Which Is The Real Doomsday Plan: The Fiscal Cliff Or The Debt Ceiling Showdown?

I agree with Ezra Klein and apparently the Congressional Republicans that it is the latter, see http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/05/the-gops-bizarre-doomsday-plan .  The former is just a slope, even if my state of Virginia will be hard hit if the full DOD cuts go through and are not offset, given that 10% of the VA GDP is DOD directly.  As for the tax changes, well, the fiscal cliff tax changes involve simply going back to the Clinton tax code under which the US saw its most rapidly growing economy in the last quarter century, certainly something worth freaking out about (eeeek!).  And has been widely reported, both the tax increases and the spending reductions will only come in gradually, so instead, to the extent it is anything all that awful at all, it will come in only gradually, a slope for sure, but not a cliff.  So far, the stock market has largely ho-hummed over all this, sliding sideways in a "fog of uncertainty," as CNN put it, upsetting such figures as Chris Matthews who thinks it should be crashing hard to teach us all a lesson (eeeek!), but is exactly what the EMH random walk theory tells us should happen if no news of any significance is arriving.  And to top it all off, apparently by 4 to 1 the public thinks that "falling off the fiscal cliff" means that budget deficits will rise rather than fall.  Oh my.

So, indeed, the real danger is that the Congressional GOPsters may be plotting to return to refusing to raise the debt ceiling when it seriously comes due some time early this coming year, just as they did in late 2011, leading to the infamous credit downgrade of the US, which was followed by a decline in interest rates on US government securities (eeeek!).  Klein reports that the "doomsday plan" of the Congressional GOPsters if there is no resolution of the fiscal cliff negotiations by the end of the year is to pass the bill to extend the Bush middle class tax cuts that was passed by the Senate and then wait to play chicken over the debt ceiling increase when it finally comes due, indeed attempting a repeat of their blackmail game of 2011 that gave us this hysterically absurd fiscal cliff pseudo-drama in the first place.

So, let us be clear.  Indeed, the doomsday plan is not the passage of this Senate bill by the House, which seems to me to be a total non-event.  It is the renewed threat to try to hold up the debt ceiling increase. Not increasing the debt ceiling could indeed lead to a real mess if actually carried out beyond some point, with rising interest rates that would put us back into recession and probably tank most of the global economy as well.  This is a real threat, and the Tea Party types really had fun with this in their efforts to try to wrangle out of Obama the sorts of cuts in Social Security, Medicare, Medicaid, food stamps, and so on, that they just dearly desire to have happen, just as long as it is Obama proposing them so that they can blame him for them after they are adopted and the public becomes infuriated about it (see their carrying on about his supposed Medicare cuts associated with ACA).  So, there is a real problem here.

Well, we have been to this one before.  A whole lot of us, including probably Bruce Bartlett first, but an increasing chorus since, says that the solution to this problem, which threatens to come up now every time the debt ceiling is approached, is to end the debt ceiling.  It was unconstitutional when it was first adopted in 1917, and it still is.  Nobody noticed it back then, only four years after the federal income tax became constitutional due to an amendment, and they continued not to notice it later as long as Congress did what it was "obvioius" it should do, which was to raise the damned thing every time it was approached.  But since the norm was broken in 2011, we now have to face it.  It is unconstitutional and incoherent.  It must go, and Obama must bite the bullet and make it go when the moment of attempted blackmail and doom comes.

Heritage Foundation on the Republican Offer on the Fiscal Cliff

As background, let’s turn the microphone over to Josh Barro:

It's not really a proposal -- it's just a set of headline numbers without specific policies. The letter says Republicans want to cut $900 billion from mandatory spending and $300 billion from discretionary spending, but they don't say what or how they want to cut … On the tax side, they agree to $800 billion in new revenue from "pro-growth tax reform that closes special-interest loopholes and deductions while lowering rates." But they don't endorse specific loophole closures or propose a new rate structure.

Josh has a lot more to say including how the President did offer specific proposals. But in the interest of fairness, let’s turn to Alison Acosta Fraser and J.D. Foster of the Heritage Foundation:

To be fair, the details of the Republican proposal are extraordinarily vague. Nor is much clarity or comfort gained from the three-page accompanying letter sent to the President and signed by Speaker John Boehner (R-OH), Majority Leader Eric Cantor (R-VA), House Budget Committee Chairman Paul Ryan (R-WI), and three other senior members of the House Republican leadership.

