Why Grandma Yellen Must Be Forced To Prioritize Spending
Let’s first reprise the great 2011 debt ceiling showdown. On July 28, just a few days prior to when the Treasury’s borrowing authority would have been exhausted, the yield on the benchmark 10-year UST note stood at 2.98%. And despite months of heated warnings to the freshly elected GOP House majority about its duty to promptly pass a “clean” debt ceiling increase that figure was actually down considerably from the 3.36% yield of early January 2011.
That’s right. As shown below, the whole seven month ordeal on Capitol Hill about the expiring borrowing authority resulted in, well, an irregular but marked decline of the benchmark bond yield.
Yield On 10-Year UST, January 2011 to August 2012
On July 31st the House GOP famously capitulated, agreeing to a big debt ceiling increase in return for what was advertised to be $2.1 trillion of deficit reductions over the next decade. At that point the yield dropped further to 2.58% on August 5th, the day S&P dramatically cut the UST credit rating from AAA to AA after the market closed.
The folks at S&P were apparently not amused by the banana republic “brinkmanship” that had prevailed on Capitol Hill for the better part of the year. So they sternly admonished Washington that—
The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,” the company said in a statement.
Did the yield soar the next week in response to America’s loss of its purported pristine credit rating, as had been warned ad nauseam by the Wall Street and Washington powers that be in the run-up to the crisis?
Why, no, it did not. By year-end 2011 the yield had further fallen to 1.89% and, as shown above, by the first anniversary of the downgrade in early August 2012 it had plummeted to just 1.50%.
Moreover, by the latter point the Y/Y inflation rate was running at 2.0% on our trusty 16% trimmed mean CPI. In effect, one-year after all the debt ceiling strum and drang of 2011 the real yield on the benchmark government security was negative 50 basis points. That is to say, the US government lost its pristine credit rating and was rewarded with tens of billions of annual debt service savings!
It might be argued, of course, that the $2.1 trillion deficit reduction plan which accompanied the GOP debt ceiling capitulation was what caused yields to go down, not up. But that doesn’t wash, either.
These deficit reductions were to be achieved by—
- A defense and nondefense discretionary appropriations freeze that was to save $900 billion over ten years;
- A further $1.2 trillion of savings from entitlements based on permanent reforms to Social Security, Medicare, Medicaid and Food Stamps etc. via the recommendations of a Joint Select Committee on Deficit Reduction.
As it happened, the latter “study committee” approach to sweeping entitlement reform was not meant to be the usual duck and dodge airball. The debt ceiling deal also established a backup procedure to increase the incentive on the Joint Committee to reach a compromise. This was to occur in the form of automatic cuts called “sequestration” that would trigger if the committee failed to make and implement the $1.2 trillion of additional savings.
Broadly speaking, for 2013 and future years these automatic across-the-board cuts would have meant about an 8.4% reduction in most affected non-defense discretionary programs, a 7.5% cut in affected defense programs, an 8.0% savings in affected mandatory programs other than Medicare, and a 2.0% cut in Medicare provider payments. For 2014 through 2021, the Medicare cut were to remain at 2 percent while the percentage cuts in other programs would gradually shrink.
As it happened, the Select Committee produced a big fat goose egg in terms of actual budget savings. So then, piling gimmick upon gimmick, the above described sequestration process was triggered for FY 2014 to FY 2021.
Alas, on the entitlement side of the budget ledger it is hard so see where the sequester “cuts” drew any fiscal blood. Federal transfer payment spending, in fact, rose from $1.8 trillion in 2011 to $2.9 trillion by FY 2021, representing a gain of 64%.
Federal Transfer Payments, 2011 to 2021
Likewise, in the case of nondefense appropriations the eight-year total of outlays (FY 2014-2021) was to be capped at $4.11 trillion. In fact, outlays for the period totaled $5.49 trillion or 34% more.
Moreover, by the last year of the House GOP plan (2021) the results were nothing short of a joke. The capped annual level of spending was supposed to be $558 billion, but it actually clocked in a $895 billion or 60% more.
Similarly, the eight-year defense cap was supposed to total $4.342 billion, but actually came in at $5.109 trillion or 18% more. Again, the FY 2021 cap was $589 billion under the House GOP plan, but actual outlays came in at $742 billion.
Overall, the Rube Goldberg budget device that then GOP Speaker John Boehner had crafted in return for the debt ceiling increase was supposed to limit appropriated defense and nondefense spending to $8.45 trillion over the next 10-years in the absence of entitlement reforms from the Joint Select Committee. The actual level, as it turned out, was $10.60 trillion. That is to say, these fakers missed their targets by $2.15 trillion over the period!
Moreover, since the Boehner gimmicks left entitlements largely unaddressed, the overall deficit outcome after FY 2011 made a pure mockery of the plan. At the time, CBO estimated that during the 10-year budget window impacted by the Boehner plan (FY 2012 to FY 2021) the cumulative Federal deficit would total $3.49 trillion.
Alas, the actual figure turned out to be 3.3X higher at $11.60 trillion!
As a result, the public debt actually doubled during the decade after the July 2011 debt ceiling showdown. The $15.2 trillion public debt of 2011 became $29.6 trillion by 2021, and has continued to climb from there into still another so-called debt-ceiling crisis.
Total Public Debt, 2010 to 2021
So here we are again—allegedly three weeks away fro
Article from LewRockwell
