There will be several pivotal fiscal policy battles this year and the fight over the debt limit may be the most crucial.

This is a “must-pass” piece of legislation, so it will be a rare opportunity for fiscal conservatives in the House to impose some much-needed spending restraint.

But it’s also a high-stakes game. If Obama (or Reid) refuses to accept the fiscal reforms approved by the House and there is a stalemate, the federal government ultimately would lose its ability to borrow from private credit markets. And while that notion has some appeal for many of us, it almost certainly would require more fiscal discipline than the political system is willing to accept (i.e., actual deep cuts rather than just restraining the growth of spending).

In a bit of reckless demagoguery, the Treasury secretary even says it would mean default — which could cause instability in financial markets.

To preclude that possibility, Senator Toomey of Pennsylvania has a proposal to protect the “full faith and credit” of the United States by requiring the federal government to make interest payments a top priority. Writing for Bloomberg, I opine about the Senator’s proposal.

…the federal government is expected to collect more than $2.1 trillion of tax revenue this year, while interest payments on the publicly held debt will only be about $200 billion. So even without an increase in the debt limit, the Treasury Department will have more than enough revenue to cover its interest obligations and avoid a default. That being said, financial markets are sometimes spooked by uncertainty. And since Treasury Secretary Timothy Geithner began making some irresponsible statements about the risks of default, there is growing interest in legislation by Senator Pat Toomey, a Republican of Pennsylvania, to alleviate the market’s fears. Quite simply, Toomey’s bill would require the federal government to fulfill obligations to bondholders before making any other disbursements. …If the Toomey legislation is adopted, fiscal reformers will have a powerful weapon at their disposal. Secure in the knowledge that default no longer is a possibility, they can be much tougher in their negotiations with the politicians who favor the status quo. This explains the attacks against the Toomey plan. Some even argue that the law requires the government to pay Chinese bondholders (gasp!) before it pays Social Security recipients. This is demagoguery. The federal government will collect more than enough revenue to finance the majority of budgeted outlays. Social Security checks will be disbursed, unless the Treasury secretary decides otherwise. In any event, the attack is rather hollow since it’s almost always made by people who say that default would be a cataclysmic event. What they really mean, it seems, is that deficits, debt and default are bad, and only higher taxes are the solution. That’s what this debate is all about. We have a fiscal crisis caused by too much spending, not too little taxes. Restraining the size and scope of government is contrary to the interests of the iron quadrangle of politicians, interest groups, lobbyists and bureaucrats who benefit from ever- expanding government.

Senator Toomey’s Legislation Would Protect Financial Markets During a Debt Limit Showdown is a post from Cato @ Liberty - Cato Institute Blog

Advocates of limited government often worry about how to maintain republican government and freedom if a substantial portion of the population don’t pay taxes and are net beneficiaries of government largesse.

Lately, it seems like a lot of the advocates of bigger government and higher taxes don’t pay their own taxes — like Tom Daschle, Timothy Geithner, Eleanor Holmes Norton, Charles Rangel, Al Franken, Governor David Paterson’s top aide, Democratic National Convention staffers, Al Sharpton, and so on.

Now the Washington Post has found another one:

Since joining the D.C. Council two years ago, Michael A. Brown has become the chief advocate for raising taxes on the city’s wealthiest residents, arguing that those who earn at least $250,000 a year are not paying their share.

Yet Brown and his wife have failed to pay the property taxes on a Chevy Chase home assessed at $1.4 million, according to public records. Brown, who earns more than $300,000 a year, owes the District $14,263 for property taxes, the records show.

I guess it’s easy to support higher taxes if you don’t intend to pay them. But I suggest that Brown bite the bullet, recruit Daschle, Franken, Norton, and their colleagues, and form a new organization:

Non-Taxpayers for a Tax Hike

Non-Taxpayers for a Tax Hike is a post from Cato @ Liberty - Cato Institute Blog

It looks like Republicans and Democrats may have made a deal on blocking the tax increases that loom on January 1. No details yet, but reports are that they will extend the current tax rates for one to three years. That means investors and businesses will face continuing uncertainty and the real prospect of a tax increase in one to three years.