At first blush, they seem to be agreeing with Josh Barro! But read on and notice that the folks at the Heritage Foundation fear that the Republicans are engaged in “categorical, pre-emptive capitulation”. After all, they prefer that we slash and burn Social Security, Medicare, and Medicaid so as to avoid raising taxes on the very well to do. Not that I agree with their agenda in the slightest – but at least the folks at the Heritage Foundation are a lot clearer about the Republican agenda than is the Speaker of the House.

"The young will pay more and get less." More Nonsense from Robert Samuelson

Our old friend, Dean Baker at Beat the Press, does a good job of taking apart yet another screed by the execrable Robert J. Samuelson, faux economist for WaPo, whining about why nobody is jumping on board with cuts to "entitlements," and particularly his old bugaboo, Social Security.  Google "Dean Baker Robert Samuelson is upset" and the first hit gives you the link (Sorry, the link title is too long for me to read it and my trying to put what I saw in just sent one to the general CEPR site, bah! (Anybody out there able to tell me how to overcome this bit when urls are too damned long too read, please?).  However, I want to pound the nails in a bit more.

So, RJS provides this line that if there is not an adjustment to SS (and Medicare), then "The young will pay more and get less."  Dean quotes this, but does not go far enough in showing how totally ridiculous this is, even though he has pointed out recently that one reason there should be no adjustments for SS now is that the young are massively misinformed about what the not so bad fiscal situation of SS is.  Large proportions of them are fully convinced that they will receive no Social Security when they retire because it will be "bankrupt," when in fact that condition will amount to them only getting something like 120% of current retirees' benefits in real terms rather than more like 170% (a bit lower, actually).  They are totally out of it, and the main threat to them losing their future benefits is if they support the sort of dreck that RJS is pushing, to cut their future benefits now because otherwise they might have their future benefits cut in the future (eeeeek!).

Let me be more pointed.  RJS's statement is simply a lie.  The proposals to cut Social Security have generally taken two forms recently: imposing a chain price index and adding another round of retirement age increases in the future beyond those that were imposed by the Greenspan Commission nearly 30 years ago and which are still coming in.  The former is estimated to reduce cost of living increases by about 0.3% per year, and this would over the next few years indeed gradually reduce what elders receive in benefits, although it is not at all clear that this will lead to any reduction in what the young will be paying, unless this is accompanied by another round of fica tax cutting, or fica is restructured to have the same revenues come in but have it paid over all income levels, thereby reducing the burden for anybody under the upper cutoff for paying it.  However, the effects of this change in the CPI used means that the cuts will get bigger and bigger as time passes, meaning that those who will be most negatively impacted will not the evil baby boomers, but the current young when they finally retire, although since they think they will get nothing, presumably they will be grateful to get even a crust of dry bread.

More egregious for RJS's arguments, and where he really is just outright lying rather than merely stretching the truth is this matter of increasing the retirement age.  Nobody is talking about any further rounds of that happening anytime soon.  RJS poses as this defender of youth against his awful generation (he trumpets his baby boomerdom to supposedly give credibility to his regularly repeated nonsense), but in fact the baby boomers, or certainly at least the front end ones like me and him, will not be affected at all by these future increases in eligibility ages.  It will be the Gen Xers and the Millennials.  RJS is just lying through his teeth.  We old farts will not pay at all as a result of this change, but today's youth will. 

Fiscal Policy Bait and Switches

Sahil Kapur catches the Republican Senator from Utah living up to his reputation of being Whorin’ Hatch:

But what he proposed this week was a classic bait and switch on the American people—a tax increase double the size of what he campaigned on, billions of dollars in new stimulus spending and an unlimited, unchecked authority to borrow from the Chinese. Maybe I missed it but I don’t recall him asking for any of that during the presidential campaign. These ideas are so radical that they have already been rejected on a bipartisan basis by Congress.

Where to start with this nonsense? First of all, the Federal budget deficit is not the same thing as our bilateral trade deficit with the Chinese, but if Senator Hatch is so worried about government deficits – he should be supporting more tax revenues. Secondly with the economy still below full employment, short-term stimulus paid for by long-term tax increases on the well to do is precisely the type of policies a lot of economists advocate. Finally, you did miss it Senator – the President did campaign on these proposals. If Senator Hatch is so exercised over bait and switches, then he needs to explain his 2005 support for this:

Ryan’s fight against Social Security has been ongoing since he pushed President George W. Bush to privatize the program in 2005

And no – George W. Bush did not campaign on this proposal during the 2004. Mercifully, it failed back then but it does seem that the Republicans would rather sacrifice Social Security benefits than impose another penny of taxes on the very well to do. Update: Tax Policy Center notes that the President has put forth both a $1 trillion proposal as well as a $1.6 billion proposal so maybe this is where Hatch gets his “double the size” claim. Note two things. First – the latter was proposed by the President back and February. Secondly:

That figure includes the $968 billion noted above plus another $593 billion in tax increases. The largest of those, by far, is the president’s proposal to limit the value of itemized deductions and certain exclusions for upper-income taxpayers.

