June 01, 2011
Some Brief Thoughts on Sovereign Defaults
Sovereign default experiences are a staple in international finance. Here are a couple bits of information from a vast literature.
First, from Asonuma (2009):
...we cover stylized facts of serial defaults, especially some features di¤ering by countries history of defaults. Figure 2 reports external debt-to-GDP ratio, bond spreads and credit ratings. Bond spreads of past defaulters, except Chile and Egypt, are higher than those of non- defaulters given external debt-to-GDP ratio7. Past defaulters tend to su¤er higher spreads on the newly issued bonds in the future after default, even if they have the same level of foreign debt relative to GDP as before. Similarly, past defaulters have lower credit ratings than non-defaulters.
It is apparent that precarious debt intolerance situation of Argentina is more severe than one of Malaysia9. Since Argentina is representative of many countries with a weak credit history and Malaysia is representative of countries with a sound credit history, this result reects that the debt thresholds of countries with a weak credit history are lower than that of countries with a sound credit history. In other words, the default probability of countries with a weak credit history is higher than one of countries with a sound credit history, given the same level of debt-to-GNP.
Figure from Asonuma (2009).
Something to keep in mind, when next you hear someone say with equanimity that a small, or "technical", default would be no problem. (These are often the same people who say that crowding out -- higher interest rates due to accumulating debt -- are a problem. This strikes me as an internally inconsistent worldview, but internal consistency I am told is the hobgoblin of small minds.)
More on sovereign debt restructuring/default from Willem Buiter/Citi.
What about orderly restructuring. As many have noted, restructurings are anything but smooth processes. Professor Anne Krueger, who was appointed DMD at the IMF by President G.W. Bush, characterized sovereign debt restructurings as "Messy or Messier", noted that one could reduce the messy nature of restructurings by either a sovereign debt restructuring mechanism (kind of a chapter 11 for countries), or further use of collective action clauses. I'll let readers guess if either of these two mechanisms apply to US sovereign debt.
Finally, in my one of my first forays into YouTube land, let me bring people's attention Douglas Holtz Eakin's view on the debt ceiling debate.
[Full disclosure: Holtz-Eakin was Chief Economist on CEA staff during the time I served on the staff of the CEA, during the first months of the G.W. Bush administration]
Update, June 2, 2pm: From Bloomberg/BusinessWeek:
Treasuries fell as Moody’s Investors Service said it expects to place the U.S. government’s Aaa rating under review for possible downgrade if there is no progress on increasing the statutory debt limit in coming weeks.
“The debt limit has to be raised or it’s going to bring a severe blow to the U.S. economy,” Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors. “I don’t think it’s anything too shocking to the market.”
Posted by Menzie Chinn at June 1, 2011 08:56 AMdigg this | reddit
I'll confess, I'm a bit confused. How does not raising the debt ceiling put the US into default? It doesn't mean the US can't refinance existing debt, does it? It only means, if I understand correctly, that the US can't issue new net debt. It implies rather that spending must immediately brought in line with revenues, no? Those defaults would then be internal, if I understand correctly (eg, social security payments, defense spending, etc.). Or do I misunderstand this?
Posted by: Steven Kopits at June 1, 2011 10:08 AM
Credit spreads only matter if you want to keep being a borrower in perpetuity.
Like a massively underwater homedebtor, Greece's debt so far outweighs its credit rating that the only rational choice is to default and then run a balanced budget.
The EU, IMF, and bankers are parasites trying to bleed the people of Greece dry.
You Walk Away. Works for homedebtors, works for countries.
Posted by: W.C. Varones at June 1, 2011 10:26 AM
I'm not sure how useful it is to look at credit spreads on non-OECD countries and apply that to the U.S. I think its fair to say that any type of U.S. default would be uncharted territory.
By the way, I'm amused at how you link a fairly absurd claim (a technical default would not cause problems) with a very a debatable claim (crowding out). Is this an attempt at guilt by association?
Posted by: Jeff at June 1, 2011 10:47 AM
Oh, you meant the U.S.
Yeah, Kopits is right. Hitting the debt ceiling has absolutely nothing to do with default. It's just an instant balanced budget law.
Anyone who suggests otherwise is putting partisan propaganda interests ahead of the truth.
Posted by: W.C. Varones at June 1, 2011 11:23 AM
Jeff: Crowding out is a concept well-defined in the economics literature. Whether it is actually occurring right now is an interesting empirical question that can be debated. I just think it's interesting those that worry about rising interest rates from crowding out don't worry about rising interest rates from rising default risk premia.
Posted by: Menzie Chinn at June 1, 2011 11:25 AM
Currently, we're on track for our outlook for an oil-shock induced recession sometime in Q3.
I have taken a look at the historical impact of such recessions. During the '73 and '79 recessions, unemployment increased by about 4 percentage points. Interestingly, budget balance was not much affected on an annual basis; it deteriorated 1-2% of GDP on average, and recovered earlier levels within 2-3 years, best I can tell.
