the afternoon — just in time to keep federal borrowing and spending on track.
The bipartisan 74-26 vote followed Monday’s equally strong vote of support in the House, and ratifies the agreement Mr. Obama and the four top party leaders in Congress reached this weekend to cut about $1 trillion in future spending and set up a process to cut more than $1 trillion more, coupled with an up to $2.4 trillion increase in the federal debt-ceiling limit.
Republican supporters said the deal makes history by being the first time that spending cuts have been attached to a debt-limit increase, and said that is now the new standard every future administration will have to meet.
“Never again will any president from either party be allowed to raise the debt ceiling without being held accountable for it by the American people,” said Senate Minority Leader Mitch McConnell, Kentucky Republican.
Democrats, meanwhile, took heart in playing defense: They said they kept the cuts lower than they otherwise would have been, and staggered them so the deeper bites come in the later years of this decade.
“My vote for this legislation does not come without some pain,” said Sen. Richard J. Durbin of Illinois, the second-ranking Democrat in the chamber, saying he was conflicted between the dangers of default versus the depth of cuts that will ensue from the new spending limits included in the bill.
Six Democrats and one liberal independent voted against the bill, saying the pain in the bill wasn’t worth it and fearing that the next fight — which will play out over the rest of this year — could threaten Social Security and Medicare.
Nineteen Republicans voted against the bill in the Senate, saying it was a missed opportunity.
“Talk is different than outcomes. What we need are outcomes. What we need is fundamental change to the way we spend money in Washington,” said Sen. Mike Lee, Utah Republican and one of a number of freshman Republicans who, energized by their recent election, led the fight against the measure.
Running 74 pages, the bill amounts to a $32.4 billion debt increase per page, for a total possible debt increase of $2.4 trillion.
On the cuts side, it instantly imposes discretionary spending limits for the next decade, for savings of $917 billion, and sets up a new congressional committee that would be charged with finding an additional $1.5 trillion in savings or new revenue.
If the committee fails to act, or Congress fails to pass their recommendations, new cuts would go into effect, split across defense and non-defense spending, totaling more than $1 trillion.
In Tuesday’s vote, the consequences of failing to raise the debt limit motivated those on both sides.
“This is not a perfect plan, but it’s something we need to have right now,” said Sen. Bill Nelson, Florida Democrat. “Government spending must be cut. The public debt must be reduced – otherwise our economy will not recover and America will no longer be in good standing around the world.”
Sen. Kent Conrad, North Dakota Democrat, told colleagues that every percentage-point increase in interest rates would mean an additional $1.3 trillion in interest payments.
Uneasy House OK's Debt Deal
Uneasy House OK's Debt Deal
Both Parties Find Fault With Bill; Senate to Vote Tuesday
NAFTALI BENDAVID And JOHN MCKINNONWASHINGTON—The House passed a $2.4 trillion debt-ceiling increase Monday night with the Senate planning to follow on Tuesday, after one of the most ferocious fights ever over government spending.
WSJ's Alan Murray and Joe White join the News Hub panel to discuss Monday evening's House vote to raise the debt ceiling by $2.4 trillion, and look ahead to Tuesday's vote in the Senate. WSJ Photo.
Congressional approval, along with President Barack Obama's signature, would raise the government's debt limit just before the U.S. government would begin defaulting on its obligations.
Both liberals and conservatives were upset by parts of the deal. Democratic and Republican party leaders spent Monday trying to get them on board.
Lawmakers and other officials raised questions Monday about how the complicated agreement will unfold in the coming months, such as who will sit on a key deficit-cutting congressional committee and whether that panel can raise taxes.
The Treasury Department has said for months that the government would begin running out of money to pay bills Tuesday if the government's $14.29 trillion borrowing limit wasn't increased.
Live Blog: The Debt Battle
The White House and congressional leaders are scrambling to agree on a deal before Aug. 2 to raise the U.S. federal borrowing limit. Follow developments in Washington and reaction globally here.
Journal Community
The WSJ's Joseph White talks to Lee Hawkins about the House's 269 to 161 vote to approve the debt ceiling deal and its broader meaning, as the Senate prepares for a vote on Tuesday.
The House vote was 269-161, with 95 Democrats joining 66 Republicans in voting no. The divided tally highlighted deep dissatisfaction among the rank-and-file of both parties, even though it was the rare bill endorsed by both House Speaker John Boehner (R., Ohio) and Minority Leader Nancy Pelosi (D., Calif.).
The margin was bigger than expected, as Democrats split evenly but Republicans voted by a wide margin for the bill. In a last-minute drama, Rep. Gabrielle Giffords (D., Ariz.), badly wounded by a gunman Jan. 8, returned to cast her first vote—a yes—since the shooting, and was greeted by loud applause from her colleagues.
Members of both parties said a debt-ceiling increase had to be accompanied by spending cuts, but they couldn't agree on the scope of those cuts.
The agreement, struck late Sunday, raises the debt cap by up to $2.4 trillion in three steps. It cuts $917 billion in spending over 10 years and creates a congressional committee to close the deficit by an additional $1.5 trillion.
If the panel deadlocks or Congress doesn't accept its plan, a pre-arranged set of spending cuts would kick in.
Many Democrats were angry that the package consists entirely of spending cuts, with no mandated tax increases. The White House dispatched Vice President Joseph Biden to Capitol Hill Monday to sell Democrats on the deal. He stressed that it would still allow the funding of priorities like education, and that it raises the debt limit through the end of 2012, rather than for a few months as many Republicans wanted.
The House erupted in applause as Arizona Rep. Gabrielle Giffords returned to DC and voted in favor of the bill. It was her first appearance on Capitol Hill since being shot last January.
Mr. Biden conceded the unhappiness by members of his party. "They expressed all their frustration," Mr. Biden said.
Ms. Pelosi told fellow Democrats in a closed-door session to vote their conscience on the debt deal, meaning she wouldn't press them to support it. Despite her yes vote, she criticized the agreement for asking nothing of the wealthy.
Senate Majority Leader Harry Reid (D., Nev.) was among leaders of both parties telling their members this was the best compromise possible.
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Nancy Pelosi walked to the floor of the House to vote on the bill.
"Everybody had to give something up," Mr. Reid said. "People on the right are upset. People on the left are upset. People in the middle are upset."