Wasn’t limiting deductions the Republican idea for revenue enhancement?

Primitive Accumulation: From Adam Smith to Angela Merkel

I am going to present this paper in Slovenia. Any comments would be appreciated.



The choice of Adam Smith as an introduction to a discussion of primitive accumulation might seem curious even though he inadvertently began the discussion of the concept. Like a modern astrophysicist trying to understand the Big Bang, he asserted that “the accumulation of stock must, in the nature of things, be previous to the division of labour” (Smith 1976, 2.3, p. 277). Smith, who often unintentionally raised important questions in the course of his confusion, was asking, what was the original accumulation that set off the ongoing process of capital accumulation.



I link the history of classical primitive accumulation to the contemporary ravages of neoliberalism.



http://michaelperelman.files.wordpress.com/2012/12/merkel1.docx

Mandated Employer Health Insurance Is Biased Against Small Business (in the US)

This morning’s story about the problems small business owners face in complying with the ACA doesn’t surprise me.  My first gig as an economist, way back in 1979, was a summer internship at the Small Business Administration, where, among other things, I prepared an analysis of the impact of health insurance mandates on small firms.  It was a pretty rudimentary piece of work: I was just a grad student and had not yet studied how to do applied micro analysis.  Still, I was able to see the main story line.

Actually, I got two out of the three pieces of the story.  First, I saw that there are economies of scale in group health insurance, and without some form of organization above the firm level, small employers will pay a higher unit cost.  Second, and quantitatively more important, small firms in the US are substantially more labor-intensive on average, so an increase in labor costs hits them harder.  The third piece, which I missed at the time, is that wages are lower in the small business sector, so a mandated benefit of given cost will constitute a larger share of the wage bill.

I concluded that, from a small business advocacy standpoint, a national health insurance program like Canada’s would be preferable to a system of employer mandates.

Since then I’ve learned that some European countries, like Germany, have employer mandates, but they don’t have the size-bias effect that ACA is likely to have in the US.  To take Germany, for instance, there are two reasons for this.  First, the Germans do have publicly-organized insurance pools above the employer level, which deals with the economy of scale problem, and SME’s are neither more labor-intensive nor lower-wage than larger firms in the same industries.  In other words, Germany doesn’t have (in this respect) a dual economy problem that mandated health insurance intensifies.

But the US suffers tremendously from duality*—the division in the economy between larger, better-capitalized, more productive, higher-paying operations and smaller, less productive sectors that offer crummy jobs.  (It isn’t entirely a division between firms because some large firms have established their own internal “secondary” sectors.)  ACA should be examined in this context, especially since the administration hasn’t proposed any measures at all to reverse the trend toward greater duality, which is one of the underlying factors behind the growth in inequality.

Just to be clear, I think it is a big step forward for workers in the secondary labor market to be able to get health insurance; this will lessen, for them, the impact of duality.  At the same time, however, we should not be surprised if ACA puts a differential burden on small business.  In the US context this might be a good thing in some respects, since jobs in small enterprises are generally pretty bad, but there are other aspects of size-bias to consider.

Ultimately, however, this is a dual economy problem, not a health policy problem.

*Duality should not be taken literally.  It is not about discrete separation but rather the tendency for size to covary with productivity and other related indicators.  Despite its moniker, it refers to a continuum.

Fiscal Cliff – Republican Leadership?

Igor Bobic brings us the latest from Speaker Boehner:

Asked on Friday what kind of specific entitlement cuts he seeks in a deal with the White House over the so-called fiscal cliff, House Speaker John Boehner pointed reporters to previous GOP budgets, declining to name further demands in a potential counteroffer … Boehner also added that talks with President Obama had come to a significant stand-still. “There’s a stalemate," Boehner said. "Let’s not kid ourselves.”