Thus, if our anticipation for a recession proves correct, we might expect the budget balance to deteriorate to the 11-12% of GDP level, with a recovery to 8-9% within 2-3 years.
Unemployment would be expected to rise to 12-13%, and given that oil prices pressures would re-emerge within two years of the trough of the recession, it's difficult to anticipate a sustained fall in this number on a business-as-usual basis. Essentially, we'd see the same situation as today, but from a higher peak unemployment level.
I would add that only in 2008 did an oil shock coincide with a financial shock. Thus, it's difficult to determine the impact of an oil shock on the financial condition of either the banks or the global economy based on gross historical numbers. However, the hard-to-avoid default of Greece must likely be factored into the equation, with such follow-on effects as that may have.
Posted by: Steven Kopits at June 1, 2011 11:26 AM
WCV, I agree, MC is just continuing the fear mongering re: defaults.
Posted by: CoRev at June 1, 2011 12:23 PM
Kopits' & Varones' point needs to be made prominent. Not increasing the debt ceiling can & should be handled as an immediate balanced budget law.
The money doesn't come in via taxes, you don't spend it. It would give Congress something useful to do: priortorize spending.
Posted by: Bryce at June 1, 2011 12:49 PM
The real USA default (internal, external or both) is anyway unescapable in next 2 years. The internal one has already started. The point of no return has been crossed, and coming recession in q1 2012 will put an end to any hopes of increased revenues.
I do not see a big difference between the USA behaviour and Greeces once they realized (Greece in 2009) they are approaching default scenario fast. Both reactions were: do nothing.
Posted by: Ivars at June 1, 2011 01:21 PM
Rather than continuing the horror flicks about the debt ceiling, I would like to see your plan to get us out of our deficit mess? It is easy to criticize, even I can do that, but the hard work is fixing the problem?
Posted by: Ricardo at June 1, 2011 01:51 PM
Menzie, Keep in mind that there has been no rise in the default premium to date, so to play "debt ceiling politics" and claim that current debt levels will raise interest rates is not internally inconsistent yet.
Posted by: Jeff at June 1, 2011 02:02 PM
Steve Kopits How does not raising the debt ceiling put the US into default?
Because Congress has already authorized ongoing spending that exceeds incoming revenues. That means someone will not get paid. The most likely folks to be left holding the bag will be defense contractors and subcontractors, with holders of foreign debt immediately in front of them. But they will come to the Treasury window and told to come back tomorrow. They'll come back tomorrow and take their place at the end of the line and told to come back tomorrow. That's what default looks like.
It doesn't mean the US can't refinance existing debt, does it?
But we won't be able to refinance at low interest rates, which will increase the long-term debt more than if the GOP had just passed a clean bill.
It implies rather that spending must immediately brought in line with revenues, no?
Except that the GOP isn't demanding that spending immediately be brought in line with revenues. Remember, cowardly Rep. Paul Ryan wanted to push out the Medicare cuts for 10 years. When the GOP voted down the clean bill yesterday, did they include any immediate spending cuts? No. In fact, a few hours before they voted to ramp up defense spending.
Those defaults would then be internal
So??? Is that an important distinction? No.
One of the things you're missing here is that Treasury bonds are woven into almost every financial asset and contract in the world. Defaulting on any part of our debt would generate all kinds of margin calls, lead to frozen credit lines, bank failures, etc. It would be Sep 2008 on steroids.
BTW, default would also be unconstitutional. I get a kick out of all these clueless teabaggers that pretend to love the Constitution but don't know that not raising the debt limit violates the 14 Amendment's 3rd clause, which was intended to reassure Civil War bondholders that the US would honor its bonds and would not default.
Posted by: 2slugbaits at June 1, 2011 03:10 PM
Bryce The money doesn't come in via taxes, you don't spend it. It would give Congress something useful to do: priortorize spending.
Just curious. If the government runs a balanced budget beginning today, what do you think will happen with excess global saving?
Posted by: 2slugbaits at June 1, 2011 03:18 PM
2slugs, since it is so hard for the Prez and Congress actually prioritize spending, and then spending cuts, not raising the debt ceiling acts as a near perfect catalyst. If you don't accept that explanation, then explain all the angst over debt ceiling issue.
Posted by: CoRev at June 1, 2011 04:06 PM
The US does not face fiscal crisis.
If we simply did nothing, in other words:
1) Let all the Bush tax cuts expire.
2) Let the Medicare doc fix (to finally) go into effect.
3) Let the Affordable Care Act go into effect.
The federal budget primary deficit would balance by about FY 2015.
What's the best way to show this (debunk the fiscal crisis myth)? Show people this graph (based on CBO estimates):
Once we free ourselves of this illusion we can be secure in stiffening our spines. The Republicans have threatened to throw the future of our nation into the toilet. Go ahead, let them try.