Conservative Republicans had their own complaints: that the package doesn't cut enough, defers tough decisions to a committee and doesn't require approval of a constitutional amendment to balance the federal budget.
Republicans also worried that the package cuts too much from defense spending. Of the initial $917 billion in spending cuts, $350 billion come from defense.
U.S. House Speaker John Boehner walked to the House chamber to vote.
Mr. Boehner met with members of the House Armed Services Committee to calm their concerns, saying he told them, "This is the best defense number we're going to get."
At first Monday, stock investors reacted positively to the tentative accord hammered out Sunday evening, sending the Dow Jones Industrial Average up more than 1% in early trading. But the relief was short-lived as investors turned their attention to the fragile economic recovery, and the Dow finished down 10.75 points, or 0.09%, at 12132.49. On Tuesday morning, Asian shares fell, as fresh worries over the global economy offset relief over the deal. Japan's Nikkei average fell 1.3%.
As leaders on both sides worked to sell the package to their members, they disagreed over whether it allows for tax increases.
In an interview with The Wall Street Journal, Michael Zink, Citibank's country officer in Singapore, discusses the implications of the U.S. debt-ceiling deal for global markets and the dollar.
"I think the big win here for us and for the American people is the fact that there are no tax hikes in this package," said House Majority Leader Eric Cantor (R., Va.).
Democrats disagreed.
"We've had our lawyers go over this very carefully," Sen. Kent Conrad (D., N.D.) said on MSNBC. "It is really very clear that [new] revenue can be part of any solution that the special committee develops."
While the agreement does suggest that the deficit-cutting committee could propose increasing taxes, it would face multiple barriers to doing so.
One is that the committee is using Congressional Budget Office projections that assume revenue will rise with the expiration of the Bush-era tax rates and current middle-class relief from the Alternative Minimum Tax. In effect, the panel would have to look for additional tax increases to achieve any deficit reduction, which could prove politically difficult.
The Obama Downgrade, Alphabetically
The Obama Downgrade, Alphabetically
H is for Hillary, who would have made a better president.
Snapshots from President Obama's efforts to improve America's standing in the world, 923 days into his administration:
A is for the Arab world, and our standing in it: This year, Zogby International found that 5% of Egyptians had a favorable view of the U.S. In 2008, when George W. Bush was president, it was 9%.
B is for the federal budget deficit, which is estimated to come in at around 11% of GDP in 2011, up from about 3% in 2008.
C is for China's military budget. For 2012, Beijing plans to increase spending on defense by 12.7%. The Obama administration, by contrast, proposed Pentagon cuts in April averaging out to $40 billion per year over the next decade, and Congress may soon cut a lot more.
D is for—what else—the federal debt, which grew to $14.3 trillion this month from $10.7 trillion at the end of 2008. D is also for the dollar, which has lost almost half its value against gold since Aug. 2008.
E is for energy. The average retail price of a gallon of gas hovered near the $1.80 mark when Mr. Obama was inaugurated. It has since more than doubled. E is also for ethanol, the non-wonder fuel the U.S. continues to subsidize to the tune of $5 billion a year.
F is for free trade. Bill Clinton signed Nafta in 1994, which facilitates $1.6 trillion in the trade of goods and services between the U.S., Mexico and Canada. George W. Bush midwifed more than a dozen FTAs, from Australia to Singapore to Morocco to Bahrain. Number of FTA's signed by the current president: zero.
G is for Guantanamo, which remains open, and for Gadhafi, who remains in power, and for Greece, which offers a vision of America's future if we don't reform our entitlement state.
H is for Hillary Clinton, who—I can't believe I'm writing this—would have made a better president than Mr. Obama.
I is for Israel, a Middle Eastern country the president claims to support even as he routinely disses its prime minister, seeks to shrink its borders and—why not?—divide its capital.
J is for jobs. In November 2008, president-elect Obama promised he would create 2.5 million jobs by 2011. By October 2010 the economy had shed 3.3 million jobs.
K is for Karzai, Hamid, Afghanistan's feckless leader. Still, the Obama administration probably did itself no favors by publicly dumping on the man, leading him to seek new best friends in Tehran.
L is for Laden, Osama bin. The president's greatest triumph, which will forever put him one notch—if only one notch—above Jimmy Carter.
M is for Mexico, a country that manages 5.4% unemployment and 4.2% annual growth even as it fights a war against the drug cartels.
N is for NATO, once a pillar of Western security, which Mr. Obama is in the process of destroying through his decision to withdraw from Afghanistan and his refusal to give NATO the push it needs to win in Libya.
O is for ObamaCare, which goes far to explain B, D, J as well as the Greek part of G.
P is for Pyongyang, whose ruler the administration is once again attempting to engage in the six-party talks. This is after the Kim regime welcomed Mr. Obama's plea for a nuclear-free world by testing a nuclear bomb, torpedoing a South Korean ship, shelling a South Korean village, and unveiling a state-of-the-art uranium enrichment facility.
Q is for QE2, the most disastrous experiment in monetary policy since Fed Chairman William Miller's low-interest rate policy crashed the dollar in 1978.
R is for the reset with Russia, the principal result of which is an arms-control treaty that brings us to parity in strategic nuclear weapons, leaves us behind in the tactical category, and ill-equips us for the challenge of a proliferating world.
S is for shovel-ready. Enough said.
T is for taxes, which Mr. Obama would like to see raised for "millionaires and billionaires"—curiously defined as people making $200K and up.
U is for Iran's uranium enrichment. When Mr. Obama came to office promising to extend his hand to the mullahs, Iran had enriched 1,000 kilos of uranium. Today they have produced more than 4,000 kilos.
V is for Venezuela, a country whose extensive subterranean links to Iran the administration has consistently downplayed.
W is for the Dubya, whose presidency now looks like a model of spending restraint.
X is for Liu Xiaobo, an example of what a deserving winner of the Nobel Peace Prize looks like. X is also for Xanax, likely to be remembered as the drug of choice of the Obama years.
Y is for Yes, We Can! Unfortunately, it's also for Yemen.
Z is for zero, which is the likelihood that one of the current GOP hopefuls will defeat Mr. Obama in 2012.
