Global Macro Strategy

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    • Engage with Andy Busch Weather Report! Andy’s View

      In this final segment of Engage with Andy Busch: Weather Report!, I try to put it all together of what these three guests had to say about this winter forecast, the impact on the markets, and what we can expect for emissions regulations in the coming months.

    • Engage with Andy Busch: Senate Budget’s Beach transcript

      Here’s the transcript from last week’s show with Senate Budget Committee’s Bill Beach:

      Andy: Welcome to Engage with Andy Busch. I’m your host. On this segment of Engage, we’ll turn to the world of politics to discover what can happen in the new Congress on critical budget and tax issues impacting business and individuals. On the line from Washington DC is Senior Economist from the Minority Staff on the Senate Budget Committee, Bill Beach. Now, Mr. Beach is responsible for the committee’s economic analysis and for preparing key components of the Senate budget. Bill, welcome to Engage.
      Bill: Andy, it’s great to be on your program, thank you.
      Andy: Okay. All right. As most know, the Republicans have retained control of the house and will take back control of the Senate next year. However, prior to this occurring, there’s some work to be done. There will need to be an agreement to keep the government funded past December 15th or it will shut down again. So Bill, my first question to you is an easy one. And I’m kidding, of course. But will the lame-duck session do this, and for how long will they extend the government funding?
      Bill: Well, this week we come back into session. Actually, we’ll be in session starting on Wednesday. And Thursday and Friday, both the House and the Senate will be engaged in what are called organizational meetings, election of their leaders. It’s real important in the Senate because until we elect the leader, the Majority Leader of the 104th Congress – it’s the congress coming up in January, we really won’t be able then to elect chairs. And so we won’t be able to have committees and we won’t be able to get our work going. But of course, that’s all future-oriented. But just to let you know that it isn’t until next week when we’re going to begin to look at the continuing resolution.
      Why do we have to have a CR, a continuing resolution? It’s because, once again, this Senate failed to adopt the Appropriations bills. I mean, we’ve kind of adopted a semi-budget.
      Andy: Right.
      Bill: We can talk about that. But the Appropriations bills are really crucial. That’s the authority to spend money. So we’ll do that next week. The House will send us a CR. Now, to your question, will it be a long CR? That is, will it go for a year or will it go for a couple of months? That’s the big question. Most of the Republicans in the Senate, and I think all of the Republicans in the House, want the CR to be relatively short. In other words, to go from roughly the middle of December to maybe the middle of March. That would give the Congress an opportunity to get organized in January, and then to put its own individual stamp on a regular budget with regular Appropriations bills. We may have one or two more CRs to get us through the summer, but that’s the issue.
      The Democrats, on the other hand, want to have a long CR so that we can do things like expand the immigration into this country, do a bunch of other legislative things under that CR. So this is going to be not an easy session at all. We’re going to have a real kind of dust up here the second week of November, probably – excuse me, third week of November, maybe even during – God save us – the week of Thanksgiving.
      Andy: Right. And I think that’s interesting. There’s a lot of speculation that within the Republican Party, they don’t want a longer CR because they’re concerned about the president using Executive Order on immigration, and they want to make sure that they can somewhat control this by telling the president, “Hey, if you do that, we’re not going to fund the government. So don’t, and let us get through the normal process. Let’s reestablish the normal process.” Right? Because it hasn’t been normal for a long time.
      Bill: We haven’t passed a budget since 2009. That is, a regular budget where the House and the Senate vote and pass what’s called a Budget Resolution.
      Andy: Right.
      Bill: And then those resolutions are negotiated, and we come up with a unified budget. We haven’t done that since 2009.
      Andy: That’s astonishing.
      Bill: That’s a serious problem.
      Andy: Bill, what have you guys been doing there in the Senate? How come nobody has – what happened? I mean, I’m kidding, ladies and gentlemen. I know why this hasn’t happened. It’s because the Democrats have controlled this process and really didn’t want to move forward on – for instance, when President Obama did present a budget, it was shot down pretty much – it was DOA, right? Even the Democrats didn’t want to vote for President Obama’s budget when he proposed it I think in 2010.
      Bill: Right. Not a single vote was cast in favor of that budget. There was one absent member, and the vote was 99 to nothing to reject the budget. So nobody wanted to – I mean, the Republicans were casting, I think, political votes there. But the Democrats just did not want to do a budget. Now, I’d like to make a really general point, and why that’s…
      Andy: Sure.
