Keith Hennessey on the Debt Ceiling and the Budget Process
Jul 25 2011

Keith Hennessey of Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the debt ceiling and the budget process. Hennessey, who worked for Senate Majority Leader Trent Lott on budget issues in the late 1990s, explains the politics of the debt ceiling and the budget process. Using his past experience as a staffer, Hennessey gives those of us on the outside a window into what is actually going on in the hallways, who has power, and how information flows up and down in the chain of constituents, members, party leaders. The conversation closes with Hennessey's best guess of which outcomes of the current negotiations are most likely and why.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Alex Gann
Jul 25 2011 at 11:27am

Very educational conversation this week. I was a little saddened that there was no mention of Ron Paul’s creative proposal to strike the $1.6 Trillion under the debt ceiling that we “owe” to the Federal Reserve. While some have called out that eventually the Fed may want to actually be “repaid” for the stimulus – since latest talks suggest more stimulus going out, the possibility of that happening is near zero.

At the same time, >90% of the interest we pay on this “debt” with the FedRes is immediately returned to the treasury. Paul’s plan is exciting and workable, I wish it would have come up!

Dsvid Taylor
Jul 25 2011 at 12:07pm

So… do you want to go back and touch on how the budget system worked before 1974? I was expecting the conversation to return to that topic and I don’t think that it did.

Jul 25 2011 at 12:34pm

I know Keith is confident that things will get worked out…but the problem with the game of Chicken is that there is the possibility of both cars hitting each other with the throttle wide open on both.

Very scary!

Russ Roberts
Jul 25 2011 at 12:52pm

David Taylor,

We only had an hour so we didn’t really have a chance to go back. Too much to talk about just on the current process. Maybe in another episode…

Brent Nelson
Jul 25 2011 at 7:05pm

Very interesting discussion. A huge help for me would have been some 30 year background information on the size of the federal budget (maybe divided into discretionary and non-discretionary), the federal deficit, and the debt ceiling.

The reason that would have been helpful to me is that as a relative newcomer to all this I don’t have a good feel for whether the current problem is that our federal budget has been exploding recently or if it just continues to grow at the same pace it always has and the difference now is that some people have decided to draw a line in the sand and make a stink.

The $3.5T vs. $4.7T numbers that were thrown around in the discussion hinted that things have changed quite a bit recently? If so, it would seem that that part of the discussion hasn’t gotten any exposure in the current discussions.

Jul 25 2011 at 9:45pm

I found this conversation extremely informative. Thanks for making it happen, Russ.

Jul 26 2011 at 9:52am

Thanks for a great podcast

Would love to hear from Keith again on the FCIC (he was a member)

Also would love to hear more on how budgets were done before 1974


Would it really be so bad if the US credit rating was lowered, raising our interest rate? If it cost more to borrow then we would be forced to borrow less. Seems like it accomplishes the same thing a BBA. Also if the US borrowed less then would not lenders be forced to find other opportunities in the private sector?

Why cannot Treasury sell TARP assets to cover payments?

What happens to the SS Trust Fund? If SS payments really can be stopped then there really is nothing in it. Does not that mean that SS is insolvent right now, not in 2035 (or whatever)

Ray Peters
Jul 26 2011 at 1:02pm

Excellent and timely podcast.

Some say the government can print money to get out of debt. I’ll take it that would be one of the options that would be bad policy.

I would also love to hear about the pre-1974 budget process.

Alan Watson
Jul 26 2011 at 2:01pm

Great podcast: timely, and an excellent combination of both factual details and broader implications. Thank you! Two comments:

(1) I was not entirely satisfied with your treatment (around minute 40) of the distinction between projected actual spending and cuts in projected spending. Although it might be technically correct in relation to somebody’s budget numbers, in fact it is extremely misleading to say as the president claimed that average annual spending of $4.4 trillion over the next ten years, versus $3.6 trillion this year, represents a “cut” of $2 trillion. I wish that both of you had insisted that we focus primarily on spending numbers rather than on the cuts from some nebulous projections.

(2) It seems to me that both of you missed a key aspect of social security payments (around minute 30). To the extent that benefit payments exceed payroll tax receipts, the system needs to make up the difference by drawing down the trust fund. But because the trust fund consists entirely of Treasury bonds, every dollar of redemption of these bonds decreases Treasury debt, and therefore allows an equal amount of replacement borrowing. Am I missing something here?

Jul 26 2011 at 2:10pm

@Alex Gann,

I don’t know if this is the reason it wasn’t discussed, but the reason I don’t think this proposal should be taken at all seriously is for the following reason explained by Lawrence Hunter from Forbes magazine (someone who, like Paul, would like the Fed eliminated):

“The problem with Paul’s suggestion is that simply extinguishing the bonds doesn’t also extinguish the $1.6 trillion the Fed printed to buy the bonds originally, which now is dammed up inside the banks in a huge reservoir of liquidity because the banks have not been lending it out. This excess liquidity would be highly inflationary if (when) it flooded out into the economy as new credit, which it will eventually, if the economy ever recovers. Therefore, the Fed retains those bonds at the ready in its portfolio so that if (when) inflation begins to rise, it will have the bonds to sell back into the market to soak up that excess liquidity it created when it originally printed the money and purchased the bonds.”

If you destroy the bonds the markets would surely freak because the Fed basically would be giving up the means by which it can decrease the money supply, severely limiting its ability to depression inflation.

Not good.

Jul 26 2011 at 2:47pm

Ray Peters:

From my understanding, the “print money to get out of debt” is done in practice by the Fed creating new money on its balance sheet and buying bonds from the Treasury. This would require new bonds from Treasury, however, which is government debt, which is what is not allowed by the debt ceiling as it currently stands. Not to mention, as you suggested, that it’s bad policy to do this.

All in all, I really enjoyed this podcast as well, and would be interested to hear discussions in the future both about how US fiscal policy was decided before 1974, and perhaps how other nations (perhaps Germany) manage their policy, comparing best practices of countries who now or at other times in history managed to avoid burdensome debts as a matter of policy.

Leigh Cop
Jul 26 2011 at 6:45pm

This podcast greatly increased my understanding of the debates going on in Washington.

What I don’t understand is how the Treasury works. What mechanism does the Treasury use to put money in and take money out of the economy? What is the Fed’s role? What is the role of the treasury? Would you consider a podcast on this subject?

Allen H
Jul 26 2011 at 7:28pm

Excellent podcast this week. Hennessey was by far the most informative person I’ve heard discuss the debt ceiling. I enjoy this podcast because it tends to steer away from current events, but this week was excellent nonetheless.

Scott Packard
Jul 26 2011 at 9:23pm

@Leigh Cop:
I think Russ Roberts covered your question about how to print money in “Selgin on the Fed” late last year.