Boehner Repeals Murphy's Law
Boehner Repeals Murphy's Law
The debt-ceiling deal puts the GOP in a good position for 2012.
When it comes to Murphy's Law—the idea that anything that can go wrong, will—we Irish have our corollary: Murphy was an optimist.
Even from this sunny perspective, it's hard to look at the debt-ceiling compromise and see it as anything but a conservative victory. It's not just that Speaker of the House John Boehner succeeded in imposing some conditions in exchange for an increase in the debt ceiling. It's that the deal has Democrats, including the president, essentially signing on to the Republican framework for defining the Beltway's budget problem: spending that is too high rather than taxes that are too low.
For the moment, the press focus remains on the intra-conservative spat between Republicans who favor Mr. Boehner's deal and tea partiers who largely oppose it. These disagreements will fade, however. And come the 2012 elections this deal will help force the debate that all conservatives have wanted all along—about the size, scope, and proper mission of our federal government.
House Speaker John Boehner
That's a striking achievement, especially if you remember how this year started. We began the debt-ceiling debate on Democratic terms, with President Obama and Treasury Secretary Timothy Geithner insisting on a "clean bill" that had no conditions attached. Then came threats about grandma not getting her Social Security check if Republicans didn't do as the president demanded, and folks likening Republicans and tea partiers to terrorists.
At the Economic Club of New York in May, Mr. Boehner calmly laid down his marker about what he called "the arrogant habits of Washington":
"[L]et me be as clear as I can be. Without significant spending cuts and reforms to reduce our debt, there will be no debt limit increase. And the cuts should be greater than the accompanying increase in debt authority the president is given. . . .
"And with the exception of tax hikes—which will destroy jobs—everything is on the table."
By this measure, Mr. Boehner comes away with most of what he wanted. He comes away with even more once you recognize that these negotiations typically are less about balancing the budget than about getting Republicans to agree to discredit themselves on taxes, usually in exchange for promises of spending restraint that never materialize. Ask George H.W. Bush.
This time the Democrats miscalculated. One mistake was thinking they were forcing the GOP into a rerun of 1995-96, when a Republican House overplayed its hand and ended up being blamed for shutting down the government. This time Republicans showed they had learned their lesson.
First, Mr. Boehner said he was against a shutdown, and put forth different solutions that would raise the debt ceiling without raising taxes. Second, by rejecting everyone else's plan while offering no plan of his own, the president effectively took himself out of the game. This curious exercise of presidential "leadership" transformed Mr. Obama into the Newt Gingrich of this debate, while Mr. Boehner looked serious and reasonable.
That seems to be the liberal reading as well. The New York Times appears to be reeling. Maureen Dowd quotes a Democrat as saying we're watching President Obama "turn into Jimmy Carter right before our eyes." The headline over Paul Krugman's column declares, "The President Surrenders." Equally gloomy is the editorial: "To Escape Chaos, a Terrible Deal."
Over at the New Republic, Jonathan Chait asks, "Did Obama Get Rolled?" Peter Beinhart at the Daily Beast answers the question with a piece headlined "How the Tea Party Won the Deal." Most argue that the president should have stood his liberal ground.
The problem with this view is that the more people see the president, the less they seem to like what he's selling. That's particularly true for the people he will need to win re-election. A new Gallup poll shows that only one of three independents now approves of how Mr. Obama is doing his job.
As for the right wing, at least for the moment the wounds on both sides of the debt-ceiling divide remain raw. Some who see the deal as another Republican sellout will fight down to the wire. Others rightly point out that the gains here are neither guaranteed nor all that substantive.
In this, the liberals are closer to the truth. Yes, Mr. Obama got a deal that takes him past next year's election, and can play himself up as the greater compromiser. The price, however, was high. Effectively he has surrendered to the Republican framework for debate on taxes and spending.
That puts 2012 on terms much friendlier to the argument that Republicans need to make to the American people. It runs like this: If you are want a government in Washington that spends less, that taxes less, and encourages our private sector to grow, you need a Republican in the White House.
Even Murphy might find the glass half-full.
Default More Than 400 Years Ago Leaves Scars
Default More Than 400 Years Ago Leaves Scars: Christophe Chamley
Illustration by Raquel Leiva Olmo
The House Republicans, many of them opposed to raising the federal government’s borrowing ceiling, might take a lesson from the first sovereign debt crisis: Spain’s default in 1575. What events more than 400 years ago suggest is that it’s easy to ignite a dangerous chain reaction in financial and credit markets and inflict lasting damage on the economy.
Republicans today are playing the part of the cities of Castile, whose delegates to the Cortes (the Spanish parliament) opposed raising taxes to service King Philip II’s long-term bonds.
Spain, at the time, was the world’s sole superpower. Contemporaries described it as an empire “over which the sun never sets.” Yet the king needed the cities’ consent to borrow at a reasonable rate. And he needed it for a reason: The cities collected the taxes.
Each of the 18 main cities of Castile levied a special tax earmarked for long-term debt service. The level of this tax was set every six years through negotiation with the king. Tax collections were used first to pay off local long-term bondholders, with the rest sent to the central government. The local long-term bondholders were, in large part, the elderly living in the area. So local taxpayers realized that if they didn’t pay, their parents would be hurt. Thus, this precursor to Social Security had an effective enforcement mechanism -- the ire of the elders.
Confluence of Interests
But the king could only exploit this confluence of interests so far. The Cortes set the earmarked tax rate by majority rule, and that limited the king’s issuance of what were, in effect, his AAA securities. The king also issued other bonds secured by other, non-earmarked revenue. These securities were of a lower grade and sold at lower price.
Thanks to Philip’s expensive military adventures in the Netherlands and the Mediterranean, Spain’s debt had reached half of gross domestic product by 1573. At that point, the cities balked at paying higher taxes. For the next two years, they refused to budge in their confrontation with the king.
Finally, in September 1575, Philip took a circuitous route to outmaneuver the Cortes. He suspended payments not on the long-term debt, but on the short-term debt, which was owed primarily to Genoese bankers. The people cheered. Resentment against bankers ran as high then as now -- perhaps higher, because the bankers were foreigners. The upshot, however, was default and a full-blown credit crisis.
Why did the Cortes and the king play this game?