Posted by: Mark A. Sadowski at June 1, 2011 05:18 PM
Let me repeat what I wrote in the comment to the prior post, which was apparently either not read or read and ignored. I am not understanding the debate going on here. It appears that the original Econbrowser post was a straw man argument, postulating that Cantor and Toomey saw nothing wrong with failing to pay interest or redeem bonds. It still mystifies me as to how anyone can read that into their quotes. It's true that some legislators are opining that default as the outcome of a failure to come to agreement on spending would be preferable to continuing to increase spending but that is not what Cantor or Toomey are saying.
If someone can clarify the point of the prior post I would appreciate it.
Is anyone reading the contents of the Cantor and Toomey quotes? It seems to me that the GOP leaders with control over legislation are proposing a legislative backup plan to reassure bond investors that they will continue to be able to redeem their bonds and receive full interest even if Congress stretches this out too long.
So while the Citi exec's comments should be taken seriously, they would seem to apply to the situation where such legislation is NOT passed. If Congress instructs Treasury that it must prioritize debt payments, it is the same as a bank saying to a credit card customer that it will not extend his debt limit and he must continue to pay interest while living on cash and carry. On top of that the bank can garnishee some of the cardholder's wages to pay down a portion of the principal.
Nothing in that scenario speaks of the cardholder defaulting on the card company. He might default on paying the babysitter and his kids' allowance though.
I am not suggesting that we can be sanguine about the government being limited in its ability to pay bills other than debt service. That would be pretty disruptive to a lot of people. But with an annual revenue stream far in excess of debt service, why would Geithner choose to stiff our bondholders before issuing IOUs to federal workers or defense firms?
The proposed legislation seems designed to stop Geithner from crying wolf by ordering him to do what he should do voluntarily. If he were acting in the interest of the bondholders he could tell them that there is enough revenue to cover their claims and that they will not lose a penny.
Posted by: colonelmoore at June 1, 2011 05:25 PM
CoRev If Congress does not raise the debt ceiling, then Congress' role is over. Done. They are irrelevant to anything after that. Who gets paid and who doesn't get paid is entirely at the discretion of the President. Entirely. Congress doesn't have anything to say about the priority of payments. Nothing. Zilch. The Administration is already signaling who will get paid, and it's not GOP constituencies.
The angst over the debt ceiling issue is that it will likely doom a weak economy to a second dip. The central economic problem right now is weak aggregate demand. Right now the GOP meme of "business uncertainty" is a misdiagnosis; but if the the Treasury defaults not only will be have much weaker aggregate demand, but there actually will be a real honest to goodness crisis in business confidence.
Posted by: 2slugbaits at June 1, 2011 05:38 PM
Was it unconstitutional when FDR defaulted the US gov't back in 1933, when he renigged on the promise to pay our debts in gold & in fact unilaterally decided to them back in devalued $s? Doesn't seem that he endured any punishment for that or for confiscating by force the citizens' gold.
I question that there is "excess" global savings. There is certainly excess credit creation & money creation on the initiative of the world's central banks. In the abscence of this fundamental distortion, the price system would reflect/equilibrate what ever real savings the world has to offer.
Posted by: Bryce at June 1, 2011 05:52 PM
I'm glad that you value the Constitution; we would benefit by abiding by it more often than we do.
Posted by: Bryce at June 1, 2011 06:09 PM
The reason the debt ceiling is important is the GOP is running on it. They just voted en masse for one of the worst ideas ever: shifting the cost of Medicare to seniors and making seniors and their families deal with insurers. The sound bite of Marco Rubio saying his 93 year old mother uses an iPad should be carved on his forehead. He represents Florida, for heaven's sake, where the problems of the elderly are incredibly obvious. I don't know a single family not affected by this and they all voted for it. Every one.
So to recover their position, they make a huge deal out of the debt ceiling. They want us to believe "spending" is the problem. What spending? Government spending. What government spending? Well, there you don't hear much, do you? We're spending more on the military. The only thing left is the non-defense, discretionary part and the largest portion of that is now spending on veterans. So let's cut medical care for veterans. Any votes for that? As many, many, many people who can actually add a column of numbers have pointed out: you could eliminate the entire non-defense discretionary budget and not eliminate the deficit. Not right away. Not in a year. That would mean eliminating the entire federal government, including funding for Congress.
They made a huge deal out of the big spending cut bill but actual spending didn't go down because they actually only cut authorization levels. Actual spending for the fiscal year is up slightly. It would have been flat, just as the White House projected a while back, but guess what? They spent billions more on the military.
