The Bush Tax Cuts and the Deficit

How much do the Bush tax cuts and the alternative minimum tax patch widen the deficit? Take a look at the lightest blue bars below:

That chart comes from the Congressional Budget Office’s latest report, released Wednesday, on the budget and the economic outlook.

CATHERINE RAMPELL

Dollars to doughnuts.

The office is legally required to provide estimates for the budget under current law; this is known as the forecast “baseline.” Every year, though, Congress reliably makes changes to current law — changes that increase the deficit — just in the nick of time. This bar chart is intended to illustrate exactly how big those last-minute changes are, lest onlookers be tempted to ignore them.

Dollars to doughnuts.

The lightest blue bars, labeled “Extend Tax Policies,” represent an estimate of how the deficit will grow if Congress extends the Bush tax cuts and indexes the alternative minimum tax for inflation, as legislators are expected to do once again. As you can see, these moves alone more than double the size of the deficit for most of the years shown.

Just above this are much darker blue bars, labeled “Maintain Medicare’s Payment Rates for Physicians.” These represent the expectation that Congress will continue to nullify their own requirements to cut Medicare payments for doctors. The law says that Medicare’s payment rates for physicians’ services will fall by 30 percent at the end of 2011, but given Washington’s record on this “doc fix,” few expect that cut to be allowed to happen.

“Additional Debt Service” — the aqua strips at the top — refers to the interest payments the government will have to pay because it will need to borrow more money to account for the greater budget shortfall caused by continuing these tax and Medicare policies.

The Rich Can Afford to Pay More Taxes

Bruce Bartlett held senior policy roles in the administrations of Ronald Reagan and George H.W. Bush and served on the staffs of Representatives Jack Kemp and Ron Paul.

Warren Buffett’s commentary in The New York Times on Aug. 15 has opened a new front in the continuing debate on whether taxes should be raised to reduce projected budget deficits.

Today’s Economist

Perspectives from expert contributors.

Mr. Buffett asserted that the well-to-do could easily shoulder a higher burden. Specifically, he proposed an increase in the current 35 percent top rate for those making more than $1 million and a further increase on those making more than $10 million. He also proposed taxing dividends and capital gains as ordinary income (currently, they are taxed at a maximum rate of 15 percent).

Perspectives from expert contributors.

Conservative groups such as the Tax Foundation pooh-pooh the idea of raising tax rates on the rich, asserting that there isn’t enough money available to bother with.

On Friday, however, the respected Tax Policy Center published estimates showing that the potential revenue would have a significant impact on projected deficits. It looked at several options, including a 50 percent top rate on incomes over $1 million and changes to the taxation of dividends and capital gains.

As one can see, the revenue potential depends critically on what baseline is assumed. That is because the top tax rate is already scheduled to rise to 39.6 percent on incomes over $380,000 in 2013. Moreover, dividends on corporate stock would go back to being taxed as ordinary income. And capital gains would go back to being taxed at a maximum rate of 20 percent.

The larger question is how much the well-to-do should pay. According to the Internal Revenue Service, in 2008, those in the top 1 percent of the income distribution, with incomes over $380,000, had an effective tax rate of 23.3 percent. In 1986, a year when the real gross domestic product grew a healthy 3.5 percent, their effective tax rate was 33.1 percent. It has been much lower every year since.

If this group were still paying 33.1 percent, federal revenue would have been more than $166 billion higher in 2008 alone. That would be enough to reduce the budget deficit by about 10 percent this year. If the top 1 percent of taxpayers had continued to pay the same effective tax rate they paid in 1986 every year from 1987 to 2008, the federal debt today would be $1.7 trillion lower.

Of course, these are not hard numbers. If the effective tax rate had stayed at 33.1 percent on the top 1 percent of taxpayers all these years, their behavior would undoubtedly have changed.

And it probably would have been impractical to maintain a higher rate on just the top 1 percent of taxpayers without having had higher rates on many of those below that percentile. But it does show the order of magnitude of how much revenue has been sacrificed from tax cuts on those with very high incomes.

