Garett Jones  

Why the GOP is the Bigger Default Risk

PRINT
Freakonomics on Shale Gas... Last Night's Debate on Health ...
Because Democrats really, really believe in death panels.  Steve Rattner, a former Obama Administration official, used the term (presumably as a form of gallows humor) in the Times a few weeks ago.  

Rattner's piece hits some of the same themes as the New England Journal of Medicine essay on "global spending targets" coauthored by Obama Administration officials that I discussed earlier.  And it's a reminder: For whatever reason, Democrats are serious about cutting health care spending the way the GOP is serious about cutting taxes.  Democrats walked the plank for it once and I predict they'll do it again and again.  

If I'm a bondholder, I like people who cut costs and raise revenue.  Note that I'm using the word "revenue" not "taxes."  To a Treasury bondholder, you and I are mere sources of net cash flow, not moral agents with inherent human rights.  Contra Jessie J's catchy tune, it's all about the money.  

Some think the GOP is better on spending.  Possibly, but to them I invoke Bruce Bartlett's aphorism: The GOP is the Party of Medicare. Since Medicare is the biggest long-term spending problem, Medicare is the spending issue that matters most to Treasury bondholders.  

The Ryan plan is evidence that the GOP has a wing devoted to cutting the growth of spending over the long haul. And his proposal for Medicare premium support or vouchers or whatever you call it would be better for the majority of citizens than a single government-managed plan.  

But again: Bondholders don't care about your well-being.  Bondholders care about getting paid.  

And as Ezra Klein notes, the Dems already cut $700 billion out of Medicare.  The proof of the pudding is in the brutal, voter-enraging legislation they've already passed. So on health care spending, we should perhaps declare D's and R's about tied from a bondholder's point of view.  

If the two parties are roughly tied on their willingness to control the most important spending component, and one party is much more willing to bring me revenue, which party should I as a bondholder favor?  

Coda: Best argument against my claim: House Speaker John Boehner.  After the budget negotiations failed, he came to the floor of the House and told his caucus "I put revenues on the table" (just listen to the first 20 seconds).  When Treasury bondholders heard those words--spoken in public--I'm guessing they breathed a sigh of relief.  

This, bondholders surely thought, is a man we can work with.  


Comments and Sharing





COMMENTS (19 to date)
Julien Couvreur writes:

Is risk of default a good or a bad thing?

Methinks writes:

I labour under no delusions about how much "better" the GOP is on spending.

That said, to the bond holders, medicare recipients and the rest I say this: You took a risk and you lost. As a taxpayer I don't care about bondholders (and all people sucking off the tit of government are effectively in the same position) any more than bondholders care about me. We entered into no contracts with each other. Their contract is with the clowns in congress. Thus, I'm unwilling to toil to pay their debt and I won't. If anyone thinks that the majority of Americans are, then they must be fantasizing that Americans are a different, less self-interested breed of humans than they actually are.

It would take a profoundly stupid bondholder to believe that raising tax rates on the Democrats' preferred victims (who happen to have the most options) and in light of the avalanche of regulation sliding toward us will actually raise revenue. The sitting ducks in terms of tax victimization are all in the sainted and untouchable middle class. The Dems have made some promises regarding how off limits they are. As a bondholder, I know that's where the real money is.

[Apologies for the delay. Actually, the delay was because of your having several spam-catching words in the same comment, including both "stupid" and "suck." The word you probably thought caused the delay is not currently on our spam list at all. Spammers are evidently not literate enough to bother with the out-of-fashion word "tit" except in combination with another word that is on our spam-catcher list. In any case, though, as a long-standing commenter, one usage of one spam word is not usually enough to delay one of your comments. Because of our point system, it takes the confluence of several spam-words. --Econlib Ed.]

Jeff writes:
And as Ezra Klein notes, the Dems already cut $700 billion out of Medicare.

"We'll see," said the Zen Master.

