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Posts Tagged ‘politics’

Ignore the WARNing

The Worker Adjustment Retraining and Notification Act (WARN) is a federal law requiring an employer with more than 100 employees to provide at least 60 advance notice of any mass layoffs or plant closings.  The law is intended to alert employees and communities of upcoming layoffs, and a company can be penalized for up to 60 days of employees’ wages for failing to comply with the WARN notification.

The WARN requirements have created a serious political problem.  According to the Congressional budget deal worked out last year, defense spending will be reduced by $55 billion starting on January 2, 2013.  If the spending cuts occur many defense contractors are concerned about a significant reduction in their contracts, which could lead to massive layoffs on January 2, 2013.  In order to avoid penalties and meet the 60-day WARN notification, employers need to notify their employees before November 2, 2012, which just happens to be 4 days before Election Day… ala the political conundrum.

On Monday, the Department of Labor (DOL) mailed a letter to state agencies stating it would be “inappropriate” for employers to send out WARN layoff notifications in anticipation of the defense spending cuts.  This immediately raised many eyebrows as to whether or not the DOL’s letter was politically motivated.   Suspicions were heightened, because the Department of Labor previously issued guidance to employers saying it could not give WARN advice regarding specific situations.

Three primary concerns come to mind regarding this matter.

Undue Political Influence

It’s hard to get away from politics in an election year.  Every decision is interpreted through a political prism, and it’s hard to divorce politics from the process.   Decisions like this one are made by high-ranking political appointees, and their jobs and influence are dependent upon whether or not their boss retains his job.  Thus, it can be near impossible to think politics won’t influence the decision makers.  However, it seems like elected and appointed officials are predisposed to make most of their decisions based on what’s best for their career and pocketbook, instead of what’s best for the country.  We can’t honestly know the motivation of the DOL personnel involved in this decision, but choosing to provide guidance on an issue they previously refused, certainly raises questions.

Meaningless Laws

The primary rationale for the DOL’s conclusion for employers to refrain from sending out WARN notices was the uncertainty of whether or not the cuts would remain in effect. The DOL essentially acknowledged this law was a sham in the first place and was passed for political expediency.  Irrespective of whether Congress ever intended for the cuts take effect, are the spending cuts the law or not??  According to the legislation on the books, the cuts will occur unless a new law is passed to restore the spending.  As a citizen, you’re penalized for disobeying a law or regulation, so why do politicians and government bureaucrats get to decide which laws they enforce or follow?

Ineffective Government

As a nation we are probably more divided than any time in history since the Civil War, yet the problems we face are immense.  The sluggish economy and $16 trillion debt are enormous problems.  Rather than having serious discussions and working towards creative solutions, our leaders are more focused on partisan brinkmanship and political machinations.  If history repeats itself, the defense spending cuts will probably never happen.  Rather than face a disgruntled electorate and risk losing an election, our leaders will forge some “compromise” which maintains the status quo and allows both sides to declare victory.  Meanwhile, nothing is resolved and the country plunges further into debt each day, and our leaders are able to pass laws that are never intended to go into effect to maintain the charade of getting something accomplished.

The DOL’s guidance for employers to ignore the WARN notices should set off a much larger warning.  Aside from the political ramifications, it’s a dangerous place for politicians and bureaucrats to selectively choose which laws to follow and enforce.  We’re either a nation of laws or not.  If not… then God help us.  Lawless nations and those which allow its leaders to use the laws to reward their friends and punish their enemies are always destructive to the people at large.

The Supreme Court Rules on Obamacare

In a 5-4 decision, the U.S. Supreme Court upheld the constitutionality of Obamacare (the Patient Protection and Affordable Care Act).  Lawyers, politicians, journalists and citizens are scouring the judicial rulings to understand its implications.  The law is exceptionally complex, so it will take time fully comprehend the ramifications of the ruling.

Here are a couple of the most significant elements of the Court’s ruling.