Some will argue that those tax cuts bought higher economic growth, but that is very doubtful. Growth was stronger in the 1990s when the relative revenue loss was small and was dismal during the George W. Bush administration, when two-thirds of the aggregate revenue loss occurred.

It is not class warfare to suggest that the richest 1 percent of people in society pay one-third of their income to the federal government, as they did under Ronald Reagan. Keep in mind that dividends were taxable as ordinary income every year of his administration, and in the Tax Reform Act of 1986 he supported taxing capital gains as ordinary income as well.

Higher effective tax rates on the rich could even be achieved without raising the top tax rate bracket to 50 percent, as it was under President Reagan. There are many tax preferences that largely benefit the well-to-do that could be scaled back to avoid raising marginal rates.

The important thing is for people to accept that we can no longer afford such low effective tax rates on those with the greatest capacity to pay at a time when total revenue as a percentage of G.D.P. are at their lowest level in 60 years and we are facing a debt crisis. The issue is not whether the rich should pay more, but how best to accomplish it.

Who Pays the Supercommittee?

The 12 members of the “supercommittee” that will try to develop yet another bipartisan fiscal policy proposal have now been named. What types of spending programs and tax breaks should we expect these members to care about most?

It might help to look at which industries and individuals give them the most money.

CATHERINE RAMPELL

Dollars to doughnuts.

MapLight, a nonpartisan research organization, has compiled donation profiles for each of the 12 members, using data from the Center for Responsive Politics.

Dollars to doughnuts.

Over the last decade the top donor, by far, was the legal industry, followed by securities and investment:

Top 10 Industry Contributors to Supercommittee Members

The individual organizations that gave the most money — including both PAC money and employee donations — were the Club for Growth, followed by Microsoft.

Top 10 Organization Contributors (PACs and Employees) to Supercommittee Members

As all good economists know, incentives matter: Politicians (like all people) are generally reluctant to bite the hand that feeds them.

Given that the antitax group Club for Growth is at the top of the list of organizational contributors, for example, we might not be surprised to find that many of the committee members are dead-set against raising taxes.

Likewise, donations from the securities and investment industry might indicate that legislators could be reluctant to eliminate the lower tax rate for “carried interest,” which primarily benefits investment managers. Donations from the real estate industry might mean the mortgage interest tax deduction, whose elimination many economists support,  could also be relatively protected.

How else might we expect the sources of these donations to shape how committee members think about fiscal policy?

Do Congress and the White House Deserve an AA+ Rating?

Uwe E. Reinhardt is an economics professor at Princeton.

There now appears to be general agreement that the downgrade issued a week ago by Standard & Poor’s on the “Political Risks and Rising Debt Burden” of long-term United States debt was not a statement on the probability of default on Treasury bonds at all. Instead, it appears to have been intended as a reminder that something has gone seriously wrong with the style of governance put in place by the Founding Fathers.

Today’s Economist

Perspectives from expert contributors.

Whether the current style of federal governance deserves the second highest grade S.&P. assigns (AA+) can, of course, be debated. I would be more inclined toward a plain B rating, that is, the governance equivalent of a junk bond.

Perspectives from expert contributors.

Be that as it may, one manifestation of the decay in the federal style of governance has been the discovery that American voters can be pleased by providing them with a growing array of government services and financial transfers and by underwriting these with deferred taxes — that is, current deficits. The deferred taxes are to be paid off by generations not yet born or still too young to vote.

In the words of Doug Elmendorf, current director of the Congressional Budget Office, in a presentation last year, “The United States faces a fundamental disconnect between the services that people expect the government to provide, particularly the benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services.”

To make politicians comfortable with this approach to governance, a theory was needed that “deficits don’t matter.” That theory reportedly was proposed by Vice President Dick Cheney to Paul O’Neill, then Treasury secretary, who in late 2002 had protested the Bush administration’s evident addiction to debt. A fascinating account of the debate surrounding this proposition can be found in Jonathan Weisman’s “Reagan Policies Gave Green Light to Red Ink” in The Washington Post, written in 2004.

The economics profession did not entirely endorse Mr. Cheney’s theory; neither, however, did it line up against it. Instead, as usual, it had a nice intra-professional, two-handed debate on the issue, accompanied by learned papers. Then, as now, the pronouncements of macroeconomists add up to confusion.