      Bill: …why that’s bad. When we don’t pass budgets, we don’t let the electorate – the people who in our system of government are the sovereigns – we don’t let them know what we’re spending our money on. A CR is just “here’s how much money we’re going to spend,” but it doesn’t specify the individual components of what we’re going to spend it on. And what that does is that undermines democracy. It separates the people even further from their government. And the people, rightly, believe, “Well, if we don’t know what they’re spending [inaudible 00:05:20]” And so often that’s the case, so it’s very bad politics not to pass a budget.
      Even the Democrats and some Republicans think they’re so clever. “We’re not going to pass a budget. We’re just going to pass a CR.” But that’s power. That’s not politics. Politics is where you let the sovereign know what you’re doing, and you connect them to the government. I mean, after all, if the people get disconnected from our government, there’s no reason why they should support it. And that’s ultimately corrosive to all kinds of institutions in our society. So we need to pass a budget.
      In the 104th Congress, we will pass a budget. It will be a balanced budget. Both House and Senate will do the same thing. We’ll send that to the president and invite his signature. And I hope he signs it, because we need to restore not only regular order up here in Washington, we need to restore the trust of the people in their government. We’re at a very dangerous moment in our history where that trust could evaporate below an irretrievable percentage, and we don’t want to happen.
      Andy: No, and I think that’s representative of the very low voter turnout. Certainly, what the exit polling was saying, just in case the Republicans think they can stick their chess out and say, “how great we are,” – basically, the polls after the election said that voters hated everyone. That was kind of the takeaway.
      Bill: Right.
      Andy: So let me shift gears just a little bit, because I think, to your point Bill, we’re going to see a little bit more of this come to the fore. Because very shortly, the US is going to break the $18 trillion debt level, surpassing the total size of the US economy. Yet most Americans don’t…
      Bill: Right.
      Andy: …seem to care a whole lot about this, as they keep hearing that the budget deficit continues to shrink. Why should voters be concerned about it if it doesn’t seem to have an impact and the budget deficit keeps shrinking?
      Bill: Well, when we break the debt limit, we’re technically not able to borrow any more money. That sends signals to financial markets that we could be, unless we get our act together, doing irresponsible things financially. Well, obviously, we are. We have trillion-dollar deficits or half-trillion-dollar deficits. That’s pretty irresponsible.
      Andy: Right.
      Bill: But financial markets are primarily interested in the integrity of our treasury bonds. So when we get up to that edge and we delay doing anything on the underlying drivers of the deficit, which are driving our debt, that sends that signal to financial markets. I mean, we have people coming in from the credit agencies all the time telling us exactly the same thing. You know, Standard & Poor’s, Fitch, Moody’s – you folks are really close to getting onto our watchlist, and you really need to get your financial house in order. So these debt crises that come up when we hit the limit are just indicators that are just bells in the night that we have an underlying, deep financial trouble. We need to address that in the budget.
      Andy: Well, I think it’s interesting, because the CBO states that the – and let’s get into the weeds just a little bit here on the budget because this is important, ladies and gentlemen. The CBO – the central scorekeeper for all things legislative in congress – the CBO, Congressional Budget Office states that the main drivers of spending increases in the budget come from three sources. And that’s – two of them are healthcare, right, with Medicaid and ACA – the Affordable Care Act. And the third one is really interesting, Bill, to the point about the debt – is that net interest on the debt – the net interest begins rising from about – I think it’s about 230 billion in 2013 to about 800 billion in 2024. That should scare everybody in the US, whether you’re a Democrat or a Republican, because it’s going to squeeze out everything that you want to spend money on.
      Bill: That’s exactly right. That’s a great way of putting it. Interest on the debt doesn’t buy any goods or services. It doesn’t buy anything that your government is providing for you…
      Andy: Right.
      Bill: …any highways – nothing. It is simply interest payments to bondholders, and many of those bondholders are US citizens, US organizations, but about 40% of the bonds are held by foreign governments. [Inaudible 00:09:26] held it well, it could now be a little bit lower than that by Asian governments, 11% by China. So we’re in a really kind of weird situation where interest on the debt will be one of our biggest payments. It will exceed by 2024 what we spend on defense. It does that, actually, in 2017. And it could be much higher than 800 billion. And the reason I’m suggesting it might be is that that’s based on fairly conservative interest rate forecasts.
      Andy: Right.
