Ugh, I Missed This Little Turd

From Dan Mitchell

Called a “debt failsafe trigger,” Obama’s scheme would automatically raise taxes if politicians spend too much. According to the talking points distributed by the White House, the automatic tax increase would take effect “if, by 2014, the projected ratio of debt-to-GDP is not stabilized and declining toward the end of the decade.”

Pretty good evidence that the default mentality in Washington is that "all your money are belong to us" and whatever is leftover that the government does not happen to spend, you are welcome to use for yourself.

  • Ignoramus

    Our federal government is a runaway train. We're past the point of stopping it without our seeing a horrific Michael Bay-produced train wreck. Even the noble efforts of Paul Ryan and some others have become futile. Crashing a big train at 60 mph -- instead of 90 mph -- is still a catastrophe.

    Most of the high-end public discourse still assumes that this is just another "he said - she said" fight between Republicans and Democrats ... do we build a great room addition to the house? ... or do we buy a new BMW instead?

    Newsflash: We could double the personal income tax on everyone and still not close the gap that we already have. Or we could tax everything over some threshold like $100,000 (soon to be $70,000)and still not close the gap. (Hold this thought).

    We also talk like this is a long-term problem. But Bernanke is spinning 20 plates on 20 sticks. When they start falling and breaking -- and they will ... and soon -- rates will back up ... and we'll double dip. Deficits will then pop over a $2 trillion run rate. Did I mention that we still have a Sand State housing crisis ... an unemployment crisis ... gas over $4 and climbing.

    The USA has taken too much advantage of its position as a financial hegemon. We will get called on it.

    This isn't necessarily The End of the World As We Know It, but could be.

    I could go on, but enough ....

    2) That our DC leaders are well intentioned. Some are. Most are oblivious, or worse still ... promoting their party's interest at the expesne

  • rox_publius

    i heartily endorse this proposal. it's about time a clear cause and effect was drawn between taxes and spending.

  • Charles

    1) A "Debt Failsafe Trigger" that drives increased access to tax revenue as a result overspending of previous tax revenue is in no way a "failsafe".

    2) "spending reductions in the tax code" is possibly the most disturbing Orwellian phrase I have ever read, outside of books actually written by Orwell.

  • Vitaeus

    How about a more useful cause and efect, they spend more than the government takes in and they are barred from reelection or even better recalled immediately after the end of the current budget year.

  • Reformed Republican

    I wish I could set up something similar. If I cannot keep my spending within my budget, my employer would be forced to increase my salary.

  • marco73

    This is very similar to the mechanism that automatically raises Congress salary, unless Congress votes not to increase their own pay. The mechanism always seems to kick in on a Friday at 5pm, right before a long holiday. Congress today votes on increases that won't take place for 1 or 2 election cycles.
    What is so magical about 2014? Why not have a straight up or down vote today, to raise our tax rates starting right now? Aren't we having a crisis?

  • carnahan

    We are not having a crisis. Long term interest rates are low. In fact after the S&P downgrade yesterday (like they know what they are doing.. hello AAA ratings on CDO trash), after an initial drubbing of bonds, they actually closed up on the day! If the markets really feared runaway inflation or default, our interest rates would be in the Greece category. There is no crisis, just hysteria. These debt terrorists remind me of rabid global warming fanatics. Despite no clear evidence (i.e. crashing bond rates), the sky is still falling. However, if we raise taxes to try and close the deficit, the sky will fall.

  • Tim

    @Carnahan: Don't confuse day-to-day and inter-day moves on bonds and interest rates with long term trends. The low point value, for example, could reflect an under-pricing of bonds; and if I assumed that S&P's action would fuel the political will for substantive budget reform, those low prices may reflect value for a long term investment in a buy and hold strategy.

    However, if we get nonsense instead of real reform; we would see interest rates rise, and in a hury. Remember, S&P didn't downgrade yesterday, and they didn't downgrade long term. They provided negative guidance in mid-term sovereign debt. Possibly because Greece and the US are different; when the budget crisis hits the US, the public reaction will be different than in Greece - or at least that's the assumption - so something will get done.

  • Old Soldier

    Yes - He wants automatic tax hikes if we don't control spending. In the same speech, Obama promised not to allow any spending cuts in any major program.

  • Jeff

    The political will to fix the issue is not there, for either party.

    As a country, we will continue on this path until external events stop us. How long this continues is really up to the bond markets. When treasury auctions start failing, without a fed backstop, and rates shoot up 5% in 30 days, it will stop.

  • Ted Rado

    We need to run the country like we run our personal finances. If you don't have the money, you stop spending. Also, one allocates their money to get the most bang for the buck. In my wildest dreams, I can't imagine spending money I don't have, and when my credit cards are maxed out, simply getting more credit cards.