I know I’ve heard it explained; I believe the Selgin podcast is the one that covers it.

@Russ Roberts and Keith Hennessey:
Thanks very much for this podcast! I burned it to a CD and my wife’s listening to it on her commute too. If I had more time now I’d write down some of these figures and definitions in order to try to get a better understanding. As it is, I’m studying for a certification that hopefully helps me find a job.

@Rich Goyette: The audio has a strong component of echo in it this week. Plus, Mr. Hennessey’s voice is pretty low at the end.

Robert Kennedy
Jul 27 2011 at 11:31am

Very interesting discussion. Very much focused on the process, as Russ made clear at the beginning. That said, I found myself depressed throughout the whole podcast that there was no substantial discussion of specific real live spending cuts and what impact they might or might not have. Vague references to withholding payments to states, etc. but very little about anything that would truly result in any shrinkage of the mission of the federal government.

I know I’m being naive but I keep hoping that the congressional leaders were willing to open their mouths and say something like “we’re getting out of the business of managing agriculture” or something with some substance. Yeah, i know all of the incentives that they have to avoid specifics. I just keep hoping…

Jul 27 2011 at 12:32pm

Thank you for the excellent podcast this week. Would love more ‘deep reads’ into current events. I would have liked some more concrete policy analysis, but that’s probably somewhat difficult to do and remain politically neutral with the guy that was Trent Lott’s aid.

Thanks Russ.

Jul 27 2011 at 1:59pm

This may be the best interview you have done, Great job!!!!!!

Next topic that needs a good economics and political interview is the greek debt bailout, we could really use some political clarity on this. The US is a major contributor via the IMF

Thanks again

Jul 27 2011 at 10:14pm

knowledge stream….now that was econtalk. bravo!

(please consider bruce bartlett and david frum on the topics of ur choosing).

luv u!

Jose Magaña
Jul 27 2011 at 10:43pm

Russ, thanks for the podcast. I’m a long time listener and although I’m more of a Keynesian I really enjoy your podcasts because you’re fair when debating the issues.

I feel much better about the debt ceiling now–for a moment I was very worried. Keep up the good work!

Lauren [Econlib Editor]
Jul 28 2011 at 3:38am

Scott Packard remarked about the sound quality:

The audio has a strong component of echo in it this week. Plus, Mr. Hennessey’s voice is pretty low at the end.

We do apologize about the sometimes-erratic sound quality of the podcasts. We appreciate the flexibility of our listeners.

Russ takes advantage of his travels to interview economists and thinkers who are available on the spot. Those conversations are not conducted in a sound studio.

In the particular case of the Hennessey podcast, it was conducted in a room with bare stucco walls, with microphones that weren’t quite close enough to the mouth (so the level had to be high), or perhaps with insufficient separation between the two people. Live and learn. But once the podcast is recorded, it would be a shame to throw it away.

Russ does his best to create an interview situation conducive to productive, friendly, professional conversation and dialog. Sometimes that results in a tough job for our sound engineer, who worked hard on making the Hennessey podcast happen. We apologize for any remaining imperfections.

Rich Goyette
Jul 28 2011 at 4:41pm

Hi, Scott

Each podcast we do has it’s challenges and this one definitely had some big ones that we were aware of. As the audio engineer it is my job to make sure that the audio quality is the best it can be; unfortunately this was one of the rare times when I could only do so much. Due to scheduling and budget we occasionally have to settle for less than ideal recording environment on the production side, so recorded assets aren’t always consistent.

– Rich Goyette

Jul 29 2011 at 11:48am

A great – very informative – podcast. WOW, have they made this complex or what. Deliberate I’m sure.

Jul 30 2011 at 2:32am


Deliberate by whom? Usually I find there is a history of happenstance, good intentions, nefariousness, etc. But hardly conscious deliberation.

John Berg
Jul 30 2011 at 3:47pm

A Palm d’or for most timely, most important, and most informative.
Some questions:
At the time the Appropriations Bill(x) is passed into law, is it funds considered spent? Could the Congress stop an appropriations bill 3 months after passage in order to save the remain 9/12s?

John Berg

Jul 31 2011 at 2:28pm

Just adding my plaudits. Very interesting and informative.

Jul 31 2011 at 8:20pm

Great timely podcast, Russ. Like the previous Freddie Mac and Fanny Mae podcast with Arnold Kling during the GFC, this was a topical and timely explanation of a headline, that to those of us down in Australia, was unclear.

As usual, it was both informative and interesting and made the situation a lot clearer. With only a day to go until the deadline, lets hope things are resolved soon!

As always, we enjoy listening to Econtalk each week and appreciate the outstanding work you and the Econtalk team put into making each podcast come together.

Aug 1 2011 at 2:30pm

Russ, the audio quality has been poor in the last three episodes.

Russ Wood
Aug 4 2011 at 2:43pm

Great interview: much more interesting than I’d expected a discussion of the debt ceiling process would be.

Having the debt ceiling crisis behind us (for now), I’d like to hear you discuss with Mr. Hennessey the federal budgeting process in general, and particularly how we might change Congressional procedures to reduce what appears to be the almost irresistible impulse of Congressmen to spend.

John Berg
Aug 7 2011 at 4:14pm

Here we are 3PM Sunday 7Aug2011 CST with the Dept Level resolved: and S&P downgrading the US to AA+. The “compromise” continuously revealing more surprises is proving to be more divisive among the Republicans than among the Dems. However, Hennessey’s writings from his blogs and web-site have proven a delight. You introduced me to a source sure to be valued for a long time.

John Berg

Comments are closed.