Stop the Spending
The cities wanted to stop Philip’s spending. They knew that bonds not explicitly backed by dedicated taxes would be very tough to sell, that a default would make it even harder for Philip to borrow without their help, and that his lack of direct taxing authority would force his hand in a standoff. But after the payments stopped on the short-term debt, things careened in an unexpected direction, much as they did after Lehman Brothers Holdings Inc. failed in September 2008. Many bankers who had lent to the king were, themselves, leveraged. The payment halt froze the funds deposited by local merchants to the bankers.
At that time of costly communications, periodic commercial fairs were essential events for the economic activity throughout Europe. Credit was rolled over from fair to fair by bankers, and lending agreements were renegotiated. With the Spanish commercial credit market frozen, the fairs couldn’t be held. Indeed, the main fair that was held twice a year at Medina del Campo was canceled. In short, the default caused a banking collapse, which led to a severe recession.
Caving on Taxes
After two years, in November 1577, the cities caved, agreeing to a very large tax increase. The king resumed debt payments to the bankers. As the king explained in the settlement agreement, called Medio General, the bankers were joined in their demands “by the petition of the delegates of the cities with particular urgency about the same business.” In other words, the cities were begging the king to restore the business of trade. The fairs at Medina del Campo resumed late in the next year, but they had lost their preeminence forever.
What’s the message for the House Republicans today? First, don’t overestimate your power. Second, history stays with us. Spain’s default is 424 years old, but its story is still being told and may, to this day, be affecting that nation’s perceived creditworthiness and cost of capital.
Wall Street Can Save U.S. With `Reverse TARP’
Wall Street Can Save U.S. With `Reverse TARP’: William D. Cohan
Anyone on Wall Street who has spent time restructuring the debt of bankrupt companies knows exactly why the politicians in Washington have proved so inept in their attempts to get a comprehensive deal to cut government spending, raise taxes and increase the debt ceiling.
What Congress and the White House have been trying to do -- essentially an out-of-court restructuring among creditors in serious denial -- is generally considered to be one of the most difficult and complex maneuvers in Wall Street sport. It is the equivalent of a 309B from the three-meter board in springboard diving: a reverse four-and-one-half in the pike position, which has a degree of difficulty of 4.8. Even the top restructuring professionals rarely pull it off.
You can’t blame anyone for trying, though. There is a huge allure to getting the creditors of a distressed company to agree to a deal outside of bankruptcy. The bankruptcy process is often very costly (the Lehman Brothers Holdings Inc. bankruptcy, the largest in history, is getting close to costing $1.5 billion) and time-consuming (we are coming up on the third anniversary of the Lehman filing).
Agreement, though, often proves elusive in out-of-court deals because, until they see a bankruptcy-court filing, creditors generally refuse to believe things are as bad as advertised and so rarely will take less than what they are owed just to get a deal done. Compounding matters, an out-of-court restructuring, generally speaking, requires there to be unanimous agreement among all classes of creditors in order to get a deal done. No wonder it happens so infrequently.
The GM Precedent
The biggest open secret on Wall Street for much of the past decade was that General Motors needed to restructure both its colossal debt and its ballooning off-balance-sheet liabilities, including those for retiree health benefits and pension payments. Making that difficult process even more challenging was that GM’s basic business -- making and selling cars -- was falling off the cliff. The GM operating pie was shrinking at the same time its liabilities were increasing exponentially. This was obvious to nearly everyone but the company’s executives, employees and creditors.
No surprise, then, that a restructuring deal could not get done -- at least until the American taxpayers agreed to bail out the company with an infusion of $50 billion. With that pledge, Steve Rattner and Ron Bloom, the “car czars,” were able to dictate terms to the recalcitrant creditors and stakeholders.
But even Rattner and Bloom couldn’t bludgeon the creditors into universal agreement out of bankruptcy, so GM filed what is known as a “prepackaged” bankruptcy -- where less than 100 percent agreement by creditors can get a deal done. This allowed the company to zip through the bankruptcy court in about 45 days, an extraordinary accomplishment that was helped along immeasurably by the power of the U.S. government to determine how the shrinking pie would be carved up.
What Congress and President Barack Obama have been trying to do in recent weeks is like GM trying to restructure its debts and obligations before the government bailout. Only the debt- ceiling task has been even more difficult, because the operating presumption in Washington seems to be that long-term creditors of the U.S. government -- holders of Treasury bonds and bills -- will get paid before the equivalent of the country’s secured creditors, which would seem to be those citizens expecting Social Security, Medicare and Medicaid checks.
China Goes First
Putting long-term debt holders at the top of the priority chain is the exact opposite of what would happen in a corporate restructuring. (The Treasury’s logic seems to be that angering older Americans is more politically palatable than angering the Chinese.)
What’s worse, no one on either side of the aisle is willing to admit that we can no longer afford our obligations and that for all intents and purposes the U.S. government is bankrupt. Something has to give: Either more revenue has to be generated through higher taxes, or spending has to be cut; preferably both, in my opinion, and the sooner the better.
But as any Wall Street restructuring professional could tell you, getting the lines of fear and greed to intersect on such a tight deadline, absent a serious dose of reality, is virtually impossible. No wonder Congress hasn’t been able to do it, and that some half-baked measure will probably win the day before the Aug. 2 deadline.
Of course, there is no bankruptcy court for the U.S. government. There is only Congress and its 535 financial geniuses running around like chickens with their heads cut off.
So, how about this modest proposal: Why doesn’t Wall Street, along with GM and Chrysler and every other industry that only survived 2008 because of taxpayer TARP money, use some of its new-found profits to bail out the government?
The symmetry of that would be elegant, of course. And then Wall Street could appoint some uber-banker like Jimmy Lee of JPMorgan Chase to become the “restructuring czar” and dictate the terms under which the shrinking pie would be carved up. Now there’s a threat that could get Congress to act, even before midnight tomorrow.
Debt Battles Revealed Tea Party’s Divisions
Debt Battles Revealed Tea Party’s Divisions: Ramesh Ponnuru
At first glance, it looks as if the Tea Partiers scored a big win over Speaker of the House John Boehner and the Republican Party establishment last week.