Earlier this month, Greg Mankiw did his best to defend what the Republicans have been saying about fiscal policy:

According to the Tax Policy Center, if we cap itemized deductions at $50,000 and keep tax rates as they are today, we would raise $749 billion in tax revenue over ten years … This may be the germ of a possible deal between President Obama and Speaker Boehner: The speaker agrees to this tax hike if the president agrees to some fundamental reform of the entitlements

Notice that he had to project the extra revenues over an entire decade to get to a significant number. Truth be told – there are only a handful of Republican Senators and Congressmen willing to buck the Norquist pledge in the least. And none of them are willing to accept higher tax rates, which mean revenue enhancements would be modest at best. While Greg Mankiw tossed out “raising the age of eligibility for Social Security and Medicare”, Speaker Boehner is too chicken to do even that. It is time for the Speaker to “lead, follow, or get out of the way” (a line that Mitt Romney misattributed to Thomas Paine). Then again - Max is offering some real insights if anyone of our political “leaders” wish to listen.

Cliff Notes

By C.A. Rotwang

By now if you're tuned into progressive commentary in the 'blahgosphere', on MSNBC, and on Current TV, you've heard the misnamed "fiscal cliff" referred to as an "austerity bomb" or a "fiscal curb." Neither is quite right.

What the "cliff" actually refers to is a raft of automatic tax increases and spending cuts that under current law take effect on Jan. 1. In other words, measures that on their face would drastically reduce the Federal budget deficit.

Lower deficits, what everybody complains about, wouldn't that be great? Well no, actually. It would be a freaking disaster at this particular point in time. Timing is everything in romance and fiscal policy. Now that the president has been reelected, we can all admit the economy still sucks. In 2000 the ratio of employment to population was 64.7 percent. At the more recent business cycle peak in 2007, it was 63.4 percent. Today it's 58.8. Sorry, Obamians, but that's terrible. That's roughly nine million unhappy people watching their futures wither away. Just ask Mitt Romney.

A tax increase and a spending cut both drain expenditure for goods and services from the economy. This depresses employment, which further reduces spending. You can see how that will go round and round. It is true that some pieces have less impact than others. In particular, tax increases on the richest have relatively little impact on spending because these folks will spend what they want with or without the tax increase. The difference will come in their saving, which is another word for 'not spending.'

What if we go over this so-called cliff? The result will not be a thousand-foot drop into recession, but the start of a slow slide into one. The expenditure drain noted above is spread over a year, and within limits it is easily reversed. An agreement even a month or two into the new year could remediate any short-term damage. So there is no explosion worthy of a 'bomb.' The cliff is more like a curb.

The problem with the curb metaphor is it glosses over the ultimate rationale for this drive for austerity. We don't want to fall off the cliff, but we can easily step off the curb. But should we? For the Republicans, it should be clear that neither the deficit nor spending are the issue. Otherwise they would drive off the cliff with all the enthusiasm of Thelma and Louise. It is not deficits or spending that exercise them; it is taxes.

But what of Obama and the Democrats? The sad fact is that Obama's rhetoric about the deficit is grossly misleading. The deficit cannot be closed with a "balanced" approach. The reason is that the root cause of the long-term deficit is not an excess of tax cuts and spending growth, but the ballooning cost of health care. Revenue increases and spending cuts elsewhere have no impact on the long-run problem, such as it is. The reason is that revenues and most spending grow more slowly than health care spending, so cuts in the former are more than offset by the latter.

The doctrine of balance, so appealing to the reasonable person, is a shallow matter of mere arithmetic. The health care problem is not arithmetic, but one of the structure of health care. We in the U.S. pay twice as much and don't get any better than other countries. Ironically, one of Obama's great achievements -- the Affordable Care Act -- takes a sizeable dent out of health care spending. It reduces the deficit. (Remember, the Obamacare-phobic GOP doesn't care about the deficit.) A serious follow-up attack on the deficit would a) focus on the medium to long term, after the recession is well behind us; and b) aim to further improve our health care system. Too bad nobody in this debate is serious.

I have just elaborated a serious, centrist view of the budget. Now you could argue that a centrist approach is necessitated by the political reality of the House of Representatives -- it is controlled by moonbats. But if you combine centrism and moonbattery, you get half of each, and who needs that? Obama's initial negotiating position is as cold as yesterday's mashed potatoes. Worse, support for Obama tends to morph into acceptance of his policies as a matter of principle, rather than the least-bad of available choices. What about a progressive view?

A progressive view starts with the recognition that the current tax system, with revenues of less than 16 percent of GDP, is appropriate to the Federal budget of the 1950s. At minimum we ought to be looking at getting the share of GDP back up to 21 percent, as in the Clinton years. Unfortunately, this will require Clinton-era tax rates on households below the current, more conservative Administration's (roll that around in your head for a second) fabled $250,000 a year income.