Repeat: you can't balance the budget this way. It's nonsense. It's political posturing to gain leverage for the 2012 elections. It's irrational in every way except politics. It's become more important because they just blew it in the biggest possible way with that idiotic Medicare betrayal. Sure, lots of people in the GOP want Medicare gone, but the people who voted for them, whose votes won the election, voted for the GOP because they bought the huge pack of lies about how the Democrats were out to destroy Medicare. Death panels. Rationing. And then what do they do? They eviscerate Medicare. They make seniors pay much more, with no cap, with a plan to make their share grow larger every year, and put them at the mercy of insurers so grandma gets a denial in the mail and then has to figure out who to call and what to do.* So they need the debt ceiling to sell the idea that the problem is all spending. Not that they'll actually say what the spending is.
*Not to mention their plan creates a huge, government funded bureaucracy of paper pushers at insurers, shifting more of our resources into do nothing, unproductive paper shuffling paid for by the taxpayer in the name of "private enterprise". Nothing could be more like Soviet Russia than a fake private enterprise dependent wholly on tax money.
Posted by: jonathan at June 1, 2011 06:12 PM
Real hard ball would be the president saying default is a National Defense crisis and I am the Commander in Chief and if the congress doesn't like what I am doing they can impeach me. I wonder if the Rethugs would have the ovaries to start the impeachment process.
Posted by: dilbert dogbert at June 1, 2011 09:36 PM
Unconventional policies matching unconventional financial tools
Leaving the rigour to the lawyers and the accomplishments to the politicians,it is tempting to make a temporary autopsy of the unraveling debts crisis.
"Event of default is a term used in commercial loan documentation. It refers to the occurrence of an event which allows the lender to demand repayment of the loan in advance of its normal due date (also known as accelerating the loan)."
Prior to the default,they are more often than none "triggers of event of default" embedded in contracts (constitutional,commercial)
None of them have been actioned by lenders (markets),no preventive warnings made possible (interest rates).Reasons and means are included in the progressing thoughts on topics such as derivatives,morphing into quantitative easing.The debts holders are and were free to sell at prices that are not reflecting the default risks,prices were not dissuasive and the warnings abstruse.The CDs swaps markets are mutant of subprime enabling to purchase and sell underlying assets when not intending to be owned and unwilling to sell since not owned.
The contradictions are self perpetuating, a new prices world built on false premises cannot be unwound, its preservation require the use of the same artifacts.
The associated social cost is much higher than any precedented economic crisis.
Posted by: ppcm at June 1, 2011 09:54 PM
The only way out of this mess, is forcing the socalled TBTF Institutions into receivership, removing or hopefully if there is that thing called justice, imprisoning and monstrously fining the failed managements of failed companies bruting failed models that are responsible for the PONZI scheme that is the derivatives markets (10X the global GDP), a return to a Glass-Seagal like regulatory apparatus, putting Americans to work on infrastructure, education, and green technologies, -oh - and a revolution! A big violent, overthrow of the predatorclass whores in the socalled government. Every single one of them (except for Dennis Kucinich and Ron Paul and a complete restructuring, and restoration of America to a nation that operates with the authority and for the benefit of, by, and for the people, - and NOT the predatorclass and predatorclass oligarchs exclusively. Since none of this is possible in the current situation, - the only other option is can kicking, the Kabuki theater politics, and a fearsome degradation of the living standards of the average American. No one is doing anything to right the horrible wrongs that brought the entire global financial system to the brink of collapse in 2008. The most criminal operators and their operations have been rewarded. The people have been burdened with the monstrous debt government through no fault of their own and with absolutely NO SAY in the conduct of the socalled government which has shapeshifted over thirty years into an instrument and tool of predatorclass. We know how this will end. It won't be pretty or bloodless. Gold, guns, and ammo. In a world where there are no laws, there are no laws for anyone predatorclass biiiiaaatches
Posted by: Tony Foresta at June 1, 2011 11:46 PM
Of course, Treasury is faced with a menu of choices when the debt ceiling is reached. One item on that menu is default on debt payments. Anyone who argues that discussion of default "is putting partisan propaganda interests ahead of the truth" is, well, putting partisan propaganda ahead of the truth.
Treasury may well decide to default on its contractual obligations and obligations to beneficiaries under law because doing so is expedient. It seems the likeliest outcome. However, those who are refusing to raise the debt ceiling are preventing Treasury from honoring the law and from meeting US obligations. Anyone who trivializes that breech is putting partisan propaganda ahead of the truth.
Posted by: kharris at June 2, 2011 04:43 AM
Jonathon & 2slugs, do we live in the same country? Clearly we are not reading/listening to real news reports. Moreover, our understanding of how the US Government works is very different.
2slugs thinks that not having a new budget defined in 2011 and leaving much of the decision making up to the Executive Branch is normal. He said: "...then Congress' role is over. Done. They are irrelevant to anything after that."
In 2lug-land future budgets are not negotiated between the two branches. Uh Huh! Congress' role is done? What we are seeing is just the opposite, real budget negotiations with the adults trying to teach clueless overspending teens.