The footprints of this new style of federal governance can be seen in the following chart, which is featured in updated form year after year in the Congressional Budget Office’s well-written long-term budget outlook.

It is instructive to reflect on this chart, along with the two charts shown below. The data for those charts can be found in Table B-79 of the Economic Report of the President, February 2011.

The first shows the gross federal debt as a percentage of gross domestic product from 1976 to 2011. It is the most inclusive measure of the Treasury’s obligations, which ultimately are, of course, the obligations of the American taxpayer. The colors of the bars indicate presidential terms.

The gross federal debt includes debt owed to other government accounts — for example, the Social Security Trust Fund, the Medicare Trust Fund and other retirement or government trust funds. Cash surpluses accumulated in these funds are invested in Treasury securities.

Of the total gross federal debt of $13.6 trillion in 2010, $4.6 trillion was owed by the Treasury to these government trust funds and only $9 trillion to the public, which included international investors (47 percent), domestic private investors (36 percent), the Federal Reserve (9 percent) and state and local governments (8 percent).

The next chart shows how the fraction of publicly held debt as a percentage of total gross federal debt has fluctuated over time. Note again that purchases by the Federal Reserve of Treasury debt, of which there have been many in the past few years, are counted as debt held by the public rather than intra-governmental debt.

Readers of this blog will draw their own inferences from these three charts. My own is that recklessness in United States fiscal policy is not a recent phenomenon, especially if one considers the devastating effect that the recession, starting in 2007-8, has had on federal tax revenues, now at a historical low as a percent of G.D.P., and on federal spending, now at a historical high. In fact, the federal deficit for 2009 had been projected by the Congressional Budget Office at $1.2 trillion even before the current administration moved into the White House.

The problem is much less the current budget deficits, which can be explained by the current recession, but that budget balance does not seem to be in sight long after the recession, we hope, is over.

It is that problem that the White House and the Congress must solve. We must hope that care for the nation’s future — evidently now taking a holiday — will return someday soon to their minds and souls. Perhaps then they will merit an AA+ rating.

Defining Economic Interest

Nancy Folbre is an economics professor at the University of Massachusetts Amherst.

Republican resistance to raising taxes represents a distinctly minority view. The latest New York Times/CBS poll shows that only 34 percent of adults believe that taxes should not be increased on households earning $250,000 or more to lower the budget deficit. Even this modest percentage surprises me, because only about 2 percent of American households report income above this amount.

Today’s Economist

Perspectives from expert contributors.

Most conservative economists argue that higher tax rates at the top would hurt everyone because they would lower economic growth. I don’t buy this argument for a variety of reasons that I’ve explained elsewhere. However, the argument seems pretty easy to sell.

Perspectives from expert contributors.

People don’t always recognize and effectively act on their economic interests. As one of my favorite behavioral economists, Dan Ariely, put it, we are all more like Homer Simpson than Superman.

I’ve always identified more with Marge Simpson than with Homer, but in any case, if the Simpsons don’t act on what we believe are their economic interests, economists should be able to explain why.

Reaching for a better understanding of the Tea Party seems like a good place to start, since it gets much of the credit or blame for current Republican priorities.

According to last week’s poll, Tea Party members are slightly better educated and more prosperous than the typical American. Still, only 17 percent earned more than $100,000 a year and 2 percent earned more than $250,000. I wish the survey had asked how many were unemployed or working in the public sector.

Some evidence suggests that the Tea Party’s interests are shaped by its racial composition. Surveys show that it includes few African-Americans (3 percent of the total) and has greater membership in the South than in other regions (41 percent of voters compared with 15 percent in the Northeast).

At that time, a majority reported that they believed that “too much has been made of the problems facing black people” (52 percent compared with 28 percent of all Americans).

Asked to volunteer what they don’t like about President Obama, the top answer, offered by 19 percent of Tea Party supporters, was that they just didn’t like him.

The most recent poll confirms this animus: Only 12 percent of Tea Party supporters approve of President Obama’s job performance, compared with 20 percent of Republicans and 48 percent of Americans.