One of Obama's two original sins (the other being the celebrated "pivot" from Iraq to Afghanistan) was promising a slim revenue system. (With ACA he violated this pledge, since low-income persons will be required to buy health insurance, which the Supreme Court classifies as a tax, but I digress.)

The proper progressive object of higher taxes is higher social spending: public investment, aid to state and local governments, and expansion of social insurance. Remember the poor? Remember New Orleans? Remember Long Island and the Jersey shore?
On the spending side, rather than balanced spending cuts, the object is a transfer of resources from defense to not-defense. Here again the reductionist, arithmetic view is a distraction. The real question is not how to achieve some kind of "fair" cut out of defense. It is: what are we doing, and why? We are presently defending Europe from nobody, and defending the rich nations of South Korea and Japan from the impoverished nation of North Korea. We have an empire of bases dedicated not to defense but to meddling in the affairs of all the world. Now is the time for a peace dividend. An army of assassins to go after the truly deserving bad guys would be very cheap, compared to the current Pentagon money pit.

That's a progressive budget view. Support for the president's pragmatic, debatable negotiating tactics should not ratify fundamentally illiberal principles. There was a great candidate who talked a progressive game in 2008... oh wait.

Never mind.

Fiscal Cliff – Republican Senators Negotiating with President Romney

Sahil Kapur listened to Senators Graham and John McCain so we didn’t have to:

Republican lawmakers are increasingly abandoning Grover Norquist’s no-taxes pledge and declaring a willingness to raise tax revenues as part of a deal to avoid the severe austerity measures set to take effect in January. On the Sunday talk shows, Sens. John McCain (R-AZ) and Lindsey Graham (R-SC) called for raising revenues by scaling back tax deductions and credits. “I would be very much opposed to raising tax rates, but I do believe we can close a lot of loopholes,” McCain said on “Fox News Sunday.” He said that could be achieved by imposing “a limit on the amount of deduction on charitable giving, a limit on the amount you can take on your home loan mortgage deduction.” Graham, who has previously spoken out against Norquist’s pledge, reiterated his position on ABC’s “This Week,” arguing that he will support higher taxes if Democrats agree to meaningful entitlement cuts. “I’m willing to generate revenue. It’s fair to ask my party to put revenue on the table. We’re below historic averages,” he said. “I will not raise tax rates to do it. I will cap deductions. If you cap deductions around the $30,000, $40,000 range, you can raise $1 trillion in revenue, and the people who lose their deductions are the upper-income Americans.”

These two have jumped on the Saxby Chambliss bandwagon offering the President something similar to what Mitt Romney campaigned on – entitlement spending cuts with base broadening. But no increases in tax rates including no increases on those already very low tax rates on capital income. If we don’t eliminate the tax break for capital, then the notion that we are raising revenues from upper-income households rings hollow. This is the same old GOP trickery that strives to reign in deficits by socking it to the poor and the middle class. Excuse me but Mitt Romney lost the election. If elections are to have consequences, President Obama should reject this Trojan Horse.

Refinery Insights and Nonsense ala Exxon

For my day job, I’ve been thinking about gasoline prices, which means I’ve been re-reading an excellent post by James Hamilton as well as looking over data from this source. But I should also mention an interesting discussion by Ken Cohn - vice president of public and government affairs for Exxon Mobil. Let’s first focus on his discussion of the role of the refinery gross margin:

As the EIA figures show, however, refining doesn’t always produce a profit. In December, the data indicate that the U.S. market price for gasoline coming out of refineries was on average about 7 cents per gallon (-2 percent) below the refiners’ cost of crude oil alone, and before accounting for their costs of upgrading the crude into gasoline. In other words, refineries faced a market where domestic gasoline prices were very weak relative to global crude prices.

Actually operating profits equal gross profits minus operating expenses so a refinery could incur losses even when gross profits are slightly positive. But let’s not cry for the refinery as the refinery margin is quite volatile and has been very high during periods such as the one right after Katrina. It is true that the refinery margin turned negative for the last two months of 2011 as retail gasoline prices were temporarily falling as oil prices rose. The only other time the refinery margin turned negative was towards the end of Bush’s term in office when gasoline prices were plummeting even ahead of the fall in oil prices. Deep recessions will do that. Of course, we all know that gasoline prices and hence refinery margins recovered after Obama became President – a fact that Republicans reminded us of during the recent Presidential campaign. But I would never confuse Exxon Mobil with being a pure refinery:

U.S. crude oil production in 2010 was 5.5 million barrels per day. But U.S. refineries processed 15.2 million barrels of oil per day – almost three times more oil than was produced in the U.S. That means U.S. refiners, like ExxonMobil, have to purchase millions of barrels of crude oil – at market prices – to produce gasoline and other products for American consumers. For example, in 2010, ExxonMobil spent $198 billion purchasing oil around the world for its refining operations.