Jonathon, there's so much ignorance in your comment it needs dissecting paragraph by paragraph. Clueless misunderstandings:
1. "They just voted en masse for one of the worst ideas ever: shifting the cost of Medicare to seniors and making seniors and their families deal with insurers." The Ryan Plan is the based upon the auto insurance model with the Federal Government paying the insurance premiums. That frightens you????
2) "The reason the debt ceiling is important is the GOP is running on it." Yup!!!! Adults trying to fix the clueless teens' over spending.
3) "They want us to believe "spending" is the problem. What spending?" There was a long list of program spending listed by the Republicans when they voted on the House Resolution. you really do need to do just a little research.
4) "...you could eliminate the entire non-defense discretionary budget and not eliminate the deficit." You at least define the problem/issue. You are clueless as to its importance.
5. "They made a huge deal out of the big spending cut bill but actual spending didn't go down because they actually only cut authorization levels." Again, you fail to understand authorizations is one of the big budget steps done by Congress.
You then go into the typical liberal/democratic rant.
2lugs & Jonathon, you guys are so far into "Sheesh-land" that it is unlikely you will find your way back to adult-land.
Posted by: CoRev at June 2, 2011 04:44 AM
Ivars, currency control will be a big difference.
Posted by: KevinM at June 2, 2011 04:58 AM
Debt limit 'chicken' can't be all bad. See Stanford Professor John K. Taylor's opinion in the June 2, 2011 WSJ. As he reports, 'yesterday 150 economists released a statement saying higher debt ceiling should be tied to spending reform now'.
Posted by: AS at June 2, 2011 06:46 AM
After budget discussions-
"Carney said specifics would be agreed upon through negotiations lead by the Vice President aimed at reducing the deficit and raising the federal debt limit.
"We are optimistic that … those talks will produce and agreement, a bipartisan agreement that will reduce the deficit in a bipartisan way because participants will find common ground," he said.
The next round of formal meetings, Carney said, will take place next week on Capitol Hill, though he stressed that staff members are continuing to work on the agreement.
However, Carney maintained the White House position that it would be a mistake to link the increase in the debt limit to specific levels of cuts as Boehner has called for.
"These are two important goals that need to be achieved. One is significant deficit reduction," Carney said. "We agree with Republicans and Democrats that that needs to be done."
He added, "He [also] thinks it's an absolute necessity that the debt ceiling be raised. … Playing chicken with the full faith and credit of the United States government is a bad idea."
It's good to see that the White House is flexible on this matter. Those Rethuglicans just want to cause a fiscal Armageddon.
Posted by: Rich Berger at June 2, 2011 07:39 AM
The letter AS mentions is here:
As usual my university (the University of Delaware) has a disproportionate number on the list (3). (Sigh.) In fact, according to my count Only Stanford (6), Carnegie-Mellon (3) and George Mason (3) have as many or more on the list. That ought to give you a good idea of where the dingbat kabuki theatre school of economics resides these days.
These sort of letters come out every few months or so (e.g. the anti-fiscal stimulus letter, the anti-QE2 letter etc.) and thankfully my dissertation adviser did not sign this time. In fact a number of the usual names are absent this time so this list of economists should be considered the radioactive core of the dingbat kabuki theatre school, such as Furchgott-Roth, Hassett (Dow 36,000), Ranson and Malpass.(In fact someone should methodically go through these letters to find the most frequent signers and institutions.)
As for dingbat kabuki theatre Nobelist signers there are Mundell and Vernon Smith. (Apparently even Lucas wouldn't sign this one.)
P.S. And yes, Menzie, Holtz-Eakin is on the list. But you probably expected it. My sympathies.
Posted by: Mark A. Sadowski at June 2, 2011 11:04 AM
God willing, bonds held by the Peoples Republic of China will be paid. We can start by eliminating one half of all discrestionary spending. Follow that by a cut to each Social Secirity check by 25% starting today. Then an immediate cessation of the wars in Iraq, Afghanistan, and Lybia. This should help for now.
Posted by: Dr. Pangloss at June 2, 2011 11:24 AM
It is important to realize that financial crises never happen when you expect them to. If there is a date at which the an entity is expected to run out of money, people adjust their behavior to make sure that they are protected *prior* to the expected default date. This moves up the default. It is classic bank run behavior.
I think that the date at which Treasury will no longer be able keep things running will happen long before August 2nd.
Also Treasury rates will start to rise early, as the unthinkable default, becomes thinkable.
Posted by: The Econometrix at June 2, 2011 01:38 PM
2slugs thinks that not having a new budget defined in 2011 and leaving much of the decision making up to the Executive Branch is normal. He said: "...then Congress' role is over. Done. They are irrelevant to anything after that."
In 2lug-land future budgets are not negotiated between the two branches.