  • The penalty for failing to purchase health insurance is equivalent to a tax, which Congress has the authority to assess.  Thus, the individual mandate is Constitutional.
  • Congress does not have the power under the Commerce Clause to force you to purchase insurance.
  • Congress can require states to increase their Medicaid roles and provide financial incentives to do so, but it can’t withhold all Medicaid funding if it doesn’t.  It seems confusing and contradictory and will likely lead to further litigation.

Here are a couple of quick thoughts and observations.

  • The logic of the Court regarding the individual mandate was interesting.  Apparently, Congress can’t force you to purchase something, but they can tax or penalize you if you don’t.
  • The Medicaid issue is one of the most unclear parts of the ruling.  Unlike the individual mandate, it seems Congress can require the states to increase their Medicaid roles, but can’t penalize them if they don’t.  The issue hinges on state sovereignty, and it will be interesting to see how this plays out, especially since several states have already passed legislation opting out of Obamacare or the individual mandate.
  • The split ruling was no surprise, but it was a shock that Chief Justice John Roberts upheld the constitutionality and Justice Anthony Kennedy did not.  The unpredictability of judges and juries is what’s often referred to as the hazards of litigation.  No matter how strong you think your case is, a judge or jury may see it differently.

Today’s ruling by the Supreme Court isn’t going to end the discussions or fights over Obamacare.  There is still a lot more to come.

I welcome your comments and thoughts regarding the Supreme Court decision.  Click here if you would like to take a quick poll on whether you agree or disagree.

Is the Unemployment Rate Misleading?

The April employment statistics were released by the Bureau of Labor Statistics (BLS) last Friday.  The official U.S. unemployment rate for April 2012 dropped to 8.1%.  It hasn’t been this low since January 2009.

According to the BLS, 115,000 new jobs were added to the workforce in April.  Certainly that is good news for the 115,000 who are now employed, and after three years of high unemployment, it’s encouraging to see the rate dropping.

The report has been out for a week, which has given people more opportunity to dig into the numbers.  Unfortunately, the headline is much more encouraging than some of the supporting data.  Here are a few facts to consider

  • 310,000 people left the workforce in April (that’s nearly 3 times as many jobs which were created).  People who are no longer looking for a job contributed more to the reduction in the unemployment rate, than those who obtained a new job.
  • There are 968,000 people looking for work, who are classified as “discouraged.”
  • 7.8 million people are working part-time for economic reasons.
  • 5.1 million people have been unemployed for more than 39 weeks.
  • 324,000 women dropped out of the labor force in the past two months.

So is the unemployment rate misleading?  Personally, I don’t think it’s misleading, but you also shouldn’t take it at face value.  A deeper understanding of the supporting data will provide a better picture of what’s really happening.

Realize the unemployment rate is only an estimate.  No one knows for sure how many people are truly unemployed and looking for work.  For example, many people think it’s misleading to exclude those who have given up looking for work.  While that may be the case for discouraged and frustrated people who can’t find a job, what about those who retire, start their own business or decide to stay home to take care of a family member?  Those people may have no intentions of re-entering the workforce, at least in the near term, so it would also be misleading to count them as unemployed.  Thus, the quandary of who should be classified as unemployed.

I don’t think the unemployment rate is misleading, unless the BLS changes its data collection and classification measures, which happened at the beginning of 2011 (read more here).  Since the BLS hasn’t changed their methodology recently, the drop in the unemployment rate can be considered legitimate.  However, you should investigate some of the supporting data, and draw your own conclusions about the U.S. employment situation.

Since it’s an election year, expect politicians and political pundits to quote the rate as a measure of their job performance or some other elected official and make their political argument for supporting a particular candidate.  Don’t be misled by a headline or political statement, since they rarely tell the whole story.  The unemployment rate may not be misleading, but other people can be.

A New Record

On Wednesday, the United States of America established a new record, although it may not be one we want to boast about.  As of the close of business on Wednesday, the U.S. total debt exceeded $15 trillion.

This bad news gets worse… don’t expect the debt increase to stop or slow down anytime soon.  We’re already two months into the current budget year without an approved budget (that’s a different matter).   However, the 2012 Budget proposals put forth so far expect to add at least another $1 trillion to the debt, which is approximately $3 billion per day.