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Podcast Episode Highlights
0:36Intro. [Recording date: July 20, 2011.] Economic adviser to President Bush, staffer for Trent Lott when he was Majority Leader. Come to you for wisdom about a very complicated and dry subject that is in the news this week and maybe beyond, which is the budget and the current discussion of the debt ceiling. Somewhat mystifying subject. Can't promise you wisdom, but promise to explain things as I understand them. The day that people are talking about as an important day is August 2nd. On August 2nd, the day the debt ceiling, which is currently at a mere $14.29 trillion, if that is not raised, the U.S. government will not have enough money to meet its obligations. Is that correct? Is that why August 2nd is important. Yes, based on information provided by the Treasury Department. There are a few things to understand about that. The first thing is that what that means is that Treasury and the Office of Management and Budget (OMB) have their cash and debt management plans, and it means that Treasury does not think that they will have sufficient cash both to pay interest and principal on debt obligations and to make all of the other payments they are scheduled to make--whether those are benefit payments or payments to states or payments to contractors. So, it's been described as the U.S. government will default; and the word default is one you have to be careful with because "default" is a technical term that means not pay our debt obligations to those out there in the rest of the world from whom we've borrowed money. American citizens and foreign citizens' governments, etc. Whoever it is who have lent the U.S. government money. We will have enough cash, at least for a while, to pay that. What we won't have is enough cash to pay that and everything else that the government needs to pay on the normal schedule that it normally pays. Which would be Social Security recipients, Federal employees, soldiers, doctors in hospitals, veterans, reimbursement to states for highways, unemployment insurance, Medicaid, welfare, road-building contractors--everything the government spends money on. So that August 2nd date, which was mentioned quite a while back--that's a forecast. Of course many obligations of the U.S. government are quite predictable. We know what the salaries are that the employees are paid on an ongoing basis; we know what debt obligations are coming due on certain dates--certain bonds mature, certain interest payments have to be made. Some of it--two sides of it are uncertain--which are the inflow, the tax receipts--people pay estimated taxes at various times and there are other fees that the government collects. And there is also ambiguity about some of the outflows. So, where does August 2nd come in? It's a forecast? Yes. Could be August 3rd or August 1st, in which case we might have a little more time or a little less time. It absolutely could. The comparison legislatively is always with a continuing resolution or a government shut-down, which we dealt with in the spring. With a government shut-down there's a provision in law that says at a specific moment, on a specific day, the government is no longer allowed to spend money. That is a very hard and very precise deadline. The debt limit is a mushier deadline for two reasons. One is the one you describe, which is you are making projections about the cash going in and the cash going out. The other is that Treasury has certain tools that it can use to manage its debt. These tools are all bad fiscal policy, all bad debt management policy; but if your choice is between doing something that's bad debt management policy and defaulting on a Treasury obligation, you do the bad policy. What Treasury has is they have a list of those things that go from least worst policy to most worst policy and they draw a line on that list. They draw that line--they make a judgment call--and they say: Look, once we get below that line we are doing things that are too legally sketchy, too bad policy; we're not going to go below that line; so given where we've drawn that line and given our projections of cash inflows and cash outflows, what does that produce? That produces a date of August 2nd. Can we backtrack for a minute? You mentioned two phrases that are mystifying to me to some extent. I have a vague idea--but continuing resolution and government shut-down. I think the right sentence would be: If the government does not have a continuing resolution, there could be a government shut-down? Which is a different thing than we are talking about right now. But it often gets mentioned that this is a threat-point for either side; and that would be a case where the government would not have the legal authority to go forward because the Congress has not passed budget resolution? Correct. So, there are two types of spending, two classifications: there's discretionary spending, which is otherwise known as annual appropriations. That is spending that Congress makes decisions every year--they pass a law every year and the President has to sign it. There are 12 of those bills. Twelve appropriations bills. Over the course of each year, those 12 bills are supposed to be passed by the House and Senate and signed into law. But the 12--is that monthly or is it just a coincidence that it's twelve? Just a coincidence. Used to be 13; it's now 12. Jurisdictional aspect. So, let's take something like the national parks. The national parks are an element of one of those 12 annual appropriations bills. The Department of the Interior. If the Interior appropriations bill is for some reason not passed and signed into law then there is no funding that can legally be spent--there may be cash available but the Department of the Interior is not allowed to spend any money. So, the Department of Interior shuts down; the national parks would close. And park rangers would get a note, a letter or an email, saying: Don't show up at work on October 1st. Who locks the door to Yosemite? What they actually do is say: Unless you are an essential employee. And someone maybe at the head of the national park service says: We'll have 3 rangers at every park who will lock the door, make sure there is no fire. So that's annual appropriations; and if Congress does not act or can't work something out, that part of the government shuts down at the beginning of the new fiscal year, which is October 1st. What often happens is Congress is behind on their work; it's late September; they are coming up on the deadline; they haven't passed 1 or 5 or all 12 of the appropriations bills; and what you hope is at least they are working hard on it, negotiating, or trying to work something out. So what they do is they basically agree to a temporary truce. They say: We are going to agree to just continue funding the Interior Department for a week at last year's spending levels; we are not going to reprioritize anything, shuttle any money around. We're just going to a one-week continuing of what we did last year while we try to finish the Interior Department's appropriations bill. That's a continuing resolution designed to prevent a shut-down of the government.
9:28That's completely different from what we are talking about now, which is Treasury literally not having enough cash on hand to pay the money that they are in fact authorized and obligated to pay. Let's take one more step back: there is discretionary spending--I hate that phrase because of course it's all discretionary, but what that phrase has come to mean is that there is legislation that's passed about programs--food stamps, Medicare, and various other programs--that are written into law that if you do x you get y dollars; and unless Congress changes that legislation those programs are called non-discretionary. Those programs are what's called mandatory spending because it's built into the way the programs have been shaped. Correct. Artificial distinction--it's a manufactured artifact of the way the laws have been written. But you are right. Annual appropriations, if Congress and the President do not act, no money is spent. Mandatory spending programs, almost all of which are entitlements, tend to be determined by formula, the way you've described it: if you meet criteria x, y, and z then you are entitled to a certain benefit or a certain dollar amount. And the key is that they are determined by formula and that they are continuing programs unless the government changes them. The default is the status quo. The default is continuing to spend the money according to the formula. So, but next year, let's say fiscal year 2012, which is rapidly approaching, starts October 1st, Congress could decide today--I may get the timing wrong; maybe it's 2013--to raise the retirement age of the Social Security program by one year. They have the discretion. Even though it's not discretionary spending--it's called mandatory. They have the discretion to change the retirement age, the benefit formula; and that could be true of all the things we are talking about, including pay to soldiers and a bunch of other stuff. Pay to soldiers is a bad example because that's in discretionary, I presume. Right. Sticking with the entitlements. When can they do that? They can do