    The USG gets involved in anything and everything. It should be limited to activities that can only be done by government. Everything else should be left to private enterprise. Where does the Constitution say we are entitled to housing, health care, college education, etc. etc.? In addition to wasting money, it is a huge disincentive system.

    We seem determined to keep our collective finger on our self-destruct button. The only way out is to cut out all non-essential government activities immediately, Will some suffer? Sure. But the USG can't fulfill every need for every citizen. That is insane.

  • Orlin Bowman

    My understanding the “debt failsafe trigger" is not an increase in taxes but rather a “reduction in deductions,” such as mortgage interest etc. , that would decrease to match the increase in government spending. This, IMO, would be a back door approach to raising funds on the back of the middle class given that both parties are proposing reductions: the republicans pushing for a greater reduction. President Obama's proposal would keep social spending (Medicare, welfare etc) at the same level and make up the difference whenever the level of GDP to debt reaches a certain level (that it is at right now) or whenever a new government entitlement is increased or created.

  • Orlin Bowman

    And to add to my comment, I would prefer that when the debt failsafe trigger kicked in, there would be an across the board reduction in all government spending, including defense and social spending, to equal the reduction in debt to GDP.

  • skh.pcola

    A "reduction in deductions" results in an increased tax liability. Semantics aside, it's the same as an increase in taxes.

  • carnahan

    @Tim, I am not confusing intra day moves with the long term picture. Please show me an historical example of a monetarily sovereign country with a fiat currency that had their bond yield essentially fall for 25+ years (is that long enough?)and then just defaulted with no intervening war, invasion or some huge extrinsic factor. As with many things, it's not a crisis, but politicians on both sides for differing reasons want you to believe it's a crisis. We are not Greece or Portugal. They cannot issue their own currency since they adopted the Euro. We can. It's like fearing a bowling alley will run out of points to issue to bowlers.

  • Tim

    @carnahan: It's funny that you drew an analogy to bowling; because there actually is a 'crisis'[1] in bowling -- score inflation. As ball coverstock technology has improved, scoring average for recreational league bowling has been climbing; along with the number of 300 games. In other words, technology has made the game easier. The concern amongst kegglers is that inflation 'devalues' score achievements.

    Inflation is essentially where the debt crisis will lead. The government, even using 'fiat currency', can't print an infinite amount of money without absolutely destroying the economy. (Zimbabwe is an example of this) As for intervening war, invasion, or extrinsic factor -- I would argue that those wars a caused by economic instability.

    Here's really the crux of the crisis. The government can't print it's way out of the mess; and it can't default. Well, it can't do these things without the complete economic and political destabilization of the world. Eventually, as our 'obligations' (SSI, the Medi's, debt service) consume more and more of our GDP; we'll reach the point of global instability by default.

    Oh. Here's a link analyzing sovereign defaults through history. There are quite a few defaults -- but I didn't bother cross referencing bond yields. Also, some of the data goes back quite a way, including England's default of 1340.
    http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf

    [1] Relatively speaking. It's a crisis if you care about bowling. Otherwise, it's a "huh"?

  • Ignoramus

    Bernanke can't keep buying Timmy's IOUs forever, or can he? If he can, we wouldn't need taxes.

    When Bernanke stops buying, rates will back up. Higher rates, >$4.00 gas, inflation on consumer staples ... can you say double dip?

    The big debate is being framed as "cuts to those most vulnerable" vs "tax cuts for the rich" But it actually won't be about raising taxes on billionaires as much as it'll be about rasing taxes on those making more than $100,000, or even $70,000. If you do the math, there aren't that many people who make over $1 million in a year ... and a trillion has a lot of zeros. So we're on track to kill off our high earning kulaks.

  • carnahan

    @Tim: Reinhart/Rogoff default examples are either gold standard or countries that had debts denominated in a currency they couldn't print. The US has neither of these. The situations aren't comparable and inflation is not the inevitable result of more money in an economy. You might care to read http://www.creditwritedowns.com/2010/05/mmt-yes-virginia-there-is-a-difference-between-greece-and-the-us.html

  • Tim

    Marshall Auerback's analysis assumes that 1) deficit spending and debt don't hamper an economic recovery and 2) the government is able to reduce the cost of assistance programs. I would argue that the former assumption may be true; but the latter is completely pie-in-the-sky. Every government assistance program is way over the projected costs, and none of them die. Just look at agriculture subsidies as the premier example.

  • Ashen Horizon

    In a vastly manipulated market sentiment as an indicator is completely ineffective. The ZIRP policies and the endless liquidity change the game so much that we witness market impassiveness in the face of shocking disasters and unrest. However what i find completely incomprehensible is why people prefer to keep their money locked in treasuries or other equally devoid of yield investments when there are numerous alternatives such as http://www.traderpaths.com that offer so much better and faster returns.

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