      Bill: If we get some inflation, if the bonds of the United States – the treasury bonds begin to have less value, that interest rate will go up much higher than what’s forecast now.
      Andy: Yeah, and it’ll speed up the amount of interest that we’re going to have to pay. One of the things that’s happened – that is, reduce the budget deficit over the last couple of years – was the agreement between Patty Murray and Paul Ryan and the sequester that occurred. But the sequester is really bad policy, wasn’t it? I mean, it cut discretionary spending and it limited any discussion of infrastructure spending, and it really hurt defense spending as well. However, it did slow the growth of discretionary spending. So I guess the question back to you is when does the sequester end, and do you think it’s been somewhat effective in what they were targeting it to do?
      Bill: Well, in the absence of anything controlling somebody who has an alcohol problem, simply taking away one of the bottles of alcohol is excellent, and that’s basically what we did. We kept most of the juice in place. We just took away one bottle, but it was helpful.
      Andy: Yeah.
      Bill: It was helpful. There’s no question about that. The sequester technically ends in 2022. Some people argue that we’ve extended it for two more years, and technically, in the Ryan-Muray budget, which was deemed and then passed by Congress – just in December of 2013. It is extended to 2023 and 2024 in an odd way. But your main point – it has been helpful. It is the worst policy you could possibly have. I mean, it was supposed to be so draconian just putting these caps on discretionary spending. That’s the spending that Congress actually controls from year to year. And not on mandatories – it was just so unacceptable. Everybody felt, “Well, then certainly they’ll pass a budget.” We didn’t, and now we have the caps. So…
      Andy: Right.
      Bill: …we’re going to try to keep them in place during these CR negotiations, and then really pass a budget. Once we’ve passed a budget, the caps will be taken off legislatively.
      Andy: Okay, that’s interesting. I think that it’s an important point to understand that so many people have gotten excited that the budget deficit has shrunk to 2.6% of GDP. But the fact is, ladies and gentlemen, it’s still $400 billion a year, and it’s still adding massively to the amount of debt that’s out there.
      Bill: Rates will have to go up.
      Andy: Right, and I think that was one of the cruel things of the sequester, right, is that to some extent, it did reduce the amount of the deficit for sure, but we can also expect these deficits to begin rising shortly, right?
      Bill: Yes, that’s exactly right. About 3500 baby boomers are retiring every day. About 10,000 reach the age of 65. Thank goodness that the remainder are continuing to work, but that’s putting tremendous and growing stress on social security and Medicare, and, in some cases, disability income. In some cases, Medicaid. So we’re about to have kind of a spiraling out of control entitlement system, and we’re looking at annual deficits by the end of this forecast period – that is 2024 – of $1 trillion.
      Andy: Amazing.
      Bill: And those $1 trillion deficits actually start a couple years prior to the end of the budget period. So we’re in the quiet before the storm, and the quiet before the storm is awful. I mean, half-trillion-dollar deficits, and you don’t want to be in the storm or even there.
      Andy: All right. Well, on that somber note, let’s take a break. And when we return, we’ll get into a discussion on tax reform and why it matters. This is Engage.
      Welcome back to Engage. I’m your host Andy Busch. We’re speaking with Senate Budget Committee senior economist Bill Beach. Bill, before we get to tax, I want to ask you about the conference that you’re holding this week on the budget. What is this thing, and what are you doing with it?
      Bill: Well, we’re pulling together people from all over the country. Here in Washington, it’s on November 12th. That would be tomorrow based on my time, and it’s a morning and early afternoon conference to discuss why we should change the budget laws. You know the budget’s not working very well. We’re not passing budgets. We haven’t done so since 2009. But more importantly, Andy, we’re not having any really good budget debates in either the House or the Senate. You may think that’s really kind of impossible, given the fact that one of the…
      Andy: Yeah. It seems really odd.
      Bill: …most well-known thing – the well-known problems we have is our fiscal crisis, and yet we avoid discussion of the fiscal crisis. That’s because the budget law doesn’t put into place the kinds of incentives, the kinds of structure, the kinds of pressures to have that debate. I’m talking about the 1974 Budget and Impoundment Act. It’s a very important piece of legislation. It’s 40 years old as of this past July. That’s another reason we’re holding the conference. So at the conference, we have former CBO Directors, a governor or two, some of our elected representatives, the major think tank people here in the United States who have written and thought about this. Sen. Sessions, who is very likely the incoming chair of the Senate Budget Committee, will give the keynote address.