Boehner pleaded for Republican members of Congress to unite in support of a package of spending cuts and a debt-limit increase. He ran into vehement opposition from Representative Jim Jordan of Ohio, the head of the Republican Study Committee, a large group of conservatives in the House.
Prominent conservative organizations -- FreedomWorks, the Club for Growth, Heritage Action for America and various groups with the words “Tea Party” in their names -- opposed him, too, because his plan did not include a constitutional amendment limiting federal spending. And they beat him: He could not get enough votes for his original plan to pass.
Take another look, though, and the clout of this faction looks a lot less impressive. Its constituent organizations, which claim to speak for the populist insurgency that won the House for Republicans in 2010, were not able to persuade a majority of Republicans to side with them, or anything close to a majority. Roughly 88 percent of House Republicans sided with Boehner. They sided with him even when some of the groups warned that they were putting the vote on their scorecards -- planning, that is, to tell their followers that representatives who voted against them were not solid conservatives.
Support for Boehner
The vast majority of freshmen Republican representatives backed Boehner, not the activist groups. The vast majority of members of the Republican Study Committee aligned with the speaker, not their committee leader. Many members of Congress who are strongly associated with the Tea Parties backed the Boehner bill, too, among them Renee Ellmers of North Carolina, Allen West of Florida and James Lankford of Oklahoma.
The same thing happened this spring, when most House Republicans voted for a deal to keep the government open even though the activist groups said they would score that vote negatively. Only 59 Republicans voted no -- and again, most freshmen and most Republican Study Committee members sided with Boehner.
What happened last week was that about 12 percent of House Republicans thought that they could use the sheer force of their willpower as leverage to get a constitutional amendment. It was never going to work, of course. They may have thought it would because some activists, often described in the news media as “leaders” or “spokesmen” for a vast movement, said it would. But these activists do not speak for all or even a large fraction of the people who share their limited-government principles, especially on strategic or tactical questions.
Often Misunderstood
The freshmen Republicans associated with the Tea Parties have often been misunderstood by friend and foe alike. They have been seen as newcomers to politics who hate all compromise and seethe with hostility to party leaders. Some of them do, but many of them are practical conservatives with experience in state and local politics.
The Tea Party faction that has been in the news over the past week -- the group that sank Boehner’s plan -- demonstrated that it could deny Republicans a majority when its members make a tactical alliance with the Democrats, who unanimously opposed the plan. Similarly, the Tea Partiers can punish Republicans and help Democrats by sitting out general elections.
But the faction’s power in Republican primaries is overrated. In 2010, only two Republican incumbents lost their seats in primaries due to conservative opposition (carbon-tax proponent Representative Bob Inglis of South Carolina, and party-switching Representative Parker Griffith of Alabama). Senator Bob Bennett of Utah lost his seat in a caucus, which rewards purists. The other big Tea Party wins came in open seats. Sarah Palin is among those threatening Republican representatives with primaries from the right.
An Irritant
Unless the Tea Party tide is stronger in 2012 than it was in 2010, Republican incumbents are probably safe, at least if they’re in places that use primaries.
In 2010, “the Tea Party” was journalistic shorthand for a new influx of people and passion into conservatism. Allied with other conservatives, they moved the Republican Party rightward. Allied as well with a public alarmed by liberalism on the march, they won a lot of elections. To the extent that Tea Partiers devote their energies to attacking Republicans for not cutting government fast enough, they will just be an irritant, as splinters usually are.
'Uncertainty' Is No Excuse for Economic Morass
'Uncertainty' Is No Excuse for Economic Morass: Caroline Baum
The president's aides made the rounds of the Sunday talk shows this week and gave us a taste of the Democratic talking points for the 2012 election. Asked why, in the face of almost $1 trillion in stimulus spending, the U.S. economy stalled out in the first half of the year -- real GDP growth averaged 0.85 percent -- administration officials fell back on that old standby, "uncertainty."
On "Fox News Sunday," Gene Sperling, director of the president's economic council, attributed the economy's malaise to the "cloud of uncertainty" created by the threat of default.
Over on NBC, Obama senior adviser David Plouffe said the "debt-ceiling cloud has harmed our economy."
In what way? President Barack Obama told us last week that most people outside of Washington had never heard the term "debt ceiling" before.
They need to find a better excuse. Uncertainty is here to stay.
In any case, it's hard to blame a year's worth of high unemployment and tepid growth on the debt-ceiling debate. It was only last quarter that orders for nondefense capital goods excluding aircraft, a barometer of business spending, rose an annualized 17.5 percent. Only as the Aug. 2 debt-ceiling deadline approached did business focus on Washington theatrics.
A comment from transportation equipment manufacturers in Monday's ISM report for July bears this out: "The looming debt ceiling has government agencies backing away from spending. Forecasting a slowdown in demand in the short term."
The key phrase there is "in the short term."
The debt-ceiling cloud of uncertainty will drift by shortly after the vote to increase it by $2.1 trillion. It will be replaced by other uncertainties, including the prospect of coming up with an additional $1.5 trillion of deficit savings over 10 years -- on top of the almost $1 trillion that's part of the package.
Life is full of uncertainty, which right now is a euphemism for a lousy outlook. (Funny how uncertainty always seems to vanish in good times.) More damaging to the U.S. economy is the hangover from a multidecade debt binge. Both the federal government and the household sector need to pull in their horns. That certainty trumps any uncertainty out there.
Biggest Political Rift Since the Civil War
Biggest Political Rift Since the Civil War: The Ticker
Index of difference in voting patterns between Democrats and Republicans in the House of Representatives. Source: Keith Poole, University of Georgia
Indices of polarization and the share of income going to the top 1% of earners. 1913 = 100' Sources: Keith Poole, University of Georgia; Emmanuel Saez, UC Berkeley, Thomas Piketty, Paris School of Economics
U.S. politicians' difficulty in agreeing on a solution to the government's long-term fiscal problems raises a question: How big, in historical terms, is the nearly debilitating rift between left and right? Have we been here before, or is the current crisis somehow exceptional?
The answer from the world of academia is not encouraging. Research by two political scientists, Howard Rosenthal of Princeton and Keith Poole of the University of Georgia, suggests the divide is bigger than at any point since the aftermath of the Civil War. As of the 111th Congress, their index of political polarization in the House -- a measure of the gap between voting patterns on the left and right -- was about 7% higher than its previous peak in 1905 (see chart). Given the infusion of Tea Party radicalism in the 112th Congress, the level of polarization has most likely risen further.