Dislike and disapproval obviously inclined them to support Republicans who gave the president a hard time. But as Kate Zernike pointed out in a recent article in The New York Times, Tea Party members did not line up squarely behind those who wear their mantle in Congress. A CBS News poll taken in mid-July showed that 53 percent of Tea Party members, along with 66 percent of all respondents, favored a combination of tax increases and spending cuts.

One self-identified Tea Party Web site goes so far as to decry wealth inequality and calls for a progressive tax on wealth.

So why did Tea Party Republicans in Congress take such a hard line? Their views — like those of most other elected representatives — are not primarily shaped by the views of their constituents.

While the Tea Party movement got a big initial boost from small donors, its elected representatives quickly began relying on political action committees and major contributions from Wall Street firms. These almost certainly grew after the Supreme Court, in its Citizens United decision in January 2010, loosened campaign finance restrictions.

Many Tea Party members may be unaware of the extent to which wealthy political conservatives like the Koch brothers have bankrolled their efforts and shaped legislative priorities.

Partly because it does enjoy significant grass-roots support, the Tea Party has helped Republicans deflect attention from growing concerns about economic inequality and class conflict.

But these concerns are likely to intensify as unemployment rates remain high and the economy moves back toward official recession.

An ABC News/Washington Post poll conducted last month found that most Americans said the biggest difference between President Obama and Republicans lay in whose economic interests they aimed to serve.

Perceived differences based on household income categories, like the “$250,000” benchmark, seem less salient than those based on big business versus everybody else.

A striking 67 percent of Americans said Republicans were protecting the interests of large business corporations, compared with 24 percent who believe the same of President Obama (see chart below).

Meanwhile, the Tea Party is taking the fall. Its popularity has declined significantly in recent months. The latest New York Times/CBS News poll found the Tea Party was viewed unfavorably by 40 percent of the public, up from 29 percent in April.

As the economy nosedives, Tea Party populists are likely to become even less popular. And perhaps Tea Party members will change their perception of where their own economic interests lie.

For Stocks, Day 7 Since the Walkout

Tuesday was the seventh trading day since John Boehner walked out of talks with Barack Obama at the White House. That move made it clear that the House speaker would not risk alienating the Tea Party and that if a debt default were to be averted, the president would have to capitulate on virtually all issues or defy Congress by claiming the debt limit legislation was unconstitutional. He chose to capitulate.

FLOYD NORRIS

Notions on high and low finance.

This is also the seventh consecutive session that the Standard & Poor’s 500-stock index has declined. The total fall for the seven days is 6.8 percent.

Notions on high and low finance.

This is something that Wall Street did not see coming. It took for granted that something more reasonable would be worked out. To make it worse, the economic data has turned much bleaker, highlighted by last Friday’s revisions in the gross domestic product. In normal times, the politicians would be vying to come up with plans to stimulate the economy. Now that seems to be out of the question, and there is more talk of a double-dip recession than at any time since the last downturn ended.

The last time I can recall Wall Street’s being so wrong about what the government would do was in September 2008. Lehman Brothers was collapsing, but the Bear Stearns precedent provided assurance that the government would not take the risks to the financial system inherent in letting a big bank fail.

Over the seven sessions after the Lehman bankruptcy, the S.&P. fell 5.1 percent. It was a much wilder ride than this one, with two days when the market lost more than 4 percent and two days when it rose more than 4 percent. The market would go on to lose much more. By contrast, the largest decline in this string was Tuesday’s fall of 2.6 percent.

Wall Street was so very wrong in 2008 because ideology trumped caution in Washington. Sort of like what seems to be happening now.

Why Would a Fiscal Commission Work This Time?

Here on Capitol Hill, legislators are fuming about being stripped of their power by a new bipartisan fiscal “super-committee.” But history shows that such commissions have been generally powerless.

CATHERINE RAMPELL

Dollars to doughnuts.

In the last six decades, Washington has assembled more than a dozen blue-ribbon panels to grapple with fiscal problems. These include the 1947-49 Hoover Commission, the 1982-84 Grace Commission and of course most recently, the Simpson-Bowles Commission, a bipartisan panel President Obama created by executive order just last year that included 12 sitting members of Congress. (If I were Alan Simpson and Erskine Bowles — the namesakes of that task force — I might be a little peeved that my colleagues are effectively repeating the exercise that I spent so much time on last year.)