      Andy: Right. That’s Alabama junior senator Jeff Sessions who takes over the chair of…
      Bill: That’s right.
      Andy: …the budget committee if he’s elected in through the process that’s going to happen later this week.
      Bill: That’s exactly right. We’re expecting that the election – for anyone who wants to watch the conference, C-SPAN will be broadcasting the entire thing. We’re getting good national coverage in the print media. I think that’s indicative of the realization that our fiscal crisis really does have roots in the law that governs our budget. And even though this may seem really arcane to folks – I mean, think about it. You have rules in your own household for your own budget. If those rules are broken year after year after year, you then don’t have rules. And suddenly you realize that all of your spending is going on your credit card, which is basically what the government of the United States does. So you would impose rules right away.
      Andy: No doubt.
      Bill: This is unacceptable. Exactly. And so I think that’s coming. So one of the things we want to do, besides passing a budget, is we want to change the budget laws. And let me just say one more thing about this.
      Andy: Okay.
      Bill: About a trillion dollars a year, in what is called economic burden, is imposed by regulations, and yet the congress does not budget one penny of those regulations. So we want to put into the revised budget law a thing called a regulatory budget that will then enable the congress to vote each year whether not we should have increased regulations or decreased regulations in certain things. And have a thing called regulatory pay go. If you want a little more regulation over here, you have to pay for it by cutting regulation somewhere else. So we have a lot of ambitious ideas for this revised budget, and the conference will cover a lot of those.
      Andy: That’s fantastic. We’ll get back to that thought in just a second, because I want to go through tax reform, because this is something that I think is really a lot in the paper. And that’s generally where you get interest from Congress, is when their constituents start calling about things that are happening. So you mentioned Jeff Sessions and some of the change in the leadership in the Senate. We also have a change in the leadership on the Senate Finance Committee, which is charged with tax-writing – with Utah senator Orrin Hatch taking over from Democrat Ron Wyden. And in the House, it’s likely that Paul Ryan’s going to take over from Sen. Dave Camp who’s stepping down. What will these leadership changes mean for the outlook for tax reform?
      Bill: You have two tax reformers who will be chairs. Of course, if Paul Ryan takes over, then he will be [inaudible 00:18:10] Dave Camp, who wrote a comprehensive tax reform plan, and had it fully developed by the various analytical agencies of the congress. So there’s a good foundation in the House for starting tax reform. And the constitution, by the way, requires that all tax bills start in the House. So it’s really more important what the House is going to do than what the Senate.
      Andy: Okay.
      Bill: And in the Senate, you’ve got a really receptive catcher. You’ve got a great backstop now in Orrin Hatch, who will take the pitch from Paul Ryan of tax reform, and send it right back to him, improved and enhanced by what the Senate wants. So I think that the calculus is really good. I mean, Orrin Hatch has lived his last 25 years screaming that he would be in a position someday to fundamentally reform the tax code. He talks that he’s – I’ve heard him talk for at least the past 10 years in many different fora about what he wants to do to the tax code. And here he is, at last – the most senior Republican. He will be also president pro tem of the Senate, able to do what I think he really wants to do. So I think the prospects for tax reform are better than ever. Everybody says, “Oh, it’s too hard to do.” No, it’s not too hard to do. It’s politically hard to do, but when you have good politicians like Ryan and Hatch, along with what I think will be stunning committees, I think we’re going to do this. And I think the president wants something that will be more distinguished than the Affordable Care Act on his resume. Certainly, we’re going to reform the corporate taxes. If anyone is interested in that issue listening to this program, be assured that in 2015, they will see a corporate tax reform bill. And I would be shocked if that wasn’t accompanied by significant changes on the individual income tax side.
      Andy: Right, because it has to, because of all the pass-through entities that just go right to the individual’s tax bottom line. All right. So here’s the big question, Bill. You knew I had one coming, all right? So the rumor is that Ryan is going to have something done by July 4th. Do you think that’s a possible timeframe?
      Bill: Oh, it’s certainly possible. Again, it depends on how ambitious that something is. But remember, he has a fully-developed tax bill in Dave Camp’s bill.
      Andy: Right.