Interestingly enough, there was very little media coverage regarding this matter.  There was more coverage about Occupy Wall Street, the Supercommittee and the Penn State scandal than our debt breaking the $15 trillion barrier.  After all the acrimony earlier this year about raising the debt ceiling, it might not be considered important news.

Here are a few details about our national debt which might interest you.

  • The U.S. population is approximately 310 million people, which means there is approximately $48,000 of debt for every man, woman and child.
  • The debt is divided into two broad categories; intragovernmental debt and debt held by the public.  The intragovernmental debt is $4.7 trillion and the debt held by the public is $10.3 trillion.
  • The intragovernmental debt is essentially money owed to the Social Security system. When politicians refer to the Social Security Trust Fund, this is what they mean.  Its debt the government owes itself.
  • Even though it may be considered an independent government agency, the U.S. Federal Reserve is now the largest stakeholder of the debt held by the public.  The Fed currently holds $1.665 trillion of U.S. Treasury Securities.
  • China is the second largest holder of debt, with $1.148 trillion.
  • As a result of the Federal Reserve’s quantitative easing, its stake in U.S. debt obligations increased by over $850 billion over the past year.

I may be a bit cynical, but unfortunately I don’t think there is much hope Congress will act to stem the flow of red ink in the near term.  They battled a few months ago and agreed the debt will rise to over $16 trillion by the end of 2012, so I don’t expect much to happen on the political front.  The lack of media coverage is an indication of the lack of interest by Congress in this dubious milestone.

On the bright side, one thing that’s preventing us from being crushed by our own debt is that nearly one-third of the $15 trillion of Treasuries is effectively being held by the federal government (i.e., Social Security and the Federal Reserve).  Thus, our real debt to investors is effectively $10 trillion.  Not a good situation, but better than $15 trillion.

At the same time, it’s not a healthy position for the government to hold so much of its own debt.  Congress may have played fast and loose with the Social Security funds, but the day has arrived when the Social Security payments exceed the taxes collected.  It’s going to put more strain on the budget, and the real cash flow of the federal government, as Social Security starts cashing out its intragovernmental loans.

It’s also not great for the Federal Reserve to continually increase its Treasury holdings.  As I and others have previously written, the Federal Reserve essentially printed money to buy up a huge chunk of government debt issued over the past 12 months.  Quantitative easing may have some economic benefits, but there are tremendous long-term risks from this strategy.

Americans like to break records, and we just broke another one.  Unfortunately, it’s an honor we could have done without.  The real question is what are we going to do to stop the hemorrhaging and get our fiscal house in order?  We just set a new record, and it’s only a matter of months before we break the $16 trillion mark.

The Buffett Rule

On Monday President Obama unveiled his deficit reduction plan.  In addition to reducing the deficit, he outlined his ideas to pay for the American Jobs Act he proposed two weeks ago.   No surprise his plan includes tax increases on more wealthy Americans.  Phrases such as “shared sacrifice” and people paying “their fair share” make for good sound bites.  However with Washington, the challenge is often deciphering what their pithy sayings mean.

He referenced the “Buffett Rule” as one of his proposals.  It’s named after Billionaire Warren Buffett who has been rather outspoken about the need to raise taxes on the super-wealthy.  Cueing off of a New York Times op-ed piece written by Mr. Buffett a few weeks ago, the Buffett Rule is supposed to make sure people who make over $1 million a year will pay a higher percentage of their income in taxes than someone who makes less than the $1 million threshold.

You may agree or disagree with the concept of the Buffett Rule.  Regardless if you think it’s a good idea, I have three primary issues with the proposed Buffett Rule.