Unfortunately, pundits continue to use terms like “extending the Bush tax cuts” or “tax breaks for the wealthy.” In reality, American taxpayers have faced a particular range of personal income tax rates for the past eight years. If the 2001 and 2003 tax laws are allowed to expire, then Americans will see increased tax rates on income, dividends, capital gains, and estates. So the issue is not “tax cuts” or “tax breaks,” it’s whether we should increase taxes in 2011.

And as I noted before, President Obama understands this. He said in mid-November, “I want to make sure that taxes don’t go up for middle class families starting on January 1st.”

The president’s got it right. Taxes are about to go up, and the debate in Congress is whether that’s a good idea. Unfortunately, President Obama does want taxes to go up for business owners, corporate executives, and investors on January 1, the very people whose decisions have the most immediate impact on economic growth and job creation.

And that’s the issue we should be debating: Is it a good idea, especially in a time of continuing high unemployment and slow growth, to raise taxes on investors and entrepreneurs. And even if Congress delays the decision, is it a good idea to leave investors uncertain about what tax rates they’ll face in a year or two?

Let’s hope Congress and the Obama administration soon learns that higher taxes, more regulation, a larger share of GDP shifted to government, fears of Fed monetization of soaring debt — not to mention newspaper reports of Obama budgeteers “flipp[ing] through the tax code, looking for ideas” and threats of “an array of actions using his executive power to advance energy, environmental, fiscal and other domestic policy priorities” — can only discourage employers, investors, and entrepreneurs. Robert Higgs has cited the role of “regime uncertainty” in prolonging the Great Depression, as investors worried about what FDR might do next. Will Wilkinson points to Treasury Secretary Tim Geithner’s saying “businesses want certainty. They need certainty so they can make long-term plans today.” Unfortunately, Will says, “Creating completely irresponsible, economically chilling regime uncertainty would appear to be the basic modus operandi of the Obama administration.” A temporary extension of today’s tax rates, with a continuing threat of a rate hike in a year or two, is entirely in keeping with a regime of uncertainty.

Taxes and Uncertainty is a post from Cato @ Liberty - Cato Institute Blog

Yesterday the Treasury and HUD hosted a “Conference on the Future of Mortgage Finance.”  It was an invite-only of Washington insiders.  Somehow I found myself on the invite list, which was almost enough to make me believe that the Administration was finally serious about reforming Fannie and Freddie.

After getting over the nausea of being in a room full of people who I personally knew bore some responsibility for the mess we are in, I was then shocked that, compared to the rest of the room, Treasury Secretary Geithner came across as the radical.  On one hand Geithner was very clear that the Administration was going to push for some sort of government guarantee, but also that the current structure, particularly Fannie and Freddie, were broken.  He also went as far as admitting that Fannie and Freddie were a cause of the crisis.

Such statements only became radical in contrast to the rest of the room.  Maybe about 80 percent of the attendees were blindly and violently attached to the status quo.  Most offensive to those us who fight for free markets was that the industry representatives were the most vocal advocates for the status quo.  To even suggest that lenders should bear the risk of loans they make was crazy to this group.  It was a clear reminder that being pro-market and pro-business are generally two very different things.   In fairness, not all lenders were busy plotting to find ways to profit while dumping their risk onto the taxpayer; some, such as Wells Fargo, were far more supportive of the private sector actually bearing the risk.

Most of those who were not industry insiders were housing and community advocates.  While this group did seem a little less self-interested, they appear to have learned little about the risks of over-expanding homeownership.  Repeatedly, access to homeownership, as if it could solve every social ill, was pushed as the primary goal.  A few dissenters reminded us that rental is a viable option too, although they were mainly looking to continue/expand Fannie and Freddie’s support of the multifamily rental market.