Dollars to doughnuts.

The panels were often devised as a way to give political cover to policy makers so they could make unpopular changes to things like entitlements and tax rates. In most cases, though, Congress ignored the proposals or deferred action.

Even the panel usually held up as the exception that proved the rule, the 1981-83 Greenspan Commission set up to revamp Social Security, was also largely a failure.

According to an unpublished memoir written by one of the now-deceased members of the commission, the panel deadlocked and then splintered. President Reagan and the House leadership were able to eke out a deal to save Social Security only by engaging in separate negotiations just as the entitlement program was about to go bankrupt.

“Most of these deficit commissions have ended up exactly the way Simpson-Bowles did: with lots of talk, lots of congratulations and no actual changes,” said Bruce Bartlett, a former economic adviser to Presidents Ronald Reagan and George H.W. Bush (and regular contributor to this blog).

Many of these commissions have issued the exact same recommendations as their predecessors, he said, only to have them disregarded once again.

“They keep appointing new commissions to reinvent the wheel,” Mr. Bartlett said.

And indeed, there are many reasons to believe that Congress’s current (and past) fiscal challenges are due less to a lack of economic ingenuity than to a lack of political will, a will that the creation of a commission does nothing to strengthen.

After all, the nonpartisan Congressional Budget Office publishes an enormous tome of “Budget Options” nearly every year for the primary purpose of letting legislators know what choices they have for fiscal consolidation strategies. Just about every permutation of tax change and spending cut is cataloged, analyzed and scored for deficit savings.

The one design element of the current fiscal super-committee proposal that bodes well is its so-called trigger function.

The only fiscal task force that economists and political historians say worked somewhat reliably was one with a similar model: a commission set up to determine which military bases closed.

Politicians are loath to vote for closing any individual base within their own district, so this commission put together a master list of military bases that were good candidates for being shut down. And if Congress did nothing, every base on the list closed. That meant the onus was on opponents to act to prevent the commission’s recommendations from taking effect.

The model was quite effective for many years.

“The deck was really stacked against the plan’s opponents then,” said Sarah Binder, a senior fellow at the Brookings Institution and a political science historian at George Washington University.

The current fiscal commission requires Congress to approve the commission’s recommendations — but if it does not do so, major deficit cuts will kick in automatically. In other words, like the base-closing commission model, Congress will have to act affirmatively to undo that legislative language if it wants no new spending cuts or tax increases to take effect.

“Expedited procedures count for a lot, and triggers count for a lot, if they can get them to work,” Professor Binder said. “All these delegated panels involve kicking the can down the road, but this one tries to make that can explode if gets kicked.”

Doing Away With the Debt Ceiling

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

Almost 10 years ago, I testified before the Senate Finance Committee that the debt limit should be abolished. Among the others who testified that day, including Treasury Secretary Paul O’Neill, no one supported my position.

Today’s Economist

Perspectives from expert contributors.

What we have seen, currently and in the years since that hearing, is that for any politician to deny the validity of the debt limit is effectively to support unlimited debt, something no member of either party can afford to be accused of.

Perspectives from expert contributors.

The negotiations leading up to Sunday night’s announcement that President Obama and Congressional leaders of both parties had reached a deal to cut trillions of dollars in federal spending over the next decade makes the case against the debt limit that much stronger. We now know that it is a powerful mechanism for political extortion.

Unless the party holding the White House has a comfortable majority in the House of Representatives and at least 60 seats in the Senate, raising the debt limit is going to remain a means by which the minority party can impose its demands on the majority.

Even if the Treasury avoids default on government debt this week, we will inevitably have to go through the same political drama the next time the debt limit runs out and every time thereafter. And sooner or later the shoe will be on the other foot, as Democrats hold the debt limit hostage against a Republican president.