  1. Additional Complexity.  As a tax professional, I can attest that the tax code is exceptionally complex and at times unwieldy.  With the myriad of deductions, exemptions and exceptions, it will be virtually impossible to make sure some making over $1 million will pay taxes at a higher rate than someone making less.  Everyone’s tax situation is unique, so it’s near impossible to offer such a guarantee.  It may sound simple, but it’s going to be very difficult to achieve.
  2. Increased Tax Avoidance.  While it may be good for those of us in the tax business, I can assure you that there will be a host of tax professionals looking for ways to minimize the tax liabilities of their clients under whatever new rules are enacted.  It’s simple economics.  The higher the tax rate, the more cost-effective it is to pay someone to find strategies which minimize your taxes.   You may have your opinions about what’s fair and right, but there is nothing illegal or immoral about structuring your affairs to pay less tax.  Tax evasion is illegal, but tax avoidance is not.  As I recently wrote, if you personally feel like you aren’t paying your fair share, then I would encourage you to make a voluntary contribution to the U.S. Treasury.  Trust me… they’ll take your money.  Political discourse and debate are fine, but it’s wrong to castigate someone who is abiding by the law because you don’t think the result is fair.
  3. Unintended Consequences.  Congress has a lousy track record of using the tax code to target certain persons.  The Law of Unintended Consequences often kicks in, and the negative ramifications are often much more detrimental than anyone anticipated.  Two great examples come to mind; one recent and one from decades ago.  The 1099 reporting provision included in the health care reform is the most recent Congressional bumbling.  As soon as it was passed, it became clear the administrative nightmare would far exceed any benefits obtained.  Fortunately, Congress repealed it before it became effective.  The Alternative Minimum Tax (AMT) is the classic example of unintended consequences.  The AMT was enacted in 1969 to tax 155 wealthy families who were viewed as not paying their fair share.  By 2008, 3.9 million taxpayers were subject to AMT, and 27% of them made less than $200,000. This probably isn’t what the 91st Congress had in mind.

The Buffett Rule may cause some wealthy people to pay more in taxes, but if history is a predictor of the future, the long-term results will be much different than expected.  Such targeted tax policy generally hasn’t yielded the desired results.  I’m not sure why they think the Buffett Rule will be any different.

Paying for Stimulus II

President Obama unveiled his latest jobs plan before a joint session of Congress last night.  Click here to read the summary of the proposals included in the American Jobs Act.  Since many of the proposals are essentially the same as the $827 billion Stimulus Bill passed in February 2009, many people consider the recent proposal to be Stimulus II.

The debates and discussions about the effectiveness of such the programs can be tackled later.  In this article, I simply want to explore the way the government is going to pay for any new spending, should it pass Congress.

Although many of the details are still being hammered out, President Obama estimated the cost of his proposals to be $450 billion.  He expects to pay for the additional spending by closing corporate tax “loopholes” and raising taxes on wealthier Americans.  Closing loopholes usually involves minor tweaks to selected tax provisions, and typically don’t raise huge amounts of revenue.  For the past few months, President Obama has been touting the need to close a “loophole” for corporate jets.  The “loophole” is all about depreciation, which is merely a timing issue.  Jet owners will still get to depreciate their aircraft, but it will take a little longer.  The additional tax revenue from closing this “loophole” is estimated to be $3 billion, over ten years, or the equivalent of $300 million a year in additional revenue.

See the graph below of the total government revenues.  You’ll notice total tax revenues are approximately $2 trillion annually.  Thus, total tax collections would have to increase by nearly 25% to raise an additional $450 billion.  Congress will need to close a lot of “loopholes” and increase rates substantially to raise an additional $450 billion, which is extremely doubtful in the current political environment.

Although this may seem like simple arithmetic, but there is a twist.  You need to understand Washington code to decipher what President Obama really means.  Just like the $3 billion in savings from closing the corporate jet depreciation “loophole,”  the $450 billion will come trickling in over the next decade, not next year.

Members of Congress and the President frequently talk about the current budget and the 10-year budget horizon simultaneously and interchangeably.  It most applications, it means spending will be paid in the current year, and any additional revenues or spending cuts take place over the next decade.

Time will tell if I’m correct, but I expect the President wants us to borrow the $450 billion over the next 12 months in an attempt to spur economic growth and pay it back over the next decade.  Given our current economic situation, you may think this is a wise decision and/or necessary.  I’m not convinced.  With a $14.7 trillion debt, which is growing by $100 billion a month, I’m not sure adding another $450 billion is the best for our long-term financial future.