      Bill: He can work with that. He has disagreements with that, but they aren’t as great as you might think. And then Paul Ryan has written extensively about tax reform. He’s had budget after budget – he’s budget chair of the House, or is ranking member that had tax reform planks and tax reform chapters. So all he really has to do is pull on his work that he’s already done and that others on that committee have done. The Joint Committee on Taxation, which is a great little unknown committee of Congress that evaluates all tax bills, has already evaluated practically everything that Paul Ryan could propose. So I think July the 4th is doable technically. Is it doable politically is an entirely different question.
      But the House Rules are such that you can push things through on a rapid scale, not so rapid in the Senate, but you can do things amazingly fast in the House, where a majority really does rule and the minority has to give way. So I think we can look forward to a summer, and we should. I mean, we’ve been – our economy is limping along at under 3%. Even though we’ve had a couple of good quarters, the year over year rate is still below 3%. We’re very likely to be well below potential for years to come, unless we do some policy changes that can unleash the creative powers of the American economy. And then we can achieve our potential. Otherwise, we’re stuck in a kind of a pre-France that will really put the current generation of young people way behind throughout their entire life. So this is not something which is like, “Oh. It would be nice if we did this.” I think it’s crucial. It’s critical. It’s just like passing a budget. Reforming our tax code is one of the things that this incoming 104th congress simply has to do.
      Andy: And one of the things that you mentioned – and I think it’s interesting – is you talked about the regulatory budget and making it…
      Bill: Right.
      Andy: …explicit, right – the burden of regulatory issues. And it gets to kind of the heart of some of the problems that we have with analyzing tax proposals, right? We analyze these things, whether or not they raise revenues or they don’t raise – you know, if a tax cut lowers revenues in a very simplified way. Shouldn’t we judge every tax on whether it does damage to the economy or whether it’s good for the economy – actually helps create jobs, or whether it does damage to the economy. It seems to me that would make a lot more sense.
      Bill: Yes. It certainly does. When a household sees their income go up, they don’t assume that they’re going to have exactly the same command over goods and services. I mean, they assume that well, maybe we can save more. Maybe we can buy more.
      Andy: Right.
      Bill: It’s unfathomable to most people that we don’t then immediately ask, “Well, what would their tax increase do to the economy?” So we need to do that. We need to do that in every respect. I think it’s also, Andy, a growing practice here in Washington to ask that question. This past year, when the House was looking at various tax bills, the committees, the analytical staff that would answer that question by analyzing how the tax bills would affect the economy, readily did so. And they were very effective in showing the Ways and Means Committee, which does the tax bills, how their actions might affect economic activity. So I think we’re on the verge of getting past this little point in history where we didn’t ask those questions and begin to ask them. Now, I need to do – we need to be smart about regulation. We think that the regulatory burden on the economy is costing the economy $1.2 trillion per year.
      Andy: Wow.
      Bill: But we really don’t know out of a $17 trillion economy – it’s an enormous burden. We need to be smart about that. Congress now, because it’s so large – or it’s estimated to be so large – Congress needs to take under its wing – the supervision of regulations. Right now, Congress passes a law, the administration develops the regulations, and congress routinely does review those, or has oversight over those regulations. I think Congress now needs to approve all large regulations that are enacted by the administration. There’s not millions. There’s not thousands. There’s only maybe 10 or 15 big regulations per year, at which comes hundreds and hundreds of smaller regulations. It’s time that that happened. And I think it’s time that that happened as part of the regular budget process, so that the administration has to come to Congress every year and ask permission to pass these big regulations. And Congress can vote them up or down as part of its budget process. Because the burden is so great, the people’s voice, which is the House and the Senate, needs to speak on these regulations. And I think we’ll get that done in the next congress or two. I don’t know that we’ll get it done 104th, but we’ll certainly try to.
      Andy: Well, can I ask you to come back on the show after your conference is done this week, and we’ll talk a little bit further? Maybe we’ll have you come back on in December in and find out what you learned and what is possible for the new year, because I know, ladies and gentlemen, this may sound like this is boring stuff, blah, blah, blah. This will have a dramatic impact on your life – whether it’s job creation, or whether or not the US government will be able to provide a better environment for you. I mean, there’s all sorts of things that spill out from this somewhat arcane but really important work. So Bill, please come back on like in the next month or so.
      Bill: It would be my pleasure. Just ask.
      Andy: Okay. All right. Bill Beach, Senior Economist from the Senate Banking Committee, thanks for coming on the show today.
      Bill: My pleasure entirely.
      Andy: All right. Time for a snack break. I’m Andy Busch. This is Engage.