that any time they want. As many times as they want; or they can ignore it for years. So, there is discretion about those mandatory programs. The only difference is the default. If Congress were to go home and not do anything for the remainder of this year, all of the annually appropriated so-called discretionary programs would shut down on October 1st. Have they agreed on any of them? They have not agreed on any of them because the Senate hasn't actually passed any of them. So, let's back up now and get that straight. We're already 12 minutes into the podcast and I've already learned a lot, so I'm doing well. Give me the sequence of budgetary activity in terms of voting and approval if all were "normal." The normal process is the President submits his budget in February. Which he did; I've seen that document. It's at If you wanted to print it out it's thousands of pages long. The pdf on the web is 216 pages--the short version. There are appendices that provide almost infinite amounts of detail. And that is a proposal. And that proposal--the one I saw--has spending for the coming year? And 9 more years after it. Which are years that President Obama, unless the Constitution is changed, will not be President. But that's traditional. The President submits a budget which goes for 5 or 10 years. So he did that. Now, the President is required by law to make that budget proposal. But, if you think about it, you could put together your budget and submit it to Congress if you want. It would have almost the same legal force--it is a proposal: Hey, Congress, here's what I think you should do. Mine would be smaller, just for the record. His is $46 trillion over 10 years. But the power of the purse--to spend money and collect taxes--that's Congress's job. So, they have to figure out what to do with it. Now, the President did something different this year, which is then, a couple of months later, he offered what he calls a second proposal. He argues that he modified his budget; he laid a new plan out there. Now, there is a debate as to whether his new ideas that he put forward, I think it was in March, were sufficiently detailed and sufficiently precise enough to constitute a new plan. It's certainly not the same level of details as the original. Not even close.
14:43Let's put that to the side. That's politics. So, normal process, the President proposes his budget in early February. Then the Congress works on what's called the budget resolution. The budget resolution is like the blueprint for a house. When you put together the blueprint for the house you are deciding how many square feet is the house, how many floors, how many rooms, and how big each room is. And how they are shaped relative to each other. You are not deciding all of the details of each room. When Congress approves the budget resolution--and it is only the Congress that does the budget resolution--the House approves it; they pass a budget resolution, which looks like a bill. It's basically tables of numbers and procedural rules. But the House passes one in March or early April; the Senate passes one; and the two of them are supposed to work out their differences in a conference committee. And then, if they work out their differences and the House and the Senate both pass the same budget resolution, then you have one blueprint for spending and taxes. And the President has to sign that? No, that does not go to the President. It's a Congress--only document. How does that relate to the 12 bills? I'll get there. That process would normally be led by the two Budget Committee Chairmen--Paul Ryan, in the House, a Republican, and Kent Conrad in the Senate, a Democrat. So, when you heard about the Ryan budget and the House passing the Ryan budget, that was the House doing the House Budget Resolution. Did they do that? They did. When was that? In probably April. And they passed a budget resolution based on a blueprint that Paul Ryan had put forward. The Senate was supposed to do the same, but they have not. If they had--in a "normal" year? If they had, they would have taken that and gone into conference with Paul Ryan; Paul Ryan and Kent Conrad would be the principle negotiators; they would try to work out some sort of compromise between the two. And then you'd bring that compromise back to the House and Senate floors and try to pass it. And if they did? If they did, then Congress has agreed upon the blueprint and that blueprint basically sets the parameters for all of the legislative action on spending and taxes. And that's going to restrict and constrain the 12 appropriations bills. What is does is say we're going to have one floor of the house that's for discretionary spending, if you will. The Budget Resolution decides the total for all 12 of those bills. And it often specifies a dividing line between defense and non-defense spending. That's then given to a totally different committee--the Appropriations Committee--and they take that total and divides it up into 12 slices. Each size of the slice then becomes a bill; and then you have 12 individual bills that move through the process. And if those bills pass? Then the President signs them; you have 12 individual annual appropriations bills and those parts of the government funded by that continue operating the way they normally should.
18:03How long has that process been in place? Since 1974? Mid-1970s. I don't want to go into what it was like before that--that would be another podcast. But, I've noted--and I'm the only person I've noted to note this, though I must not be the only person who has noticed--starting in 1974 the U.S. government started running deficits pretty systematically. Could be coincidence. But it could be that the very process itself is not healthy. It's a very different process than it was before, and it strikes me as remarkably cumbersome. It's cumbersome in years when the Congress and President are different parties; even when they are the same they can disagree for all kinds of reasons. But right now we are in a world where the House is controlled by the Republicans and the Senate by the Democrats. It's not surprising that that can lead to conflict that is hard to resolve. What you're telling me right now--and I've read this; it's weird. Why hasn't the Senate put forward their own budget? You have Republican sympathies. You'd have to ask Senator Reid, the Senate Majority Leader, and Senator McConnell. What do you think they'd say? I think they would say--I think they have said--that there's no need for them to do a Senate-only budget resolution when in fact the budget decisions are being made at a higher level; are being made in these negotiations with the House and the White House. I don't buy that argument, but I think that's the argument they would make. But the bottom line is: we started this conversation about August 2nd; we've digressed, for those of you listening at home--we're talking about October 1st now. Separate problem. That's interesting, informative and surprising to me. Now let's go back to August 2nd. So, on August 2nd, it is expected that if nothing is done, if the debt ceiling is not raised, the Federal government will not have enough money to cover its obligations. These include debt obligations plus outlays that are budgeted--appropriations that have been agreed to from the past discretionary spending bills and mandatory entitlement spending, correct? Correct. The way I think of it, since Congress is expected to be on recess. When is that? I think the very end of July. I think of it as some time in August. Treasury tells us August 2nd. I don't think they are lying, but there are judgment calls and estimation questions; but the mushiness doesn't really matter that much because whether it's August 2nd, 9th, or 16th, it's still some time in August after Congress has supposedly gone on recess, so the mushiness doesn't really matter that much. So, they would go on recess for how long? Basically the month of August; they come back right around Labor Day. So, it would be slightly awkward if they said tomorrow they were going on recess, and August 2nd came along and the Treasury couldn't cover its obligations. So there are two reasons why I don't actually worry about default. One is, if Treasury ever did get put in the situation where they had to choose between default and some other bad policy like delaying reimbursements to states, there's no doubt in my mind what they would choose--they would delay reimbursements to states. Anything other than default. But the other one is that leaders of Congress cannot possibly go on recess with this uncertainty out there in the markets. The political costs would be enormous. They would be destroyed. So, I don't actually worry about default because if Congress doesn't work something out, they will have no other option other than to delay the start of recess. They'll have to stay unless they work out some, even just temporary, solution. Well, that's what people say about the National Football League (NFL) problem, but they haven't managed to come to an agreement yet. Let's talk about this one and then let's talk about default, or you might call it semi-default. Let's say they can't agree. They don't go into recess but they can't agree. As a result this thing happens on August 2nd or