Since we were talking about the debt ceiling I thought it was clear from the context that I was not talking about budgets; I was talking about Treasury disbursement priorities. The issue here is cash management of disbursements against past budgets, not future budgets. Disbursements are the province of Treasury, not Congress.
AS Debt limit 'chicken' can't be all bad. See Stanford Professor John K. Taylor's opinion in the June 2, 2011 WSJ.
Two things should have set off your BS detector. The first was that it came from the WSJ op-ed page, which is barely suitable as birdcage liner. The second alarm should have been that it was written by John Taylor, who has pretty much embarrassed himself throughout this whole affair. I think Taylor, Mulligan and Lucas are having a contest to see which of them can be more wrong about the economy.
Posted by: 2slugbaits at June 2, 2011 02:00 PM
I question that there is "excess" global savings.
That explains a lot. You're quite wrong, but it at least is a window into why you say what you say.
Posted by: 2slugbaits at June 2, 2011 02:02 PM
CoRev The Ryan Plan is the based upon the auto insurance model with the Federal Government paying the insurance premiums. That frightens you????
Sounds like you got that from Fox Noise. Here's the real story. The Ryan plan for Medicare is based on exploiting the gap between the rate at which private healthcare costs are increasing versus overall inflation. Ryan's plan gives seniors a wasting financial asset. That's one way that it "saves" money. The Ryan plan also cuts Medicaid and cuts the "donut hole" correction immediately, which is something that a lot of GOP congresscritters did not apparently realize until they heard about it at townhalls.
The analogy with auto insurance is spurious to say the least. Yes, the Ryan plan offers seniors a menu of plans with guaranteed coverage, but the guarantee is worthless because it creates a high risk group with premiums far in excess of the value of the voucher. And if seniors can't redeem the voucher they lose all of the benefit. Again, that's a feature of the plan, not a bug. It's how the GOP intends to hoodwink tomorrow's seniors.
Now that you understand how the Ryan plan works, are you still a big supporter?
Posted by: 2slugbaits at June 2, 2011 03:49 PM
You have more courage than I. The moment I saw CoRev comparing health insurance to automobile insurance I gave up any hope. However, since you gave it some effort let me add to what you said.
According to the CBO Ryan's Plan would more than double a typical 65 year old's out of pocket healthcare expenses in 2022. See page 22:
Since that is a little abstract I sometimes recommend that people look at the CBPP's version of it that puts it in dollar terms ($12,500). See Page 3:
But since this is still probably too subtle I recommend CoRev take a look at this video:
Posted by: Mark A. Sadowski at June 2, 2011 05:20 PM
2slugs, maybe you weren't around for the earlier debt ceiling fights, but it's OMB's normal role in prioritizing payment authorizations, not treasury. For normal operations of disbursements/outlays treasury acts more as an accounting function writing checks and tracking them against existing obligations and authorizations. During periods like this, when the are limited by available revenues, they include a prioritization step that pays them in order of importance. Importance is established by OMB and other presidential staff. In short periods, Congress does not get involved, but if they choose not to raise the debt ceiling permanently or for with strings attached, the strings will include priority requirements. Those like we are starting to see,assuring no default on current treasuries debt held by the public.
So, no! Congress is already involved.
As far as Ryan's Medicare Plan goes you have it quite wrong. It does not create any high risk group. That group already exists, and many are already covered by existing private insurance plans. The difference is Medicare becomes the primary when it is started, and the private plan becomes the secondary payer. For those who do not get private insurance after retirement, then they can decide to implement Gap insurance for the difference between Medicare and actual expenses. Which kinda shows that the "high risk" group you are talking about is still finding insurance.
There's much more with regards to how Ryan's Plan will be implemented, but you are far from the expert. You need to refresh your crystal ball its feeding you some bad info.
Posted by: CoRev at June 2, 2011 05:27 PM
CoRev Ugh! Lots of Executive departments will have input to the prioritization. Duh! My point was that it is the Executive that sets payment priorities and the Treasury executes those priorities. Congress has no role in setting priorities. Now could they in the future? Perhaps through future legislation, although the constitutionality of that would be suspect since executing within constraints is a peculiarly Executive function. Remember, it's the GOP that now demands an explicit constitutional citation for every new piece of legislation. Nowhere does the Constitution grant that kind of authority to disbursements (as opposed to authorizations). On the other hand, the 14th Amendment's 3rd clause has historically been interpreted as giving direction to the Executive in general and Treasury in particular. In any event, none of that is relevant to the current debate. The law today says Congress plays no role in setting disbursement priorities.