Sonic Charmer writes:

Similarly, a person who maxes out their credit cards and dutifully pays only the minimum balance, which is more than their income - but never discusses or considers defaulting - looks like he is 'less of a default risk' than someone who sees his credit card debt as unsustainable and makes noises about exploring their options...

Until he isn't, of course.

egd writes:
the Dems already cut $700 billion out of Medicare
You're kidding, right?

The ACA cuts are similar to the "Doc Fix" that has been around since the late 90's: a plan to cut reimbursement rates for Medicare. But Congress has voted to prevent implementation of the "Doc Fix" since the law was passed.

Since Congress has refused to implement the "Doc Fix" every year since its passage, why would you expect Congress to implement "Doc Fix v.2"?

John Thacker writes:
the Dems already cut $700 billion out of Medicare. The proof of the pudding is in the brutal, voter-enraging legislation they've already passed.

Just like the GOP already cut about half that much they passed the Sustainable Growth Rate in 1997, right? Except that the "Doc Fix" has suspended it every year. Don't count your chickens before they hatch.

I think that the long term political equilibrium (regardless of which party wins or takes what side) is that the cuts won't happen, but the extra spending will. Therefore, on net the policy of doing nothing (the GOP) was better for bondholders than the policy of more spending that will happen but spending cuts that won't (the Dems). If the Republicans try to keep the cuts, the Democrats will run on repealing them-- just look at how the Medicare Part D debate went, where as irresponsible as the Republican plan was, the Democrats were only distinguished by offering a competing drug plan that was even more expensive and less paid for.

John Thacker writes:

Even worse for your argument, let's stipulate that Medicare is the worst long term budget item. It is.

However, even if we grant that the Democrats cut $700 billion out of it (we'll see), the overall PPACA plan was roughly revenue neutral over the ten year budget period, because it had as much spending balancing it. (To get savings, you have to count things that the CBO won't score, and I'm sure you can't claim those as savings that have been voted for.)

It doesn't matter than you've cut $700 billion out of your largest spending item if you immediately spend that $700 billion on something else. That's like moving into a smaller house and buying a fancier car. Indeed, if you've made the easiest $700 billion in cuts but replaced them with other spending, you may have actually made it harder to get long term fiscal balance.

Just as you said about the GOP, the Democrats may have "a wing" that "really, really believe[s] in death panels." But if you think that they don't have a lot of members who thought that pretending to fiscal rectitude was necessary to get coverage expansion passed, but will be more than willing to get rid of the cuts as soon as they bite, I think you're sadly mistaken.

John Thacker writes:

Bondholders don't care about your single largest budget item. Bondholders care about getting paid. Cutting $700B from one item only to immediately spend it elsewhere isn't impressive.

Pat writes:

John Thacker's right.

Bondholders don't care if 700 billion is spent on a different prefix (Obama vs Medi)

Future cuts are less certain than current spending. The phony Medicare cut makes things worse for bondholders.

I suspect there's a big overlap in readership between MR and econlog and personally, I get more than my fill of Ezra Klein over there...

Doug writes:

But guys, don't you see. ACA will "bend the cost curve" any day now. For the government to spend less on healthcare it must spend more.

It's like totally obvious to all the smart people at the New York Times and in DC cocktail parties. If the plainlanders can't see the wisdom of spending more to to spend less it's only because they're too stupid.

Plus the United States actually can't default, sovereign debt, Keynesian stimulus, blah blah blah. Long story short fiscal prudence is completely unnecessary for the state. Pay no attention to Europe.

Methinks writes:

Doug, they can't tell up from down and they're bending the cost curve the wrong way because of this dyslexia. Come next election, they'll swear up and down that they bent the cost curve (they just won't say which way) or try to blame it on Bush.

And my all time favourite explanation for why prudence isn't necessary for the state? Because through the magical power of discounting, money is free to the government. I have a degree in Finance and I don't remember that math, but political math seems to be completely different from the math math I learned and use. Maybe you have to pass it before you find out what's in it.