But their 10-K filing for fiscal year ended December 31, 2011 reads:

Divisions and affiliated companies of ExxonMobil operate or market products in the United States and most other countries of the world. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products.

Could some of the oil they import be produced by Exxon foreign affiliates? If Cohn is peddling the notion that Exxon’s profits were squeezed during 2011, the 10-K filing shows that the impression is incredibly wrong. Their upstream operating profits rose from $24.1 billion in 2010 to $34.4 billion in 2011. In fact their downstream profits (which include distribution profits) rose from $3.6 billion in 2010 to $4.5 billion in 2011. Exxon – like most integrated oil companies – make most of their profits from production. So when oil prices rise, overall profits tend to increase even if refinery margins take a temporary hit. Cohn’s discussion isn’t that bad despite my quibbles with it. But note that James Hamilton provides even more insights without the excuses for ExxonMobil.

Is China Heading for Another Round of Capitalist Roading?

It is now several days since the once-every-ten years Congress of the Central Committee of the Chinese Communist Party that decides on the top leadership of the party and the nation for the coming decade closed up shop.  On the surface the main winner is Xi Jinping, a reputed "princeling" whose father was a general of the Long March era and thus one of the leading cadres of the party in the early days of Mao's leadership.  The main post that he was awarded is to be the Secretary-General of the party, which in communist-ruled countries has traditionally been the top leadership position, at least as long as the party rules the government and society. 

However, Xi is doing even better than just that and his predecessors.  His two predecessors were Jiang Zemin and Hu Jintao.  Both were initially selected to become leaders by Deng Xiaoping, who only held a few official positions, Vice Premier and Chairman of the Military Commission, the latter position making him Commander-in-Chief.  But he was never Secretary-General of the party or President, the official Head of State, those two positions wandering among various others while he was Vice Premier and Military Commission Chairman.  However, both Jiang and Hu would come to hold the three positions: Secretary-General, President, and Chairman of the Military Commission.

Xi's move into these is going faster than was the case for his predecessors.  He is Sec -Gen already, and this has been widely announced.  Hu Jintao continues to be President, however it is all but certain that he will step aside next March when the new Peoples' Congress elects the President and Premier.  This gap in transition imitates what happened when Hu came to power and when Jiang came to power before him. 

Where Xi is breaking precedent is that he has also been chosen now to be Chairman of the Military Commission, reportedly at the request of his predecessor Hu.  Hu had to wait two years after becoming Sec-Gen to get this position, and his predecessor, Jiang, also had to wait for two years, while Deng Xiaoping remained as Commander-in-Chief and effective shadow boss to make sure that Jiang did as expected and hoped for.  Hu's handing over this very powerful position means that indeed he will not be exercising any further effective power.  Xi is more clearly the boss.

Ah, but things are not so simple.  The Chinese invented bureaucracy (although the French invented the term), and they have more layers within the party than other nations.  The old USSR had a Central Committee and then a Politburo [Political Bureau] of that group that was the real leadership group, with its numbers fluctuating over time, but in later years consisting of 7 members, with the Secretary-General being the Chairman of that body.  In China there are 106 members of the Central Committee, but the Politburo is an unwieldy 25.  So, the top body is the Standing Committee of the Politburo of the Central Committee.  That group was 9, but at this Congress its number was reduced to 7.  Xi Jinping is in it as is incoming Premier, Le Kiaoqeng. 

But this is not the end of the story.  In the days of Deng, it was believed that the real power resided in an unofficial group of older leaders who all resided in Zhongnanghei, a compound not too far to the west of the Imperial Palace in central Beijing.  This unoffical group was known as the "Sitting Committee," presumably because they were so old they sat all the time.  Those in the Standing Committee were just their flunkies.  It appears that this body is being reconstructed.  The sign of this is that Xi and 4 others of the new Standing Committee are reportedly proteges of past president Jiang Zemin, now 86.  He addressed the opening session of the party Congress,  but holds no official positions at all.  His rival for power in that body is apparently Hu Jintao, but Hu has only one clear protege in the new Standing Committee, incoming Premier Le.  The fact that Hu is stepping down now in favor of Xi for the position of Military Commission Chairman is the bottom line sign of his defeat by Jiang in this power struggle.