Ominously, the polarization of U.S. politics correlates very well with the growing gap between rich and poor. Consider, for example, the share of a country's total income that goes to the top 1% of earners. In the U.S., according to economists Emmanuel Saez and Thomas Piketty, the share stood at 17.67 percent in 2008, among the highest in the developed world. Over the past century, it has moved more or less in sync with political polarization (see chart). Other measures, such as the Gini coefficient and the wage difference between finance and other industries, also move in close correlation with polarization.
It's hard to know which way the causation flows, whether inequality begets polarization or the other way around. Most likely, it goes both ways -- which would suggest that, as U.S. legislators work out the details of their deficit-reduction deal, they would do well to craft one that doesn't further increase the gap between rich and poor. Assuming, that is, they want to live in a governable country.
Branding Medici-Style, No Need for Tiger
Branding Medici-Style, No Need for Tiger: Virginia Postrel
Illustration by Drew Heffron
Florentine authorities and residents were appalled when the cast of MTV’s “Jersey Shore” invaded the Tuscan capital for the show’s fourth season, which will debut Aug. 4. What were Snooki and The Situation doing associating themselves with the refined city of Dante and Botticelli (not to mention Ferragamo)? Even New Jersey won’t claim these louts.
The ostensible idea was to pay homage to the cast members’ Italian heritage. But these hyper-American descendants of peasants from Italy’s far southern regions hardly represent the Florentine heritage of art, humanism and elegant style. Nicole “Snooki” Polizzi and Jennifer “JWoww” Farley aren’t even of Italian descent. The cast’s Florence connection is quite a stretch.
But stretching, it turns out, puts them in a great Florentine tradition. Brand-building through misleading images wasn’t invented on Madison Avenue or Hollywood. Many of Florence’s Renaissance treasures are monuments to exaggeration for the purposes of self-promotion. The medium may have changed, but the motives haven’t. It’s a bit of history that today’s Wall Street billionaires, who have a bit of a collective image problem, might want to study.
The Renaissance patrons who paid for all those frescoes, paintings, altar pieces and sculptures weren’t generally funding beauty for its own sake. They were buying status -- building their brands, we’d say today. Their patronage showed off their wealth and piety and, in many cases, advertised their supposed links to the prestigious and powerful. In the process, these patrons often shaded the truth, leaving out unflattering facts and suggesting associations they didn’t in fact have.
Buttering Up Bankers
Know what to look for and Florentine artworks reveal secret messages that, while not as sexy as Dan Brown’s Mona Lisa fantasies, have the advantage of actually existing.
Take the boys shown walking up the stairs behind their tutor in Domenico Ghirlandaio’s fresco in the Santa Trinita church. What could these kids have to do with the “Confirmation of the Rule of Saint Francis,” the official subject of the fresco? They aren’t friars or church officials.
In fact, their portraits are just good public relations. The patron, a banker named Francesco Sassetti, included them to butter up their father, Lorenzo de’ Medici, and to let the churchgoing public know that he and Lorenzo were tight.
Renaissance Public Relations
But the painting doesn’t tell the whole story. It “conveniently omits a crucial fact about the patron’s relationship with the Medici,” write art historian Jonathan K. Nelson and economist Richard Zeckhauser in their book, “The Patron’s Payoff,” which uses economic signaling theory to analyze Renaissance patrons’ motivations and techniques. That fact: “By the time he commissioned the fresco, Sassetti had nearly run the Geneva branch of the Medici bank into bankruptcy.” Oops. Maybe the portraits were meant as a distraction or damage control. How could you fire (or worse) a man who had sponsored such fine pictures of your kids?
Nelson and Zeckhauser’s work demonstrates that Renaissance art is full of status signals and calculated image-building -- once-obvious messages that today’s tourists never notice. Nelson, who is the art history coordinator at Syracuse University’s campus in Florence, showed me some examples at Santa Maria Novella, the church dedicated to the Virgin Mary that stands near Florence’s train station. (It was novella, or new, in the 13th century.)
Like Stadium Naming
Consider Filippo Strozzi, who paid big money for the private chapel to the right of the main altar. As often happens with stadium-naming rights today, the chapel was available only because the previous owner had fallen on hard times. And just as the new stadium sponsor can’t evict the old team and install a new one, Strozzi couldn’t kick out the private chapel’s old patron saint, St. John the Evangelist, in favor of his own namesake, St. Philip the Apostle.
So Strozzi found a way to give both saints seemingly equal treatment, while actually making his namesake the more prominent. He commissioned two walls of frescos, each with scenes from the life of one of the saints. Both walls are beautiful works by Filippino Lippi -- but St. Philip is on the right side, which is much easier to see.
To the left of the Strozzi chapel, the church’s prime real estate, surrounding the main altar, is decorated in an even more blatantly image-building fashion. This area was controlled by another wealthy patron, Giovanni Tornabuoni, who (surprise) took it over after the previous patrons ran out of money.
A Flattering Image
Tornabuoni commissioned Ghirlandaio to create frescoes with scenes from the lives of the Virgin Mary (the church’s patron saint) and John the Baptist (the city’s) -- and to include in them flattering portraits of many members of the Tornabuoni family.
In one scene, the official subject is the angel’s appearance to Zacharias, John the Baptist’s father, to announce the saint’s impending birth. But Zacharias and the angel are decidedly secondary figures, stuck in the background like a play nobody’s paying attention to. Flanking them are various groups of Florentines, including Tornabuoni himself.
To demonstrate how Tornabuoni stretched the truth to make himself and his family look even more prominent, Nelson points to a clutch of four men in the scene’s foreground: the city’s leading humanists. Why put a philosopher, poet, or professor in a scene filled with family members and other close associates?
Celebrity Endorsements
They were there, Nelson suggests, to advertise that Tornabuoni was footing their bills. It was the Renaissance equivalent of putting a photo of yourself shaking hands with the president in your office. But Tornabuoni didn’t need the humanists’ permission to include their portraits, and he certainly didn’t have to pay them. In fact, there was no such connection. Tornabuoni was just enjoying a little reflected humanist glory. Should someone object, he could simply say that he was honoring his city’s greatness. When exaggerating, deniability is essential. “You don’t want to blow the balloon too big,” says Nelson.