Unfortunately, the option of just letting the debt limit expire is not available. It is permanent law and can be abolished only by repeal or by a ruling by the Supreme Court that it is unconstitutional. Note that the law does not impose a deadline at which the debt limit runs out; rather, the limit is a dollar figure that must be amended when the gross federal debt reaches it. The date when the limit is breached is a function of Treasury’s cash flow and expenses.

The Constitution grants Congress the power to “borrow money on the credit of the United States.” Before World War I, it had to authorize each and every Treasury bond issue and its precise terms. During an era when the federal budget was usually balanced, this was not a huge problem.

But with the unprecedented borrowing needs of the First World War, Congress ceded to Treasury the power to decide when and under what terms it would borrow, subject only to an overall dollar limitation.

While politicians and the general public believe that the debt limit is an important constraint on national indebtedness, not one iota of evidence supports this belief. Economists have been making this point repeatedly for more than 50 years. In 1959, Marshall Robinson of the Brookings Institution came to this conclusion in a book-length study of the debt limit:

On the record, the debt ceiling experiment has failed. Although at times the ceiling has clamped down on government spending, it has not prevented the long-term growth of debt. Indeed, there is some evidence that reactions to its short-run pressure may ultimately contribute to the growth of debt.

Before 1974, it was plausible to argue that there was some virtue in having a debt limit because it forced Congress to acknowledge the consequences of deficit spending from time to time. But that year, it enacted the Congressional Budget and Impoundment Control Act, which requires Congress to enact a budget resolution annually that specifies an appropriate level for the deficit and the debt.

Consequently, a separate vote on the debt limit is at best superfluous. As the General Accounting Office put it in a 1979 report:

The implementation of the Congressional Budget and Impoundment Control Act of 1974 has brought into question the need for the Congress to consider the debt ceiling separately from the budget process.

This fact led Alan Greenspan, then chairman of the Federal Reserve, to recommend abolition of the debt limit in 2003 testimony:

In the Congress’s review of the mechanisms governing the budget process, you may want to reconsider whether the statutory limit on the public debt is a useful device. As a matter of arithmetic, the debt ceiling is either redundant or inconsistent with the paths of revenues and outlays you specify when you legislate a budget.

Mr. Greenspan’s point is crucial: the decision to run a deficit and increase national indebtedness is made by Congress when it votes to cut taxes, create entitlement programs and enact appropriations that will necessarily cause spending to be higher than revenues – not when it raises the debt limit.

As the Congressional Budget Office put it in a 2010 report:

By itself, setting a limit on the debt is an ineffective means of controlling deficits because the decisions that necessitate borrowing are made through other legislative actions. By the time an increase in the debt ceiling comes up for approval, it is too late to avoid paying the government’s pending bills without incurring serious negative consequences.

It is nothing but grandstanding for members of both parties to vote routinely for legislation that they know will create deficits and then profess shock and horror that the debt limit must be increased as a consequence. Even Captain Renault in “Casablanca” would be offended by such hypocrisy.

Historically, raising the debt limit was mere political theater giving cover to Congressional double-talkers because everyone knew that it would be increased. But that is no longer a foregone conclusion now that a significant number of Republicans in both the House and Senate believe that default on the debt is preferable to deficit spending.

Indeed, many say publicly that they will never support a debt limit increase under any circumstances and will even filibuster one, asserting that default would actually be a good thing because the budget would be balanced overnight.

For these reasons, the debt limit must be abolished. While that is extremely unlikely at this time, it is nevertheless necessary. As the computer eventually learned in the movie “War Games,” the only way to avoid disaster in this sort of game is not to play.

The Debt Ceiling, in Pop Culture

Open Market

Enlisting readers in a hunt for answers.

During the financial crisis, the bank-run scene from “It’s A Wonderful Life” proved a useful pop-culture reference for helping people understand what was happening to the economy.

Enlisting readers in a hunt for answers.

This whole debt ceiling debacle and its potential consequences are similarly confusing, especially if you’re just tuning in now. It would be nice if there were a similar popular allusion to help people make sense of the debate. Yesterday I asked the Twitterverse for suggestions, and so far I’ve heard “Thelma and Louise,”  the end of “Planet of the Apes” and “Jackass: The Movie.“ Those aren’t exactly the kind of analogies I was looking for, but hey, they’re amusing all the same.