August 5th or whatever, where the government can't cover all of its obligations. You are suggesting the last thing that would happen would be a literal default where they didn't cover the debt payments--the interest and principal that they've promised to pay lenders--holders of U.S. Treasuries. That's the judgment I'm making about the judgment call I think the Administration would make. Prediction. So the first question is: What options do they have? You said there's a list. They've exhausted some of those things on the list. What's left when push comes to shove and they find out there's not enough money in the till to pay everything? You are saying they would almost certainly pay the principal and interest on the debt. What else would they certainly pay? They have two types of options. They have debt management options and then they have cash management options. The cash management options are saying: We're going to delay paying x--we'll pay them a week later or two months later than we normally do. So, that's a short run solution. All of these are short run solutions. The debt management things tend to be more complex. For instance, the Treasury is supposed to make cash payments into a retirement fund for government employees; and they are supposed to do that on a regular basis. What in fact Secretary Geithner has done, as his predecessors have done before him, they've declared a debt suspension period where they've said we are not going to put that cash into the Civil Service retirement fund. We'll do it later. When times are rosier. We'll just remind ourselves that we owe money to the Civil Service retirement fund and we'll pay it back when we've gotten past this debt limit crisis. We are in a debt suspension period right now. Oy. He could choose to extend that. He could choose to do that for the next six months. His August 2nd prediction is I think doing a debt suspension through the end of July. He could, if he wanted to, make a judgment call and say he is going to continue that practice. You are grimacing. It's bad policy; and it really is. At some point the lawyers at Treasury will say: Look, you are really stretching the bounds of what we are legally allowed to do, and it appears that the Secretary has made a judgment call that he is going to do this through the end of July and not beyond that. But that's a debt management option. But if you are looking at cash management options, who are you going to delay payments to? Seniors. Probably not. I assume they'd probably start with the states. The Federal government writes big checks to reimburse states for the Federal share of Medicaid, welfare, unemployment, highway obligations--all sorts of things which are joint Federal-state responsibilities. I assume they would do what they often do, which is when they get in trouble they will shift their problems to another level of government. The governors will scream; that will really hurt states that are already in tough fiscal binds of their own; but we are talking about hypothetical, in extremis situations, which by the way I don't think we'll get to.
27:15So, all these options that are available to the Treasury are pretty unattractive. Very unattractive. Though you said a few minutes ago, we're not going to default in the literal sense of the term, both markets and the world and life would view those other options as not good. Correct. So, if I could: a little bit on the Administration's language and the way they've been framing it. I think it's not good that they have been talking about default, because they know that if push comes to shove, they won't actually get to default. And if you know that the alternative really bad scenario is slowing down payments to states or something other than shocking the financial markets, you shouldn't go out there and tell the financial markets that you might stick it to them. But I assume--so far that hasn't cost them, in the sense that financial markets have not shown that they are alarmed by this. I don't know. I haven't looked at the metric of that in the market recently. Isn't it just a negotiating ploy? Which is what the Republicans are doing, too--they are saying they are not going to raise taxes a penny. Maybe they mean it. Some people say they are intransigent. I assume it's just that they want to get more than less. Correct. My problem is with the nature of the threat they are making. When the President said: Look, if we don't do this there might not be enough cash to pay Social Security beneficiaries--which he did say--in my view that's a perfectly legitimate threat to make. It's terrifying to members of Congress. It's real serious policy damage. And it's one that I imagine the Administration could actually consider doing if they were pushed to this. But since I don't think they would ever actually default on interest and principal payments, I think it's irresponsible to make that threat. Well, they could make a judgment that it's better to antagonize the Chinese than Aunt Mabel in Peoria. In terms of the policy consequences, I cannot imagine the Administration doing that. One is direct real pain to millions of Social Security beneficiaries, who will call their member of Congress--and be genuinely hurt in a lot of cases. Counting on that money to pay rent and food. But the other is you are taking the risk of another global financial shock with potentially catastrophic consequences. Not just old people. What we're going to move to next is we are going to turn to the issues of what we here in the Press about cuts and balance and the threats both sides are making. Once concluding point: while I don't particularly like the threats they were making, I think there's mushiness to the August 2nd deadline. I actually support the idea of an early August deadline. I think it's useful to have that mechanism. So, all of the things they are doing in the way they are talking about it, all of these debt and cash options, those to me are all less important because I actually support the idea of let's create a deadline to try to force these hard choices to be made. And the hard choices presumably are going to be to raise the debt ceiling so that we don't have to face these choices, but get a set of cuts. Some kind of fiscal reforms to accompany that.
31:01I want to stop for a second--the digression I want to get to is: What's it like in Harry Reid's office and Paul Ryan's office these days? Who is knocking on the door? Who is calling? And what are they doing? How much do they go out into their colleagues' offices, the other staff or themselves personally, to feel the pulse of this? Obviously nobody wants to not pay seniors. That would be a bad thing, to not send their Social Security checks. When the President says something like that, I assume people are calling these key folks, as well as their own representatives saying: Don't do this; don't do that. And you are also negotiating. You are spending a lot of time as a staffer, with fellow people in your own party, but also across the aisle. What's going on? The negotiations are above Paul Ryan's level now. This has been for the House Republicans it's been the Speaker Boehner and the Majority Leader Cantor. House Minority Leader Pelosi; and then Mitch McConnell. When you say above his level--he's very familiar with the numbers, because it was "his plan." He was the person doing all that. But each of those leaders will have a Budget Staffer--I used to be Budget Staffer for Trent Lott when he was Senate Majority Leader--who can provide the leaders with the substance they need for the negotiation. And then to the extent that they need more help or just because they want to consult the Committee Chairman, Paul Ryan, they'll say: Hey, we're thinking of doing x; what would the numbers be or how would you do it? Or they might reach out to Dave Camp, Chairman of the House Ways and Means Committee: How should we think about a deal on taxes; what are important principles to include in it? So, the leaders of the party, both because they need the expertise and because they want to have the support of key members within the groups they represent, if they are good at their jobs--and I think most of them are--they are reaching out to the members they represent and saying: I'm representing you; here's what I'm doing or here's what I'm getting from Harry Reid or from the President. And they'll do those consultations. Because the leaders are really just agents--they are negotiators on behalf of large groups. They want to get it passed. Nobody wants to say: I'll do x, you'll do y; and then find out that y is not acceptable to the House. So one of the things you read is, say: The Tea Party is putting a lot of pressure on these freshman Republicans. That I understand--they write letters. What goes on in that building? The key is that the members of Congress are all talking to one another. Where? A lot of it is occurring on the floor of the House and the Senate. This is just buttonholing--they are just standing around the water cooler. Well, the key is that they vote several times a day, and so the members are all off in their offices or committee hearings or they are meeting with constituents--they are doing whatever they do. And then the bells ring and there's a vote on the House floor or