As to gap insurance, there is a pretty big difference between insuring someone who is between 65 and 75 versus insuring someone who is between 75 and 85. If you have a comfortable retirement income many people can afford gap insurance up to a point, but after age 75 it is out of reach for most folks. That's why Medicaid is concentrated in people over 75, and not the sterotypical poor young family. In other words, for most people over 75 "gap" insurance is called Medicaid unless you are fairly well off in retirement. And the hoodwinking part of the Ryan plan is that it is precisely because the voucher is virtually worthless 10 after retirement (i.e., just when people start to need it) that Ryan is able to claim savings. The voucher is not too bad in early retirement, but that's not when you need it.
You don't seem to understand how Ryan uses the power of compounding to gut the value of the voucher.
Posted by: 2slugbaits at June 2, 2011 06:10 PM
Mark Sadowski, provides us three references to prove that Ryan's plan is ... you can guess. Ref # is the fear mongering video throwing mom over the cliff. Useless and meaningless.
Ref 2 is a specialty report comparing the poorest elderly, dually eligible medicaid and medicare. That's not your representative group.
But the CBO estimate is on Ryan's high level proposal and not on anything close to what might be in any legislation. So what it is analyzing is mostly their own assumptions. Many of them are not what many would consider reality-based.
So the best Mark can muster is more fear mongering, and analysis based upon some shaky assumptions. Mark, gotta do better than just continuing the Dem talking points and hyperbole.
I have a proposal, doesn't cost anything, that would cut 5-10% off the total medical costs for the average 40+ Year Olds. They're the group where chronic diseases begin to appear and increase costs. Another proposal which allows HC recipients keep any saving would probaly add at least another 50% to that above 5-10%. Those solutions are not what Dems want to hear, because they do not include Government control.
Posted by: CoRev at June 2, 2011 07:34 PM
2slugs, c'mon now. Get a grip! You said: "My point was that it is the Executive that sets payment priorities and the Treasury executes those priorities. ... In any event, none of that is relevant to the current debate. The law today says Congress plays no role in setting disbursement priorities." and "Now could they in the future? Perhaps through future legislation,..."
So, from that I think we agree. Congress has a role, if they choose to take one, and they are in that legislative process as we speak. Failure to pass a 2011 budget exacerbates that situation, and that failure was a purely political decision by the Dems in control of Congress then.
The Dem Congress is partially responsible for today's budget situation. Today's Repub. House is trying to provide some direction to this and future budgets. The core argument between the Executive and Legislative Branches is spending, which results in those Dept of Treasury outlays/checks, and it is this current Congress that is tying to change direction of that spending train.
So, your example says the train's caboose, Dept of Treasury, is the driver of the train. No! You are ignoring everything that went before it. Congress provides the fuel (funding) for that train to move, and Congress can and does set the speed and direction of that spending train.
Congress does have a "role" in disbursements, and because of the prior Democratic Congress's failure, is moving to take a more direct role. So to state that "Congress plays no role in setting disbursement priorities." is wrong and arguing for argument's sake.
Posted by: CoRev at June 3, 2011 04:27 AM
Dual eligibles represent 9 million seniors or 21% of all people recieving Medicare. Secondly, if you read the analysis of Ryan's plan you'll see that those under the poverty line in 2022 ($13,620) would see their out of pocket expenses increase by $4,700. Those between 135% and 150% of the poverty line in 2022 ($18,387-$20,430) will see their out of pocket expenses increase by $6,650. Those above 150% of the poverty line in 2022 will see their out of pocket expenses increase by $12,500.
I consider the CBO (the primary source for these estimates) to be the benchmark standard for reality based analysis. If you have a source that you think is better feel free to present it.
Posted by: Mark A. Sadowski at June 3, 2011 08:16 AM
"$12,500" should read "6,450"
Posted by: Mark A. Sadowski at June 3, 2011 08:20 AM
"6,650" should also read "6,450"
In other words everyone over 135% of the poverty line in 2022 ($18,387) will see their out of pocket expenses go up by $6450. (Would have been much simpler but I'm still drinking my coffee.)
Posted by: Mark A. Sadowski at June 3, 2011 08:33 AM
From page 6 of the CBO report you cite-
"CBO’s long-term scenarios and the proposal analyzed here are all subject to pressures
over the long term that would make them difficult to sustain. Under the extendedbaseline
scenario, revenues would reach higher levels relative to the size of the economy
than ever recorded in the nation’s history, payments to physicians under Medicare
would be reduced well below current rates, and payments to other Medicare providers
would grow more slowly than the cost of their inputs; nevertheless, federal debt
would continue to grow relative to GDP. Under the alternative fiscal scenario, revenues
would be lower and Medicare’s payments to physicians and other providers
would be higher than under the extended-baseline scenario, but the government’s
debt would skyrocket to levels unprecedented in the United States. Rising tax rates or
surging federal debt might accentuate concerns about the budgetary situation and
thereby lead policymakers to reduce benefits under Medicare, Medicaid, or other
"Under the proposal analyzed here, debt would eventually shrink relative to the size of
the economy—but the gradually increasing number of Medicare beneficiaries participating
in the new premium support program would bear a much larger share of their
health care costs than they would under the current program; payments to physicians
and other providers for services provided under the traditional Medicare program
would be restrained (as under the two scenarios); states would have to pay substantially
more for their Medicaid programs or tightly constrain spending for those programs;
and spending for federal programs other than Social Security and the major
health care programs would be reduced far below historical levels relative to GDP. It is
unclear whether and how future lawmakers would address the pressures resulting from
the long-term scenarios or the proposal analyzed here."