These days, celebrity endorsements come at a price. But stretching is still common. What, I used to wonder every time I got off an airplane, does Tiger Woods have to do with consulting services? But there he was, seemingly every few feet in every airport, on Accenture Plc (ACN) billboards proclaiming, “We know what it takes to be a Tiger.”
Tiger and Medici
Then one day Accenture realized that it didn’t know Tiger so well after all, and the billboards suddenly vanished. Similar things happened in the Renaissance, when patrons backed the wrong Medici in paintings, which were a lot harder to get rid of.
But such permanence also has its upside. To curry favor with the Medici, Guaspare del Lama, a Florentine broker and money changer, paid Sandro Botticelli to put portraits of family members in the “Adoration of the Magi” in his own chapel at Santa Maria Novella. But, notes Nelson, “this pandering did not help him when he was arrested, and convicted, of fraud.” It did, however, make him immortal. More than 500 years later, people still talk about the “Del Lama Adoration,” which is now in the Uffizi museum, largely because of its portraits of five Medici patriarchs.
Zeckhauser, who is on the faculty at Harvard’s Kennedy School of Government, notes a similar phenomenon there, with the school’s Taubman Building. Its namesake, A. Alfred Taubman, can hope that in 50 years he isn’t remembered just as the shopping mall magnate who went to prison for price fixing at Sotheby’s but as a Harvard patron. Given the building’s usefulness as a reputation-builder, one of Zeckhauser’s colleagues cynically proposed, “maybe we should go after him for another.”
Consumer Spending in U.S. Fell
Consumer Spending in U.S. Fell in June
The value of purchases in June was the lowest of the quarter, making a third-quarter rebound more difficult. Photographer: Jin Lee/Bloomberg
Aug. 2 (Bloomberg) -- John Ryding, chief economist at RDQ Economics LLC, discusses the state of the U.S. economy, the labor market and negotiations over raising the debt ceiling. Ryding, speaking with Betty Liu and Michael McKee on Bloomberg Television's "In the Loop," also discusses U.S. personal income and spending data released today. (Source: Bloomberg)
Aug. 2 (Bloomberg) -- James O'Sullivan, chief economist at MF Global Inc., talks about U.S. consumer spending data for June and the outlook for the economy. Purchases unexpectedly declined by 0.2 percent in June, the first time in almost two years, Commerce Department figures showed today in Washington. Sullivan speaks on Bloomberg Television's "InBusiness With Margaret Brennan." Former U.S. Treasury Secretary Paul O'Neill also speaks. (Source: Bloomberg)
Aug. 2 (Bloomberg) -- James Paulsen, chief investment strategist at Wells Capital Management, talks about the outlook for the U.S. economy. Paulsen speaks with Adam Johnson on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
July 13 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke speaks before the House Financial Services Committee about the U.S. economy and outlook. Bernanke, delivering his semiannual monetary report in Washington, also spoke about the Fed's readiness to add stimulus measures to spur economic growth and warned policymakers about the risk of debt default. (Source: Bloomberg)
Consumer spending in the U.S. unexpectedly dropped in June for the first time in almost two years. Photographer: David Paul Morris/Bloomberg
The lack of jobs combined with wage gains that have failed to keep pace with inflation raise the risk of further cuts in consumer spending. Photographer: Jim R. Bounds/Bloomberg
U.S. consumer spending unexpectedly dropped in June for the first time in almost two years and savings climbed, adding to evidence that the slump in hiring is hurting household confidence.
Purchases declined 0.2 percent after a 0.1 percent gain the prior month, Commerce Department figures showed today in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase. Incomes grew at the slowest pace since November.
The lack of jobs combined with wage gains that have failed to keep pace with inflation raise the risk of further cuts in consumer spending, which accounts for 70 percent of the world’s largest economy. Companies like Newell Rubbermaid Inc. (NWL) are among those cutting forecasts for the year.
“Consumers ended the quarter on a pretty poor note,” said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston, who projected spending would drop. “The third quarter is looking very soft too. Consumers are facing lackluster wage growth in this phase of still-high gas prices.”
Stocks extended fell on mounting concern the U.S. economy was faltering. The Standard & Poor’s 500 Index declined 0.3 percent to 1,282.54 at 9:47 a.m. in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 2.71 percent from 2.75 percent late yesterday.
Survey Results
Projections for spending in the Bloomberg survey ranged from an increase of 0.4 percent to a drop of 0.3 percent. The Commerce Department revised the May spending figure from a reading previously reported as being little changed.
Incomes climbed 0.1 percent in June following a 0.2 percent gain the prior month that was revised down. Economists had forecast incomes would rise 0.2 percent, according to the Bloomberg survey.
Wages and salaries were little changed, the weakest reading since November.
Americans boosted savings, a sign of growing concern over the economy and jobs. The savings rate climbed to 5.4 percent, the highest since September, from 5 percent.
Today’s report showed that adjusted for inflation, which are the figures used to calculate gross domestic product, consumer spending was little changed after dropping 0.1 percent in May. The value of purchases in June was the lowest of the quarter, making a third-quarter rebound more difficult.
Inflation Stabilizes
The Federal Reserve’s preferred price index, which is tied to spending patterns and excludes food and fuel, increased 1.3 percent from June 2010, the same as in the prior month.
The so-called core price index rose 0.1 percent from the prior month. The gauge was forecast to rise 0.2 percent from May, according to the survey median.
Gross domestic product climbed at a 1.3 percent annual rate from April through June after a 0.4 percent gain in the prior quarter that was less than earlier estimated, Commerce Department figures showed July 29. Household spending grew 0.1 percent, the weakest performance since the second quarter of 2009, at the end of the last recession.
A slump in confidence threatens to derail any recovery. The Thomson Reuters/University of Michigan index of consumer sentiment fell in July to the weakest reading since March 2009. The Bloomberg Consumer Comfort Index also dropped in the week ended July 24 to the lowest since May.
Stagnant Wages
“Wages are very stagnant and that’s affecting consumer spending and consumer confidence,” Fed Chairman Ben S. Bernanke said in semi-annual testimony to Congress on July 13. “There is also ongoing uncertainty about the durability of the recovery.”