Senate floor. And the members come from wherever they happen to be and they cast their vote. And it's 15 or 20 minute window and you have to get there to cast your vote. So, that's when you bump into other members and that's when you have conversations about what's going on. Or maybe if Eric Cantor, the House Majority leader, goes down to the floor, he would certainly have half a dozen members cuing up to talk to him saying: Hey, I read in the paper that you said x; you are not going to have me on board if you actually do that. But there's 435 Representatives--some number greater than half are Republicans. They don't sit in a big room Tuesday morning and have breakfast and have a brainstorming session. So, there are organized structures to deal with this. In the House, of course you have Speaker Boehner, Majority Leader Eric Cantor, and then you have the Whip, Kevin McCarthy, and the whip's job is to round up the votes and to count the votes. He is both the intelligence agent, to know what's going on among that 240-something House Republicans--and it's also his job to try to get them to vote as a group when a big vote is coming up. And Kevin McCarthy has a team called his Whip Team--a bunch of other members, other House Republicans, and they divide the Republicans up. So, if you are a Republican Congressman and you are a member of Kevin McCarthy's whip team, you might have 10-20 members who you are assigned to. So, what might happen is the Speaker might say: We need to get the feel of House Republicans on the following question. He calls up Kevin McCarthy and says: Here's the question I want you to whip. And then Kevin McCarthy and his lieutenants and actually have to find the people on their list and say: This is the question we want to know the answer to. So, there's a lot of back and forth, obviously. Information is flowing up and down. And in addition, the good leaders will do meetings with groups of members. They'll say: Look, we've been doing a lot of negotiation; I haven't talked to the freshmen in a while; we've got 30-40 freshmen. Let's divide them up into groups and I'll just do meetings of 10-15 at a time. Or: I haven't met with the moderates, with the Northeasterners, this group. So, they are constantly doing those meetings to get the feel of what's going on. So, they are gathering information; they are also marketing. They are communicating with their members in both directions. And, what role do constituents have in this process? Obviously, that's going on in the background the whole time. Their role is principally through their individual member of Congress. They are calling up the member or their staff or writing letters or an op-ed in their local paper, saying: Here's what I think my representative should do. So, they are trying to influence one person in that big discussion.
38:15Let's move on to where we are today--it's the end of July--and the things you hear floating in the Press, and we'll get to the McConnell proposal--which I think you're the only person I've read that understands it. When I spoke to Keith a few days ago about whether we should do this podcast, I said: How come there's so much misinformation and disinformation about this issue? And I think you said: Well, there aren't that many people who understand and about half who do can't describe it because they are in the middle of it. Those staffers we are talking about. Let's move to what is actually going on and what the threat points of the actual negotiations are over. What we hear about, which I find confusing or deceiving at two levels. By the way, who votes on the ceiling being increased? It is a bill that becomes a law, so the House, the Senate, and the President has to sign it. So, the House, being Republican, is seen as holding--all three of those groups has a veto of one kind or another; the President has a literal veto. If you think of this as a spectrum, you have at the ends of the spectrum, House Republicans at one end and then the President at the other end of the spectrum. And if enough House Republicans and the President agreed on something, you would probably get the support of the Senate and enough Democrats and Republicans to go along. So, the Republicans' negotiating position has been: No tax increases, which obviously there's some ambiguity about what is a tax increase; we'll probably get into that. Their position has been: We are only going to accept an increase in the debt ceiling if we get sufficient budget cuts. Correct. What they've said, and the Speaker laid this out, is: We have to reduce spending by at least $1 for every dollar that the debt limit is increased. There's a certain logic to that, but I'm not sure that's the right--that would be my first choice. That's how he laid it out and that's the principle that's been governing the Republican position in negotiations. And no tax increases. But you hear about, for example, is some people have offered a couple of trillion in cuts--and these are all over 10 years--so the U.S. government is spending roughly $3.5 trillion, $2 trillion over 10 years is $300 billion. That's not a very big number in a $3.5 trillion budget. So, I have two problems. The first one you've written about ably. The first one is: What you call a cut depends on what you call the baseline. So, for example, in the President's budget proposal, because that's the only one I know about--well, there's also the Ryan plan. We have two we could talk about. In the President's plan, he proposed to spend $46 trillion over 10 years, which is $4.6 trillion a year, so a $2 trillion cut from that would lower the average spending over the next 10 years to $4.4 trillion, which to me is not much of a cut. I call that an increase from the current level of $3.5, $3.7 trillion--whatever it turns out to be this year. So, why are we talking about cuts? Why aren't we talking about the level of spending? Any smart shopper who goes into a slightly shady store and sees a sign that says 20% off, might be a little suspicious: Did you mark up the price 50% and then knock 20% off? And so, that's the problem here. And this is not a Democrat or Republican problem. The problem is that the way that we do budgeting in Washington, you are always starting from the assumption that what we've been doing in the past we'll continue doing in the future; and then we'll compare a proposal relative to that. Seems okay. It's called baseline budgeting, and it's a reasonable way to do it. What's the problem with that? The challenge is that you get into arguments about what it means to continue what we've been doing. The area where this came up most frequently and visibly was with the tax rates. The battle that they had late last year. We now have individual income tax rates which have been in place for more than 10 years. These are what are still labeled the Bush tax cuts of 2001 and 2003. Which the President, to the disappointment of his base continued. He extended for another 2 years. Those tax rates are supposed to increase on January 1, 2013. So, current law says that tax rates will go up January 1, 2013. Current policy is the tax rates have been in effect for 10 years. So, the question is, when you are looking at someone's tax proposal, whatever they propose to do on taxes for 2013 and 2014, if you compare it to current law, you are comparing it to an area where the government is collecting a whole lot more money is because your starting point is tax rates have gone up in January of 2013 if you are comparing it to current tax rates. If you are comparing it to current policy, then you are starting from a much lower level of taxes currently by the government. So, if your policy is somewhere between the two, one person will say that's a tax cut relative to current law; another will say it's a tax increase relative to current policy. They will agree on what the proposal will actually collect in revenues, but because they are comparing it to different things, they will describe it as a tax cut or a tax increase. So, that would be relevant for your forecast of the debt and annual deficits past 2014. But on the expenditure side, the issue you've mentioned to me when we've talked about it before is the war. Wars, plural. So, for example, when someone says: I'm cutting spending $2 trillion, the question would be what are you assuming would be expenditures on Iraq and Afghanistan? If your starting point is the President has announced a withdrawal schedule for Iraq and at least a couple of points on that withdrawal schedule for Afghanistan, the announced policy of the Federal government is one that we won't be spending in Iraq and Afghanistan, 5 or 8 years from now, the amounts we are spending today. So, the question is, when you measure the cut, are you measuring that from a starting point that you assume that we are spending as much in Iraq and Afghanistan as we've been spending today, or do you start from a point where you actually assume the drawdown? And the danger is that some of that $2 trillion in spending cuts may be mythical because you never were really going to spend that money anyway, because everybody knows that you plan to pull a lot out of Iraq and Afghanistan. And we could debate about whether it's realistic to plan to withdraw in 2 years or 5 years. That's a separate question. To me, because that's an open question, the debate could be: Well, I really think we are going to be in Iraq and Afghanistan in 2017, so I'm worried that there's a good chance we would be. Certainly there's a good chance we're going to be there in 2013. This is instead just the question of when people are comparing budget plans, how do you measure it? But to me, given that we could debate this, and we're not going to, it seems to me that's why we ought to look at spending, not cuts from a baseline that could or won't happen. I think if you've got the bandwidth to do it, you want to look at both. Fair enough. I always start by looking at the amount of spending that the government will be doing, the amount of taxes that will be collected, because then I don't have to worry that someone's gimmicking me through playing games with the baseline.