So what does this mean in terms of policy?  This is not entirely clear.  However, Jiang's group seems to be full of princelings and also many involved in businesses, often with accusations of corruption coinciding.  They are also thought to be somewhat more market capitalist oriented.  Hu's group largely come from the Youth organization of the party, most from modest backgrounds.  When Hu came to power he made much noise about attempting to equalize incomes, particularly across regions.  However, he has been accused of being too cautious, and it does not appear that there has been much movement towards such equalization.

Perhaps lying behind this victory of Jiang over Hu is an earlier fight over the past year involving the former party chief of Chongqing, Bo Xilai.  Strongly supported by some in the military (since purged) he pushed a neo-Maoist populist line of moving much more sharply towards equality and a revival of cultural Maoism.  Ironically he was personally a princeling but running to the left of the Hu crowd.  However, he was brought low by charges of corruption and a murder charge against his wife involving a British diplomat.  It may well be that the fall of Bo was the real power struggle, with Jiang the main player behind the scenes in that.  With this victory, he probably also had won the day over the more moderate Hu faction, although they appear not to have been totally purged.  Hu can stick around to joust with Jiang on the Sitting Committee in Zhonganghei.  But for now, it appears that the princeling proteges of Jiang Zemin are in charge, with a high likelihood of more moves towards market capitalist reforms, even as newly appointed figures in the military may push a more aggressive and hardline stance in terms of relations with the rest of the world.

"It was a flash mob with weapons"

The title is a quote from a "senior US official" reported by super well-informed WaPo columnist David Ignatius weeks ago.  The gist of it is also backed up by a report by David Kilpatrick in the NY Times of the same period, both of which have been conveniently forgotten in the general rush to declare that the Benghazi attack was "a terror attack, not a spontaneous response to a video."  This is constantly being repeated by almost everybody discussing whether or not Susan Rice lied to the public on TV about what happened in Benghazi.  In fact, while some of her wording was a bit off, she was pretty close to the truth, and Ignatius reports that the CIA knew that the Ansar leaders had been watching the demonstrations in Cairo just before they set off to attack the consulate, the Cairo demo of course being inspired by the anti-Muslim video.  In short, it was a terror attack inspired by the video, or, "a flash mob with weapons."  People need to understand this.

A very recent report that reprises all of this and makes this point with cites to and quotes from the original articles is http://www.rutlandherald/com/article/20121121/OPINION04/711219953/1108/OPINION .

A further note on this is that while critics of Rice are quoting Petraeus as saying in closed testimony that references to Ansar-el-Sharia and al Qaeda were removed from the briefing materials given to Rice, what they are conveniently ignoring is that these were removed so that the groups would not know how well CIA was tracking them, and indeed, given the report from Ignatius that CIA was watching Ansar so closely that they knew they were watching TV footage of the Cairo demos is a sign that indeed there was very close surveillance and indeed why Petraeus was working so hard to keep news of CIA's involvement, including sending its rapid response team in within 20 minutes from being publicly reported.

People really need to know.  Liberal media repeating the story that "it was a terror attack, not a response to the video" are simply wrong.  It was both.  It was a terror attack inspired by the video."

Can Borrowing From Abroad Avoid The Debt Ceilinlg?

No, but Allan Sloan in the Washington Post today thinks it can, or maybe it can.  He proposes that Treasury borrow $200 billion in US government securities from China to use to continue to pay bills if we hit the ceiling, thereby supposedly overcoming dumb gridlocks that should not be happening and have led to such stupidities as the current "fiscal cliff."  Sloan modestly calls this the "Sloan Strategem" (Ahem, rule against people naming things for themselves holds here, ahem!)

But the answer is no.  Treasury already has a bunch of delaying mechanisms that hold off the moment of truth for several weeks.  We saw that in 2011, when we breezed past technical bankruptcy in June only to fact it in early Augusst when the fiscal cliff got cooked up.  This device would only add some other arbitrary amount of time that would simply delay the moment of blackmail reckoning.

The answer is to abolish the debt ceiling.  People ranging from Bill Clinton through Bruce Bartlett to me and a lot of others have argued that the debt ceiling is unconstitutional on multiple grounds, quite aside from being bizarre and self-contradictory, actually incoherent.  Obama should bite the bullet when it next comes really due, and declare it unconstitutional.  I bet the markets will go up if he does so, although there will of course be a Supreme Court case on the matter.  But better to fight that fight than to be set up to constantly have to deal with these blackmail threats that the House Tea Partiers have made it clear they will continue to impose repeatedly, no matter what comes out of the current fiscal cliff negotiations, which may well be things that voters most definitely did not vote for in this recent election and should not be put into place.