Before you decide if it’s a good idea or not, at least make sure you know what the President and Congress want to do.  Like so many other things in Washington, you may think they mean one thing, only to find out our leaders meant something else.

If anyone says the American Jobs Act will be fully paid for, check to see how and when.

Raising Taxes on the Super-Rich

Billionaire Warren Buffett made headlines last week with an opinion article he wrote for the New York Times.  His statement “My friends and I have been coddled enough by a billionaire-friendly Congress” attracted a lot of media attention and discussion.

In writing, “It’s time for our government to get serious about shared sacrifice” you can deduce his apparent attempt to sway public opinion and encourage Congress to increase the tax burden upon the wealthiest individuals in the country.  He generally described the targets for the additional sacrifice as those making over $1 million each year, but he didn’t offer specific proposals or suggestions of what additional sacrifice they should be required to make.

In the article, Mr. Buffett disclosed his 2010 tax liability of $6,938,744, which he said was 17.4% of his 2010 income.  It’s a hefty sum; not surprising for one of the world’s richest men.  Most of us would be happy to earn $6,938,744 in our lifetime, let alone pay that much in taxes in one year.

I have no qualms with Mr. Buffett sharing his opinion and participating in the debate over U.S. tax policy.  It’s part of his First Amendment rights to free speech.  Hypothetically, I would ask Mr. Buffett one question… if you believe your taxes are too low, what’s stopping you from paying more?

If Mr. Buffett thought $6,938,744 was insufficient or not his fair share, what prevented him from paying more?  I contend the only thing preventing him from paying a greater sum was himself.   If he chose, Mr. Buffett could have voluntarily added to his 2010 tax liability whatever additional amount he thought was fair.  The U.S. Treasury would have gladly accepted his additional contribution.

His tax liability of $6,938,744 is a rather exact number.  While not explicitly stated, it’s implied this was the statutory amount he was required to pay.  Thus, he paid the minimum amount he was legally obligated to pay, which is what everyone does, irrespective of their socio-economic status.

I may be cynical, but I know many wealthy people who advocate for government spending and programs, yet are constantly trying to minimize their personal tax liabilities.  There is nothing wrong with minimizing your tax liability.  It is part of what I do for people on a daily basis.  However, I see a tinge of hypocrisy when you think others should pay more tax, yet look for “loopholes” for yourself.

I think Mr. Buffett’s credibility in advocating for higher personal income taxes would be bolstered if he chose to make a voluntary contribution above and beyond the minimum required tax liability. His convictions would be demonstrated by his actions and not just his words.

That’s my opinion. What’s yours?

Effects of the Credit Downgrade

Late Friday afternoon, Standard & Poor’s (S&P) announced it was downgrading the credit rating of U.S. Treasury securities from AAA to AA+ and retained its negative outlook.  Although S&P previously announced it was considering a downgrade, the announcement was a bombshell dropped at the end of a tumultuous week of economic and political news.

  • After weeks of political posturing and rancorous debate, Congress passed the Budget Control Act of 2011, increasing the debt ceilingPresident Obama signed the legislation on August 2, thereby avoiding a potential default by the U.S. government.
  • After the debt deal was done, Moody’s and Fitch Ratings announced they would retain their AAA rating of U.S. Treasuries but continue to monitor U.S. fiscal health.
  • The Dow Jones Industrial Average ended a 9-day losing streak with a blistering 334 point decline; wiping out all of the gains for 2011.
  • S&P capped the week by announcing their downgrade.

Since Friday afternoon, politicians, economists, and pundits have been discussing the impact of the downgrade.  There has also been a lot of pointing fingers of who is to blame for  tarnishing the image of the U.S.  It has also left a lot of people wondering about the real implications of a downgrade in the credit rating of the U.S. Government.

Here are a couple of things I think you can expect from the downgrade.