The extended baseline scenario reflects current law, including expiration of the Bush tax rates and the reduced healthcare spending assumed under Obamacare. The alternative scenario includes extension of Bush tax rates, relief from the alternative minimum tax and higher payments to physicians than assumed under Obamacare projections. The Ryan proposal increases the cost of healthcare for retirees - that's the downside for Medicare recipients. The upside is that the finances of the country do not go off a cliff.
The Ryan proposal is out there. The Democrats want to pretend that no choices are needed now. The surprises come later when it's too late. Higher taxes and death panels. There's no free lunch.
Posted by: Rich Berger at June 3, 2011 09:49 AM
Mark asks: "I consider the CBO (the primary source for these estimates) to be the benchmark standard for reality based analysis. b>If you have a source that you think is better feel free to present it." Mark, you're trying too hard to salvage democratic demagoguery of a non-issue. We do not have a bill to actually compare. There's little doubt that most of the items you guys are emphasizing would be resolved.
Until then, I much prefer to not discuss maybe issues as if they were fact.
Dems have been concentrating on the costs for the elderly if changes are implemented. Republicans are concentrating on costs if changes are not implemented. Here are some astounding estimates.
Two-earner couple with one spouse earning a high wage ($68,900 in 2010) and one earning an average wage ($43,100 in 2010)
They will have paid in: $140,000 and receive $881,000.
By 2030: paid $171,000 and received: $1,190,000.
From last page here: http://www.urbaninstitute.org/UploadedPDF/social-security-medicare-benefits-over-lifetime.pdf
If you believe this is sustainable you are probably a Dem and already receiving benefits.
Posted by: CoRev at June 3, 2011 09:59 AM
I would summarize the extended baseline scenario as assuming the following:
1) All the Bush tax cuts expire.
2) The Medicare doc fix (finally) goes into effect.
3) The Affordable Care Act goes into effect.
Under that scenario, 75 years from now federal tax revenue will be about 30% of GDP, debt held by the public will be about 100% of GDP and the federal budget will be roughly in primary balance:
It's not ideal (that's why the President has proposed additional cuts to Medicare) but it's not the end of the world either. Ryan's proposal on the other hand doesn't even come close to being a reasonable alternative. And the estimates of additional out of pocket expense in 2022 under Ryan's plan are only the beginning of the story as under his plan healthcare costs completely spiral out of control.
Posted by: Mark A. Sadowski at June 3, 2011 11:52 AM
I don't agree with your 2; as I understand it the doc fix is the deferral of the scheduled cuts in physician reimbursement. I believe that the extended baseline puts the cuts into effect and the alternative scenario recognizes that physician reimbursement is higher than under the the EB.
I could not find the exact language, but I think that's at least one difference in the two scenarios.
Posted by: Rich Berger at June 3, 2011 12:13 PM
CoRev Honestly, sometimes I think you must be perpetually out to lunch. You're making a strawman argument. Nobody is saying that Medicare is sustainable on its current path. Hey, that's one of the points that I was making a year ago when talking about the structural deficit as being the primary concern rather than the cyclical deficit, which is what the GOP was talking about. The CBO numbers have long shown that Medicare and Medicaid will eat our lunch if not brought under control. Again, no one is arguing otherwise. The argument is whether you do it smart or do it stupid. The Ryan plan does it stupid. Worse yet, it doesn't actually cut costs unless you believe regular "exceptions" to the rule won't happen so that those currently under age 55 won't lose out when they retire at age 65. Just as Congress always passes a "doc fix" so too will they pass an annual "55 fix." That's a no brainer. And factor that into Ryan's plan and it explodes the debt.
If you want to control Medicare & Medicaid smart, then you do it by focusing on healthcare costs in general; otherwise you're just doing smoke and mirrors. Obamacare was a babystep in the right direction. It would have been more successful were it not for the GOP lies about "death panels" and such. Hey, Sen. Coburn had some good ideas on healthcare reform in the summer of 2009, but Sen. McConnell ordered him to shut up because he was worried that Coburn might actually have supported some of the bill. Can't have that when the main job is to defeat Obama at all costs, now can we.
Posted by: 2slugbaits at June 3, 2011 02:56 PM
You're right. I mispoke. I should have said that the EB means ending the doc fix.
So at least we're in agreement as to what the extended baseline scenario means.
Posted by: Mark A. Sadowski at June 3, 2011 03:41 PM