47:42So, while we're on this, a few months ago Congress agreed to cut $38 billion and the Congressional Budget Office (CBO) said it's not $38 billion--it's $50 million. Was that one of these gimmicks? No, that was different. That has to do with the way the government spends money and the timing of it. If the government is going to write a check to a senior citizen or pay an unemployment check, if Congress says we're going to pay someone $100 in unemployment benefits, as soon as the government writes that check, $100 goes out the door. So, Congress has made a decision to spend $100 and a check gets written almost immediately. A lot of what the government does, though, the cash goes out the door much more slowly. If the government's building an aircraft carrier and it costs $100 million to build--well it's a lot more than that. It takes 3 years to build it and the payments take place over time. So they spend $5 million in the first year and $30 million the next year and $40 million the year after that, and that $100 million flows out the door over 4, 5, 8 years. What happened with that $38 billion is they have decided to cut $38 billion, but the cash that's being reduced is mostly being reduced in future years. You were only going to pay $350 million of that in cash out the door early. This year. So, I don't think that was a gimmick; I think that was people not understanding how the cash actually flows. There are plenty of gimmicks; this wasn't a gimmick. It was a mistake if the leaders were suggesting we'll be spending $38 billion less in cash this year. But I don't think they were saying that. It got interpreted. But the point we are talking about mainly is when people wave around a flag saying we've just cut x trillion dollars, you've got to be very careful. And you've highlighted I think the most important examples of where the gimmicks took place. On spending, it's Iraq and Afghanistan you've got to watch for. And how much money is that? It's over $100 billion a year, but I'm not sure it's a lot more than that. That's a trillion dollars over 10 years. Real money. One more technical question: Try to help me see how what I'm reading in the paper today about x trillion dollars in cuts relates to the nuts and bolts of the budgetary process that we talked about at the beginning of the conversation. Let's say the Republicans want $6 trillion in cuts--put taxes to the side--over the next 10 years and the Democrats are willing to accept $2 trillion; and they eventually compromise and they agree on $4 trillion. How does that get translated into either appropriations bills that supposedly have to get passed by October 1st in any programmatic sense? How do they manage to do that? They are doing negotiations right now that don't fit within the normal budget process. That's fine. If you had a successful negotiation if you were going to try to take the results of that and push it back into the normal budget process, what you would have been negotiating was that blueprint for the House. That first stage. The result of the agreement would then turn into the House and Senate Budget Resolution, which then all the processes are in place to figure out how that defines the appropriations bills and everything else. I'm really thinking about a different issue here, which is sandbagging. How will the Republicans--by the way, I'm open minded and agnostic about whether Republicans really do want to cut government, interesting separate issue. There's a chance they'll actually do something because they are brand new; name so degraded because of past failures and government under their watch when they had control over the House, Senate, and the Presidency; so I'm very skeptical whether actual cuts will take place. But suppose that is true in their mind. Suppose they actually negotiate real cuts, don't do any of the gimmicks you are talking about; really actually want to get government closer to the levels of spending of 2005 or 2007 before the crisis, 2006 or 2003. How are they going to make sure that that actually happens given the number of steps that actually have to take place? So, they raise the debt ceiling $6 trillion or whatever that is--how are they going to get what they claim? If you get down to the point where you are trying to seal a deal, the deal includes not just numbers but agreement on processes, on an order of events and the rules that will govern those events. So, you make a decision--we've agreed on these spending cuts and we'll put them in a bill which the House will pass first and the Senate will pass second, and all of that will get done by a certain date. And if and when that occurs, we'll move on to the second stage. So, you are actually negotiating the rules and processes by which you will implement this agreement; and the members and their staffs all spend a lot of time making sure they are covered in the contingency where someone renegs or threatens to reneg. Actually, there's a huge cost on Capital Hill to reneging on your deal. You may negotiate in a nefarious way; but actually breaking your word to another member is something that get punished within the confines of Capital Hill. That being said, members are very good at rationalizing and saying: Technically, I complied. So, people just make sure that the process is negotiated. I put up the 1997 budget agreement that was negotiated between President Clinton, Speaker Newt Gingrich, and my old boss Senate Majority Leader Trent Lott--linked to from my site--and you can see it's probably 20 pages and 3 or 4 of them are process steps, describing how this will be implemented. And all that was, was a contract of sorts that you guys agreed on. Was that made public at the time? Making it public is a way of constraining your counterparty from reneging. Negotiated like a bill, like a treaty almost.
55:17Now, I raise this issue with some trepidation, because it's quite complicated, but maybe you can give us some of the flavor. About a week ago, Mitch McConnell, Senate Minority Leader, Kentucky, Republican, proposed something that when it was described to me I thought sounded ludicrous. When I read about it on your blog I thought it was interesting. His idea, the way it was described to me, was: The House and Senate would vote to let President Obama raise the debt ceiling, and that way he'd be responsible for the outcome. That sounded repulsive on all kinds of levels. It's not what he proposed, though. What did he actually propose? I'll try and describe it as best I can in a value-neutral way. For those of you listening, if you've gotten this far and you are sufficiently interested, I'm going to try to limit Keith's description of this because he could talk about this probably for half an hour. We'll try to limit it to just 3-4 minutes. If in the course of that your eyes glaze over but it's too complicated, Keith has laid this out in print very nicely in 2-3 pages. Try to give me a nutshell, thumbnail. What it says is the Congress will give the President the authority to raise the debt limit. It's a transfer of power from the Congress to the Executive Branch. But with strings. Normally what happens is to raise the debt limit, Congress has to act and then the President has to approve it. Congress has to pass a bill saying we are raising the debt limit and then the President has to sign it. Under the McConnell proposal, Congress would give the authority to raise the debt limit to the President. Mr. President: for the next two years, you can raise the debt limit in the following amounts and on the following schedule and we will reserve to ourselves to override it if we don't like it. So, rather than we in Congress having to take an affirmative action to raise the debt limit, we'll stop you if we don't like it. So, that sounds unconstitutional, and politically cowardly. But it's the strings that are interesting. First of all, Senator McConnell emphasizes that--I won't say he says he doesn't like it, but what he says is: Look, the debt limit has to be increased, for the reasons we've talked about before, so I'm not optimistic that these negotiations are going to lead to anything. So, this will probably work. He emphasizes that it's a fallback plan. The response is: If you don't like McConnell's way of doing it, what other way is there of doing it that can actually pass the House and Senate? So, you don't have to like the McConnell proposal to actually think