  • There is a bruising to the American pride and psyche.  Nothing has changed since Friday, but most Americans want to believe we are the best of the best.  The downgrade is likely to increase the uncertainty and pessimism of the American consumer.
  • Interest rates won’t change immediately.  Interest rates are effectively determined by the free markets, not by S&P.  A credit ratings agency simply tries to assess the risk of a particular security, but it’s up to the market to decide the interest rate.  Don’t expect interest rates to change in the near future, but there could be some upward pressure on rates if investors become more leery about the fiscal stability of the U.S. government.
  • The stock markets aren’t going to crash.  As anticipated, the markets were battered yesterday and lost about 5% of their value, but it’s not a direct correlation to the S&P ratings change.  Remember the Dow took a 334 point hit last week before S&P made its announcement.   Furthermore, the 10-year Treasury yield fell from Friday’s rate of 3.558%. This means investors bought more Treasuries; the very securities that are supposedly more risky.  The selloff is more attributable to the poor outlook of the global economy and European sovereign debt worries.  Investors are seeking stability, so they’re buying up Treasuries and gold.

There is one potential redeeming element which may come from the downgrade, but it’s far from certain.  This might serve as a wake-up call for our political leaders to get serious about the fiscal future of our country.  As I wrote last week, the debt deal was long on promises and short on spending cuts.  In my opinion, a 0.6% cut in spending for 2012 is a pittance in light of overall spending.  The rating downgrade could prompt our leaders to get serious about tackling the debt and deficit.

No longer is it just extreme fiscal conservatives who think it unrealistic for the U.S. government to overspend by $1 trillion each year without consequence.  Standard & Poor’s is a significant player in the global economy.  You may question the timing and motivation of their downgrade, but it should serve as a clarion call of the long-term risks and ramifications of our debt and deficit spending.  I can only hope our politicians are listening and have the courage to do something about it.

Details of the Debt Deal

After weeks of political wrangling, Congress and President Obama enacted the Budget Control Act of 2011.  The legislation provides for an immediate increase the debt ceiling of $400 billion, averting a potential default by the U.S. government.  Avoiding default is probably the one thing most Americans are pleased with in this bill.

The debt deal is long on political rhetoric and short on details.  While many of our political leaders are touting the success of this legislation as a significant step towards dealing with the fiscal challenges of our country, there is little discussion of what is actually going to happen.  Beyond deferring the most significant spending cuts to a Joint Select Committee (JSC) composed of 12 Congressional leaders, evenly divided by house and party, there are few details of how the actual spending cuts are going to be achieved.

The Congressional Budget Office scored the spending cuts to be $2.1 trillion between 2012 through 2021. Of this amount $917 billion is supposed to be guaranteed in exchange for allowing the Treasury to sell another $900 billion in bonds.  The remaining $1.2 trillion is supposed to be determined by the JSC.  At this point, no one knows what is going to be cut to achieve any savings.

From what has been released, the bill calls for $21 billion of spending cuts in Fiscal 2012 and $42 in 2013.  Not surprisingly, the substantial cuts happen far in the future, which means there is always the chance the cuts won’t happen.  For those of us who believe government spending is on an unsustainable path, this is not very encouraging.  Here are a couple of things to consider.

President Obama’s 2012 Budget  proposal calls for $2.6 trillion in revenue and $3.7 trillion of spending; resulting in a $1.1 trillion deficit.  The House passed a budget with $2.5 trillion in revenue and $3.5 trillion of spending; racking up a $1 trillion deficit.  According to the debt deal, spending will be trimmed by a measly $22 billion.  This is about 0.6% of all federal  spending for the coming year.

Talking in trillions and billions can seem rather esoteric, so think in these terms.  Assume you make $50,000 this year.  If you managed your finances like the federal government, you would spend over $70,000, borrowing the difference.  If you cut your spending like Congress and the President have proposed, you would only trim your spending by $420 for the next year.  That’s right… just a mere $8 per week, even though you’re overspending by $20,000.  Given those parameters, would you say you were serious about changing your spending habits by cutting $8 per week?