If the Administration was hoping that this group was going to come up with answers, then they must have been sorely disappointed.  If Obama is serious about taking the taxpayer off the hook for risk in the mortgage market, then he is going to have to take on the special interests.  My fear is that the event was just the beginning of how health care reform played out:  cut a deal with the industry, pay off the Democratic base, and screw the taxpayer.  Let’s hope we actually see some change on this one.

Reflections on a Mortgage Summit is a post from Cato @ Liberty - Cato Institute Blog

Recent comments by Treasury Secretary Tim Geithner and National Economic Council Director Larry Summers illustrate the incoherence of the administration’s fiscal policy. Previously, they were against raising taxes in the short-run because that would damage the economic recovery. Now they are hinting or suggesting that recovery depends on raising taxes to reduce the deficit.

Previously, they supported rising levels of spending and deficits to supposedly grow the economy, but now they are saying that deficits need to be cut for the economy to grow. Geithner and Summers seem to be repeatedly changing their message depending on the political requirements of the news cycle, rather than providing a consistent program based on economic theory.

The reality is that rising taxes and spending suck resources out of the private sector economy, which damages growth whether we are in an expansion or a contraction. That’s because governments in America already consume more than one-third of everything produced in the nation, and so further resources added to the government sector produce very little or negative returns.

Geithner and Summers ought to stop trying to manipulate the short-term macroeconomy, and instead focus on economic reforms to remove obstacles to private sector growth over the long-term.

Administration’s Fiscal Muddle is a post from Cato @ Liberty - Cato Institute Blog

Over the weekend Treasury Secretary Timothy Geithner, who’s had a bit of trouble paying his own taxes, made it clear–in Washington-speak–that tax hikes are coming.  He appeared on air with George Stephanopoulos. 

Byron York of the Washington Examiner provides the transcript of the relevant Q&A:

STEPHANOPOULOS: Former deputy Treasury Secretary Roger Altman said it is no longer a matter of whether tax revenues should increase but how. Is he right?

GEITHNER: George, it is absolutely right and very important for everyone to understand we will not get this economy back on track, recovery will not be strong enough to sustain unless we can convince the American people that we’re going to have the will to bring these deficits down once recovery is firmly established. Remember we inherited a one point three trillion dollar deficit. The cumulative consequences of the policies this country pursued over the last 8 years left us with 6 million dollars of more debt than we would have had by making a bunch of commitments to cut taxes and add to spending without paying for those. We are not going to be able to afford to do that. And it is very important that people understand that. Our first priority now though is to get this economy back on track, make sure this financial system is repaired. Without that, we’re not going to get our deficits under control and the necessary path to fiscal responsibility, the necessary path to getting this country living within our means again is not just health care reform, to bring down those costs, but we’re going to a range of other things and that’s going to be a very difficult challenge for this country. We can do this, it just requires the will to act.

STEPHANOPOULOS: Including new revenues?

GEITHNER: Well, we’re going to have to look at — we’re going to have to do what’s necessary. Remember the critical thing is people understand that when we have recovery established, led by the private sector, then we have to bring these deficits down very dramatically. We have to bring them down to a level where the amount we’re borrowing from the world is stable at a reasonable level. And that’s going to require some very hard choices. And we’re going to have to do that in a way that does not add unfairly to the burdens that the average American already faces.

STEPHANOPOULOS: But that’s the dilemma, isn’t it?

GEITHNER: That is the dilemma.

STEPHANOPOULOS: Because when you look at health care reform again _ I know you believe it’s going to bend the cost curve over time. But the Congressional Budget office says, at best, the health care reform plans out there are going to be deficit-neutral over the next ten years. So to bring the deficits down, there is not enough money in the discretionary budget, we all know that. That means more revenues. The President has said that taxes won’t go up for any Americans earning under $250,000, but it doesn’t appear that he’s going to be able to keep that promise if you’re going to bring the deficits down.