Fiscal Crock

I think I know what the grand bargain will be.  Obama will be a hero to the left by marginally increasing taxes on the people who earn more than $250,000.  Then you will cave on Social Security and Medicare while bragging about his dedication to progressive causes.  Also, in the name of reforming taxes, he will close the loophole on tax breaks that the middle class relies on by, for instance current collecting taxes on medical insurance provided by employers.

Virginia Considers the Fiscal Cliff

Today the Washington Post reported that Virginia Governor Bob McDonnell has ordered that state agencies should plan for a 4% reduction in funding expected to occur if America falls off the fiscal cliff.  While many have pointed out from Dean Baker to Paul Krugman and beyond that the fiscal cliff is oversold, an event that is not some disaster on 1/1/13 if not resolved by then, but one that gradually brings its potentially recessionary impact on the US in gradually over weeks and months, it is true that Virginia may well be more negatively impacted by it than any other states due to its greater reliance on DOD spending than any other state in per capita terms, and in order to get House Republicans to buy into a tax increase as part of a compromise (which they refused to go along with, despite this cliff), major cuts in DOD spending were put into it along with ending the Bush tax cuts (and we all know how terribly the US economy performed under the Clinton tax code), so that indeed it is not at all ridiculous of Virginia's governor to make appropriate plans in case of the worst possible outcome, although the fact that the Commonwealth has been running budget surpluses for the past three years mitigates this danger to the point that only a 4% contingent cut is being planned for.

The other matter that the governor is dealing with is that of the reality that Obama's ACA, that offshoot of a Republican Heritage Foundation proposal, will now remain the law of the land given the election outcome.  However, the implementation of it into practice depends on a major expansion of Medicaid. Indeed, when one gets down to the real gist of how Obamneycare expands insurance coverage, this is the main mechanism, well beyond what is expected to occur from the creation of the various state and federal and state/federal individual mandated exchanges.  However, the SCOTUS has stupidly and carelessly decided that states do not need to expand the program (and Medicaid should always have been a strictly federal program like Medicare, but... ).  In any case, Gov. McDonnell, facing the possibility of fiscal shortfalls arising from the falling off the fiscal cliff, is making clear that one of the first things to go would be any ACA-prescripted expansion of Medicaid coverage.  Indeed, even if the fiscal cliff is elided, he is not necessarily inclined to expand it anyway.

This indeed makes it clear that the major program most at risk due to the forthcoming fiscal cliff negotiations is indeed Medicaid. This has been clear for some time, and it is clear that if in fact Romney had won the election, Medicaid would have been on a serious chopping block.  It may still be.  After all, if there is an effort to seriously reduce federal spending being pushed in the upcoming negotiations between Obama and the Congress, there are only five programs that exceed $100 billion per year in the face of a budget deficit still more than ten times that.  Those programs are Defense, Social Security, Medicare, Interest Payments on the National Debt, and Medicaid.  The powerful political forces lined up to defend the top four (and some would argue that interest payments on the debt are beyond cutting, although a default on our debt would change that one) may indeed lead to the outcome of seriously cutting Medicaid, whose main recipients and supporters are poor and powerless.  The farce would be to fake a spending cut by sending Medicaid to the states, possibly entirely as Paul Ryan has suggested at times. But, as we are seeing in Virginia, sending it to the states may amount to ending it, or at least really seriously cutting it, leaving the poor uninsured en masse.

The deeper issue is that the whole fiscal cliff is a fabricated farce, drummed up out of the House Republicans' ridiculous and irresponsible effort to play serious games with raising the 94-year old debt ceiling.  That this ancient and unconstitutional limit has not been a serious issue in the past is precisely because no one was so stupid or irresponsible to mess with raising it when that needed to be done.  Now that the House GOP has decided to play blackmail games with it, it has become clear that this monstrosity that no other country in the world has ever had (some have targets based on percents of GDP, not absolute nominal debt ceilings), must go.  Bill Clinton told Obama back when this issue erupted in 2011 that he should just declare it unconstitutional and proceed paying the bills legally mandated previously by Congress, a move initially suggested by Bruce Bartlett back in the 80s when he was serving as Assistant Treasury Secretary for Ronald Reagan.  That issue is not immediately in play for the negotiations the last blackmail round set up for this totally unnecessary fiscal cliff, but when it comes up sometime later this spring, Obama should do the right thing and declare the debt ceiling unconstitutional, thus saving the republic any further fooling with this ridiculous farce.