Floccina writes:

Jeff Hummel: "default would be a balanced budget amendment with teeth”

Methinks writes:

I think there is a word (you can guess what it is) that got my previous comment permanently stuck in comment purgatory. Second try:

Any bondholder who believes that Democrats are going to be able to "raise revenue" by raising the tax rate on the intended victims is a bondholder too...uh...challenged "upstairs" to deserve to be paid back.

You see, this is the group of people with the most options and can most easily and perfectly legally avoid paying more in taxes. I understand that bondholders don't care about me and see me as a source of revenue (fat chance). I don't care about them either. I entered into no contract with them. The clowns on Capitol Hill did. I have no intention of toiling to pay off Uncle Sam's debt and if I were a betting woman (and I am), I bet that no American with any alternative will either. If bondholders think differently, then they are fantasizing about a different and less self-interested American than I have ever met. Heck, even Warren "please tax me" Buffet to this day employs a posse of CPAs to minimize his tax burden.

The much much better way to raise some "revenue" is by victimizing the untouchable and sacred middle class with a tax hike. The government can just yank it out of their paycheck before they ever see the money and their options are pretty darn limited. The Dems are promising not to do that. The Republicans are afraid to do that as well.

If I were a bondholder, I'd be thinking about how fast I can dump my position before things get really tough. We've got time. Europe will blow up first. The one thing I wouldn't be thinking, if I were a bondholder, is "politicians can fix this".

D. F. Linton writes:

I don't know if its fair to score the $700B take from Medicare for Obamacare as a demonstration of willingness to cut Medicare in general. It strikes me more akin to using your home equity line of credit to make the first couple of payments on your new boat loan.

Hugh writes:

It is sad that a professor of economics should fall for this 3 card trick of robbing Peter to pay Paul.

The US Government needs to adopt proper accounting standards to stop politicians from playing these games.

Ken B writes:

The best argument against you, via Macur Olson, is the size and power of public sector unions, both state and federal. And they are Democrat.

Ken B writes:

Garrett:

For whatever reason, Democrats are serious about cutting health care spending the way the GOP is serious about cutting taxes. Democrats walked the plank for it once and I predict they'll do it again and again.

I'm frankly a bit puzzled by this claim. I think the Democrats want to increase governmental control of health care spending. That's what they walked the plank for. They are in fact consistently hostile to the kind of thing that would actually cut costs. As one example DRH, myself, and others have made the proposal on this board to radically reduce the restrictions on prescribing medicines. That got short shrift even when the Fluke debate made a clear example, contrceptives, front and centre in the debate. I heard not a single supposedly cost-cutting-berserker Democrat endorse that. But when was there a better chance if Garrett is right? But if I am right, and they care more about control, this is easily explained.

Slim934 writes:

"You see, this is the group of people with the most options and can most easily and perfectly legally avoid paying more in taxes. I understand that bondholders don't care about me and see me as a source of revenue (fat chance). I don't care about them either. I entered into no contract with them. The clowns on Capitol Hill did. I have no intention of toiling to pay off Uncle Sam's debt and if I were a betting woman (and I am), I bet that no American with any alternative will either. If bondholders think differently, then they are fantasizing about a different and less self-interested American than I have ever met. Heck, even Warren "please tax me" Buffet to this day employs a posse of CPAs to minimize his tax burden."

@ Methinks: this is wonderful. There is little I enjoy more than watching people point out the obvious concerning the debt: if it were to default it would largely be bad for the parasitic classes and we have no duty to them.

Peter writes:

Yes, reduced media scrutiny of Dems means they can cut things that would ruin the career of a Republican. Imagine the bird around W's neck had he cut $700b off medicare.

Power to cut plus lust for revenue would argue your point.

As a libertarian, of course, you might cheer pain for bondholders qua people who shift resources from private to public sectors.

Comments for this entry have been closed
Return to top