GEITHNER: George, we can’t make these judgments yet about what exactly it’s going to take and we’re going to get there. But the very important thing, and no one is going to care about this more than the President of the United States, is for people to understand that we do not have a choice as a country, that if we want an economy that is going to grow in the future, people have to understand that we have to bring those deficits down. And it’s gonna, it’s going to difficult – hard for us to do and the path to that is through health care reform. But that’s necessary but not sufficient. We [are] going to do some other things too.

STEPHANOPOULOS: So revenues are on the table, as well?

GEITHNER: Again, we’re not at the point yet where we’re going to make a judgment about what it’s going to take. But the important thing –

STEPHANOPOULOS: But you’re not ruling it out, you can’t rule it out.

GEITHNER: I think what the country needs to do is understand we’re going to have to do what it takes, we’re going to do what’s necessary.

Everyone in Washington knows what Secretary Geithner means when he says “we’re going to do what’s necessary.”  His apparent equivocations are simply intended to provide the usual deniability for politicians with reelection campaigns to run.   

Tax increases are coming!

Tax Increases are Coming! is a post from Cato @ Liberty - Cato Institute Blog

With the House having passed credit card legislation and the Senate scheduled to take up its own bill this week, one questions keeps coming back to me: What’s the hurry?

We are in the midst of a recession, which will not turn around until consumer spending turns around—so why reduce the availability of consumer credit now? And the Federal Reserve has already proposed a rule that would address many of Congress’ supposed concerns. The Fed rule will be implemented July 2010. Were Congress to get a bill to the president by Memorial Day, as he has asked, the Federal Reserve and the industry still couldn’t implement it before maybe January, if they were lucky.

Congress should keep in mind that credit cards have been a significant source of consumer liquidity during this downturn. While few of us want to have to cover our basic living expenses on our credit card, that option is certainly better than going without those basic needs. The wide availability of credit cards has helped to significantly maintain some level of consumer purchasing, even while confidence and other indicators have nosedived.

It was the massive under-pricing of risk, often at the urging of Washington, that brought on our current financial market crisis. To now pressure credit card companies not to raise their fees or more accurately price credit risk, will only reduce the availability of credit while undermining the financial viability of the companies, ultimately prolonging the recession and potentially increasing the cost of bank bailouts to the taxpayer.

As Treasury Secretary Timothy Geithner has repeatedly said, some of the biggest credit card issuers will not be allowed to fail (think Citibank, American Express, Capital One, KepCorp) should they suffer significant losses to their credit card portfolios. Will taxpayers ultimately be the ones covering those losses?

Congress should also further examine the wisdom of restricting credit to college students under the age of 21. Outside of the obvious age discrimination, why treat adults between the ages of 18 and 21 any differently from those above 21? The basic premise of college is making sacrifices today in order to have a wealthier tomorrow—accordingly being able to borrow against that better tomorrow should be an option for any college student. Just as some small number of college students don’t benefit from college, some don’t benefit from credit cards, but throwing the “baby out with the bathwater” hardly seems the idea solution.

Now Is Not the Time to Reduce Credit Card Availability is a post from Cato @ Liberty - Cato Institute Blog

Treasury Secretary Timothy Geithner has finally unveiled details about his bailout plan. Not surprisingly, he plans on propping up insolvent (but politically influential) financial institutions. Even worse, there is no effort to shut down — or even reform — the two government-sponsored enterprises that deserve the lion’s share of the blame for the financial crisis. Yet as Peter Wallison of the American Enterprise Institute explains in this new video from the Center for Freedom and Prosperity, Fannie Mae and Freddie Mac are at the epicenter of the housing bubble and subsequent damage to financial markets.

Fannie Mae and Freddie Mac: The Toxic Duo is a post from Cato @ Liberty - Cato Institute Blog