So readers, what do you think? Is there a film or other cultural touchstone that can help people understand the debt limit discussions and their potential consequences?

Debt Crises, Real and Fake

There are real debt crises — Greece is going through one — and there are fake ones, created by politicians playing chicken with the nation’s credit.

I expressed that sentiment in a column last week that ran in the Asian editions of The International Herald Tribune on Friday. The new Greek rescue caused me to write a different column for The Times, and the I.H.T. column never made it onto the Web. It follows.

FLOYD NORRIS

Notions on high and low finance.

In the world of government bond markets, never have the haves been treated so much better than the have-nots. The haves can borrow for virtually nothing. The have-nots, if they can borrow at all, must pay exorbitant rates.

Notions on high and low finance.

Yet politicians, even in the countries that investors seem to trust completely, talk of impending budget disaster if spending is not cut immediately.

This summer, as the markets offered a ‘‘no confidence’’ vote on Europe’s effort to rescue Greece — and grew notably more worried about Italy and Spain — they appeared to be highly confident about the debt of the United States government.

The yield on benchmark 10-year Treasury securities fell back below 3 percent this month, even as the Washington rhetoric about the debt ceiling heated up.

That was a sign that investors were not alarmed about a potential United States default, whether in the next few weeks or the next 10 years. If they were, rates would be soaring.

For much of the spring and summer, the proportion of people who believed that Congress would raise the debt ceiling seemed to vary based on the distance from Washington. The closer to Capitol Hill, the more doubt there was that rationality would prevail.

In politics, it appears, familiarity breeds contempt.

If rationality does prevail, the debt ceiling will be raised. For that matter, there is no good reason to have a debt ceiling other than to give politicians a chance to grandstand. The important decisions for Congress and the White House concern spending and taxing. Borrowing, or paying back debt as happened for a couple of years before the Bush tax cuts, is a result of the interplay of those decisions and the state of the economy.

Trying to control the result by putting limits on borrowing is a bit like trying to balance a household budget by waiting until the money has been spent and then deciding not to pay the bills.

To analyze the fiscal problems confronting the United States now, it is necessary not to confuse short-term and long-term problems. And it is crucial to pay attention to the state of the economy.

A weak economy will inevitably worsen the fiscal balance. Tax receipts fall because profits and incomes decline. Government spending increases on automatic stabilizers, like unemployment insurance payments.

To the extent high deficits are a result of a weak economy, a decision to react by cutting spending or raising taxes can lead to a vicious cycle. The solution, if possible, is to revive the economy even if that makes deficits temporarily worse.

One of the most important failures to analyze what was happening in the economy came in the late 1990s, when the United States government, to the surprise of almost everyone, began to run budget surpluses. Some of that was a result of tax increases and spending restraint, but a lot of it was caused by a completely unexpected and misunderstood surge in tax receipts.

That surge was the result of the bull market in stocks, and of the peculiar nature of it. Individual income tax payments soared both because of high capital gains and because profits from stock options are taxed at ordinary income rates, not the reduced rate charged on capital gains.

Most analyses ignored that. The conventional assumption was that the taxes on option profits were balanced by reduced taxes paid by companies. That would have been accurate if the companies were paying taxes and could use the additional deductions. But many of those companies — the heroes of the dot-com bubble — paid no taxes because they had no profits. So the extra deductions did them no good.

A proper analysis would have seen that the inevitable end of the bull market would reduce tax receipts, and a slowdown would increase government spending. In that sense, it is wrong to blame the Bush tax cuts for ending the surpluses of the Clinton years. They would have ended anyway. The deep tax cuts and the wars in Afghanistan and Iraq made the deficits that much larger.

There is a risk that many analysts now are making the opposite mistake. Deficits have skyrocketed in recent years for reasons that are clearly temporary, or that will be temporary if the economy recovers.
In some of the debate, the short-term problems are mixed up with longer-term demographic concerns caused by the aging and retirement of the baby boomers and the rising costs of Medicare, the health insurance program for Americans over the age of 65.