that it has to get done. It is constitutional. It's been done in other areas. It's been done for regulations. When the President institutes a regulation there's something called the Congressional Review Act, which allows Congress to come in and try to stop him. This is modeled after that process. Let's get to the strings. The strings are: First of all, it's time limited. The authority expires in probably 2013. Second, the debt-limit increases can only be for certain amounts, totaling $2 trillion--3 chunks adding up to $2 trillion. And then the third is the President has to propose spending cuts at least as large as the debt limit increase he's asking for. That's in the original McConnell proposal. Subsequent to that--now Senator McConnell and Senator Reid are negotiating--the news reports is they are negotiating adding two additional things. One is attaching some actually real spending cuts to the McConnell bill, so it wouldn't just be the McConnell process--it would be the McConnell process plus hundreds of billions of dollars in spending cuts. So, we Congress will give up our right to vote directly on this, raising the limit--you have to follow spending cuts now and promise to propose some in the future. And the other string that's being described as being negotiated is maybe some sort of process whereby Congress will negotiate and consider additional spending cuts. This is all predicated on the assumption that the ongoing negotiations aren't going to be successful. That's interesting. It clears up for me what seemed to be a rather bizarro move. It's still bizarre, but it's not bizarro.
1:00:32What do you think is going to happen? We're sitting here on July 20th; there's maybe two weeks to go, maybe a little more or a little less. We're watching a game of chicken play itself out. I assume you have friends on Capital Hill you talk to, get some information from; I assume they are somewhat forthcoming, maybe not. What's going to happen? I can see two paths that look fairly likely to me. One is the McConnell path, or now the McConnell renegotiation path. Which is the White House negotiations continue; they are ultimately unfruitful, and something like the McConnell proposal, I think probably with some spending cuts, passes the Senate, on a bipartisan basis; goes over to the House, and then passes the House right before the recess, probably splitting Republicans--probably with a whole lot of Republicans voting no. And that's one where, unlike most bills that pass the House pass on something close to a party-line basis, or everybody supports them because it's non-controversial, this is one where if something like the McConnell-Reid came over from the Senate, I could see it being sort of a 50-50 kind of vote where you've got almost equal numbers of Republicans and Democrats. That's a guess. So, say, the freshmen Republicans vote against it because they say this isn't enough; it's not big enough. That's an attractive political option; it gives them an out with their constituents. The leaders don't look like they are totally dysfunctional. They go home, and that gives them a month. That's tough for the leaders, in the House in particular, because then the people they represent are splitting. Right. Now, their members may be perfectly happy. Some may say: I'm okay voting for this because I think it's good policy. Others saying I think it's bad policy but it's politically attractive to me to vote no and go tell people I voted no. But it's still tough for leaders to have their conference split. And I think there are a lot of members--a lot of House Republicans have been very aggressive in saying they don't want to shift that responsibility for the debt and the authority to the President, and they like the pressure that it keeps on spending. They think it's constructive, and it forces--as ugly as these negotiations are--it's at least forcing the issue of how we are going to deal with high spending levels and the deficits. The other obvious option out there is the one that Charles Krauthammer has described, which is one where the House Republicans initiate is a $500 billion debt limit increase tied with $500 billion in spending cuts. That gets you 3, 4, or 5 months. The House passes that, probably with most Republicans voting for it, maybe a few Democrats; and then they send it over to the Senate and they dare the Senate to stop it. While the President has said he will not sign a short term debt limit increase, I think that's a bluff. Krauthammer has said that's a bluff. I think he's right. What that does, that tees this up again a few months from now; but it keeps the pressure on to have more spending cuts. That's a reaction against the mechanism that Senator McConnell has. But in the paper today, to add one more piece of jargon, the Gang of Six, which are six Senators, three from each party--might be a Gang of Seven now. In the paper today, the President was supporting their plan. New proposal. Did that pass? I don't think so. I certainly don't think it could pass the House. Because? Because it raises taxes more than the President has proposed. And because it doesn't cut spending enough. One thing we didn't talk about in all this was the President's role. We talked about Senate staffers. Presumably the President has people on Capital Hill with what he wants. Who is that team? The President's team has been his Budget Director, Jack Lew, his National Economic Council Director Gene Sperling, his Treasury Secretary Tim Geithner, and then his Head of Legislative Affairs, Rob Nabors. That's the core group, representing the President in the Biden negotiations and all these other negotiations. What are the Biden negotiations? Negotiations that have occurred over the past few months led by the Vice President, created by the President, and it was the VP with those other officials I talked about negotiating with House Majority leader Eric Cantor, House Republicans, Nancy Pelosi for House Democrats, and then the two whips, the two number 2 guys in the Senate--Dick Durbin, Harry Reid's lieutenant, and then Senator John Kyle, Senator McConnell's lieutenant. Those people have been negotiating on a package of spending cuts--and the Democrats would say tax increases--and if there are spending cuts attached to the McConnell proposal it will be a subset of what the Biden group have agreed to.
1:06:40We could think of there being four possible options that could happen over the new two weeks. Option number one is just a failure, leading to a default or a semi-default where the U.S. government doesn't meet its obligations in an attractive, responsible way, which, even if it's not a technical default is not good for our reputation elsewhere. Basically sends a signal to the world that we can't run our government. People talk about investors are going to get spooked. To me, it just says we're dysfunctional, which is not a good thing. Option number two is something like the McConnell plan where the House dumps the responsibility to the President, taking some cuts as well. Option number three is a short term, three monthy thing that the House puts forward, and it's better than nothing, so it passes and we keep fighting. And the fourth option is there is something grander--there's a meeting of the minds and x trillion dollars of cuts, maybe some tax increases, and the debt ceiling is raised. I want to change your option one: I don't think that Congress will recess if they haven't done any of the other three options. If they get down to July 31, one of the other three will get done. If none of those three get done, I think they delay the start of recess and they pass a one-week clean debt-limit extension. $200 billion. Whatever it takes to go a week, or 3 or 4 days. And then they keep negotiating. So, they go week by week. Assuming that you are right and we don't get to the Armageddon, the three things that are left are: McConnell Plus, the grand meeting of the minds, or the 3-months temporary thing. Those are so wildly different. How is that process? They all kind of happen at the same time. That's why this is fascinating. All being negotiated by different people. Ultimately it comes down to three people that really matter--the Speaker, because he decides what comes to the House floor; the Senate Majority Leader, Senator Reid, because he decides what comes to the Senate floor; and the Senate Minority Leader, Senator McConnell, because he can decide whether or not to let Reid do what he wants because he can filibuster. Ultimately those three people--notice I didn't say the President--will decide what comes up, which bills, which will get voted on first, in what order. Lots of other people are involved, but those are the three most important. And no, you can't predict which one of those outcomes will occur. Ultimately, it's not going to be a question of which one of those options do you or I think is better. It's where are the votes; what do you have the votes to actually pass? Bottom line is they are going to pass something. And if they don't, they'll keep trying. May mean the August recess never occurs. At some point the members get exhausted and someone gives in a says: Let's kick this can into September and continue fighting there.

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