Many politicians and commentators are calling this a historic piece of legislation.  They refer to it as a down payment on our debt and an important first step.  This may be true, but it’s an indication of how difficult it is for Congress to cut federal spending.   If they can barely manage to trim $22 billion, how are they going to come anywhere near close to $1 trillion?  It would take over $1 trillion of additional cuts and/or revenues to balance the budget, before we can even begin to pay down the debt.

The debt deal further illustrates the Congressional propensity to defer hard decisions.  Effectively, it will be a future Congress and potentially a different President, who will have to make the hard decisions to cut spending and balance the budget.  Given the history and culture of Congress, it’s no wonder the debt deal is long on politics and promises and short on specifics and spending cuts.

Debt Ceiling Extension – Short or Long-Term

One of the issues in the debt ceiling debate is the size of the increase in borrowing capacity, which effectively determines how long before the government runs out of money again.  President Obama and some Congressional leaders have demanded any debt ceiling increase cover the projected federal deficit for at least 18 months, thereby deferring the next debt ceiling vote until after the November 2012 election.

Congress has passed and the President has signed three debt ceiling measures over the past 2 ½ years. Here is the  history of the debt ceiling votes since President Obama took office in January 2009.

  • February 2009 – debt ceiling increased to $12.1 trillion, lasting 10 months
  • December 2009 – debt ceiling increased to $12.4 trillion, lasting 2 months
  • February 2010 – debt ceiling increased to $14.3 trillion, lasting 15 months

President Obama’s current insistence for a limit to last 18 months is longer than any of the three extension bills he previously signed.  Given the acrimonious nature of the current debate and political wrangling, it’s understandable why he prefers to push any future debate beyond the 2012 election.   However, a political preference to avoid a contentious issue does not justify vetoing legislation with a shorter time frame.

Many Republicans are willing to pass a shorter-term measure because they believe the political sentiment on this issue is in their favor.  In all fairness, if they believed a short-term measure was detrimental to their political future, they would be pushing for a longer term solution as well.

The supporters of the 18-month measure have argued a short-term increase will continue to negatively impact the economy and jeopardize the U.S. Government’s credit rating.  However, neither Moody’s nor Standard & Poor’s have indicated the size of debt increase as a significant factor in assessing the credit rating of U.S. Treasury securities.  Both have stated there are two primary factors they are considering; 1) the U.S. not defaulting on any of its payments and 2) a meaningful reduction in future budget deficits.  The length of a new debt ceiling has not been mentioned as having any bearing on their assessment.

The markets seem to echo this sentiment.  We’re days away from the August 2nd default date, yet there has been no appreciable change in the trading or pricing of U.S. Treasuries.
It appears traders and investors assume Congress will pass some measure to prevent the government from defaulting, even if it’s short term.  Although investors prefer Congress to act sooner, they understand the political landscape and realize such issues often result in deals being cut at the last moment, or Congress passes a short-term extension to grant themselves more time to reach a deal.

The 2011 Budget is a good example.   Rather than shutting down the government for failing to reach an agreement, Congress passed six continuing resolutions to fund the government from October 1, 2010 through April 8, 2011, before the final budget deal was reached.  The shortest continuing resolution was 3 days, keeping the government operating from December 18 – 21, 2010.  Although it may be annoying and unnecessary, short-term extensions to keep the government operating have become rather common.

At this point, I think a short-term resolution is probably the most likely bill to pass.  As much as the President may want an 18-month limit and some conservatives want no increase in the debt ceiling, neither one of them wants to be the blame for the U.S. government defaulting and the potential economic chaos which could result.  Political winds can shift rather quickly, and no one wants to be caught downwind of decision which freezes the markets or dramatically increases interest rates.

If you have read any of my prior articles, you know I strongly believe dramatic long-term changes to our fiscal policies are necessary. At the same time, significant changes in policies or spending should not be hastily passed, and I would much prefer good legislation over expediency.

Everyone may be tired of the debate and just want it to be over, but don’t allow politicians to obscure what they’re doing by waiting until the last minute to present and pass something.   Spending cuts and tax increases affect real people.  Tough choices need to be made… that’s a given.  Let’s just make sure we all have time to understand the choices being made by our elected officials; before they are enacted.