It is worth looking at what has happened to financial markets around the world since the financial crisis exploded. A mild slowdown turned into something much worse after the collapse of Bear Stearns in March 2008 showed the vulnerability of the financial system. Stock markets plunged around the world, credit dried up for many borrowers and there was a flight to safety. Central banks intervened with unprecedented measures and banks were bailed out. Deficits soared.

Now, more than two years later, the American stock market is about where it was in February 2008, just before the crisis hit. That may not sound impressive, but markets in nearly every other country are down sharply. The dollar has lost ground against the Swiss franc and the yen, but is up versus the euro and the pound.

The yields on government bonds — the price investors demand to lend money to the government — are down in countries with solid foundations, including the United States. They have soared in markets where default seems a real possibility, and are up in some European countries where investors are getting more nervous, including Italy and Spain.

That is a vote of confidence in Uncle Sam, at least relative to the alternatives.

Markets can be wrong, of course. But Europe is in far worse shape. Greece is insolvent. It must have its debt reduced, but a default could cause bank failures and substantial losses for the European Central Bank. Europe’s battles reflect the fact that there are no good alternatives. There is a crisis in Europe, where lenders now fear to tread. Would there be one in the United States if the politicians produced an unnecessary default? Let’s hope we will not find out.

An Inconvenient Precedent for the Debt Crisis

CATHERINE RAMPELL

Dollars to doughnuts.

Last night, President Obama and the House speaker, John Boehner, gave dueling speeches on how to fix the deficit. One line from Mr. Boehner’s speech confused me:

Dollars to doughnuts.

Here’s what we got for that spending binge: a massive health care bill that most Americans never asked for. A ‘stimulus’ bill that was more effective in producing material for late-night comedians than it was in producing jobs. And a national debt that has gotten so out of hand it has sparked a crisis without precedent in my lifetime or yours.

The wording is a little ambiguous, but it appears that the “crisis without precedent in my lifetime or yours” refers to the current stalemate over the debt ceiling and the resulting threat of default.

With all due respect to Mr. Boehner, there is a precedent for this, and it was in his lifetime.

Mr. Boehner was born in 1949. In 1979 there was a showdown over raising the debt ceiling, and the country came within hours (not days) of defaulting on its obligations. In fact it actually did temporarily default on some of its obligations, although that seems to have been because of technical difficulties because discussions ran so close to the wire.

Brady Dennis of The Washington Post wrote a nice summary of this event earlier this month:

Congress had been playing a game of chicken with the debt limit, raising it to $830 billion — compared with today’s $14.3 trillion — only after Treasury Secretary W. Michael Blumenthal warned that the country was hours away from the first default in its history.

That last-minute approval, combined with a flood of investor demand for Treasury bills and a series of technical glitches in processing the backlog of paperwork, resulted in thousands of late payments to holders of Treasury bills that were maturing that April and May.

“You hear a lot of people say, ‘The government never defaulted.’ The truth is, yeah, they did. … It might have been small, it might have been inadvertent, but it happened,” said Terry Zivney, a finance professor at Ball State University who co-authored a paper on the episode titled “The Day the United States Defaulted on Treasury Bills.”

Conspiracy Theories About Republicans and the Economy

In the last few days, several readers, economists and radio hosts have asked me whether I buy the most cynical interpretation of the debt crisis stalemate: maybe Republicans are reluctant to raise the debt ceiling, or are calling for austerity measures that could slow the recovery, because they actually want the economy to do badly. That way voters will demand a change in political leadership, and vote more Republicans into office in 2012.

CATHERINE RAMPELL

Dollars to doughnuts.

I’m no political scientist, but that sounds a little too Machiavellian even for the most hardhearted of politicians.

Dollars to doughnuts.

But more important, I’m also reluctant to believe this conspiracy theory because the conspiracy isn’t necessary. That is, the economy is likely to be in bad shape in November 2012 no matter what happens with the debt talks.

As of January, the Congressional Budget Office projected that unemployment in the fourth quarter of 2012 would be 8.2 percent. Macroeconomic Advisers, another respected forecaster, recently published a similar outlook.

Of course, there are many outcomes to these debt negotiations that would make the economy even worse off than the current projections show. But really, there’s no need to paint the lily.