Weekly earnings adjusted for inflation dropped 0.9 percent in the 12 months ended June on average, according to figures from the Labor Department.
The labor market is still struggling to heal. The jobless rate climbed to 9.2 percent in June while payrolls grew by 18,000, the fewest in nine months. The economy also failed to create enough jobs in July to trim unemployment, economists in a Bloomberg survey said before a Labor Department report due this week.
Merck & Co., Cisco Systems Inc., and Goldman Sachs Group Inc. are among companies that announced workforce reduction plans last month.
Fuel Costs
Higher expenses for necessities like energy are also crimping purchasing power. The cost of regular gasoline climbed in May to about a three-year high of $4 a gallon, and remained above $3.70 at the end of July, according to AAA, the nation’s biggest auto group.
The “difficult” U.S. economy was among reasons Newell Rubbermaid, the Atlanta-based maker of Rubbermaid containers and Sharpie pens, last week cut its full-year profit and sales forecasts.
“The consumer environment remains very tough,” Michael Polk, chief executive officer, said on a conference call with analysts on July 29. “The key uncertainty is whether the consumer will show up and spend.”
Auto dealers are also seeing a slump. Cars and light trucks sold at an average 11.41 annual rate in June, the slowest in a year, industry data showed. Figures for July, due today, will signal vehicle sales have stalled, according to a Bloomberg survey.
Congress’s Agreement on Debt Ceiling Is an Alarming Bipartisan Mess
Congress’s Agreement on Debt Ceiling Is an Alarming Bipartisan Mess: View
Illustration by Bloomberg View
Aug. 1 (Bloomberg) -- Under the current political compromise the U.S. debt ceiling will eventually be raised by $2.1 to $2.4 trillion dollars says Bloomberg Government analyst Scott Anchin. The cuts will only lower the nation's debt to GDP ratio to 76.2% by 2020 says Bloomberg Government analyst Christopher Payne. (Source: Bloomberg)
Aug. 2 (Bloomberg) -- Michael Yoshikami, chief executive officer and founder of YCMNet Advisors, which manages $1.1 billion in Walnut Creek, California, talks about the outlook for U.S. stocks and the nation's economy. Yoshikami also discusses the proposed plan to raise the U.S. debt ceiling. He speaks from Berkley, California, with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
The deal reached by the U.S. Congress to raise the $14.3 trillion debt ceiling has spared the nation an immediate catastrophe while potentially setting a path for longer-term disasters.
Financial markets’ initial euphoria over the deal faded quickly. The S&P 500 index of U.S. stocks declined for the sixth day in a row, losing 0.4 percent Monday to close at 1,286.94. The dollar gained against the euro and the yen but declined to a record low against the Swiss franc.
The markets’ response underscores an unfortunate reality: While the government may have averted a self-inflicted disaster, it hasn’t solved fundamental problems and appears to have created new ones. What the U.S. needs is a deficit-reduction plan to address its long-term fiscal gap without weighing too heavily on a weak recovery.
Instead, it’s getting the opposite: immediate spending cuts that threaten the recovery in the short term but aren’t substantial enough to fix the long-term budget problems.
Under the deal the House approved Monday, the government must find $21 billion in new spending cuts next year, and possibly much more. If legislators fail to agree by the end of this year on at least $1.2 trillion in further deficit reduction, the country will face indiscriminate cuts in domestic and defense programs.
The cuts could hamper the recovery, especially given $250 billion in expiring unemployment benefits, the end of the temporary payroll-tax cut and the winding down of the stimulus program. Growth was barely evident in the first half, and a manufacturing report Monday showed a steep deterioration in both activity and hiring plans in July.
AAA Rating
A growing economy is crucial to fixing the government’s finances. Economic output is the denominator in the U.S. government’s debt burden, which currently stands at almost 100 percent of gross domestic product, according to the International Monetary Fund -- the highest level since the aftermath of World War II.
Even if the economy doesn’t falter under the cuts, the deal provides far too little future deficit reduction to put the government’s finances on a sustainable path, and possibly too little to maintain its AAA credit rating. Economists estimate the U.S. structural budget deficit -- the gap that must be closed to achieve long-term stability -- at about 5 to 6 percent of GDP. The $2.4 trillion in deficit reduction envisioned in the compromise plan amounts to 1 percent of projected GDP over the next decade.
Political Will
Make no mistake: The U.S. is a wealthy country that can afford to solve its budget problems. Closing the fiscal gap will require political leaders to embrace more ambitious policies and to build popular support for the sacrifices they will entail. These tasks will only be more painful if markets ultimately force them on us.
Bold measures -- including overhauling entitlements, rethinking the uniquely dysfunctional U.S. tax code and considering a federal value-added tax -- must be on the table. At an estimated 30.5 percent of GDP in 2011, the total tax burden on Americans is the lowest among the Group of Seven industrialized nations.
In addition to fiscal restructuring, the U.S. needs political renewal. The debt-ceiling deal was nurtured in a hothouse of ideology and blossomed in a storm of political machinations that put the nation at risk. Having successfully held the economy hostage to achieve their aims, House Republicans established a template for the aggrieved, reckless and intractable partisans of any future Congress. The danger did not end with Monday’s vote.
Long-Term Dangers
The accord that resulted is almost wholly uninformed by the nation’s actual economy, demographic trends or social reality. In addition to stalled economic growth, we have an aging population and growing inequality, with roughly a third of the nation’s wealth controlled by 1 percent of our citizens. The deal amounts to complete denial of these facts by our political leaders.
That includes President Barack Obama, who has largely ignored the long-term dangers posed by deficits in his budget proposals and who failed, inexplicably, to endorse the sensible suggestions of his own deficit-reduction commission. The congressional committee charged under the new debt deal with finding additional budget savings is unlikely to produce anything comparably bold or intelligent.
This deal is an unholy and bipartisan mess. But it must be made to work. Congress should use the breathing room it provides to find creative long-term fiscal reforms that focus not just on avoiding crisis -- but on creating a government that’s smarter, fairer and more innovative. Done the right way, the boring work of crafting budgets can be an edifying national experience. We’ve seen quite clearly what happens when it’s done the wrong way.
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