Friday, December 27, 2013

The Year of 2013 In Reflection

2013 was about as substantive a political year as one can have in an odd-numbered year in the United States.  Here is a look back at what, in my opinion, are the 10 biggest news stories of the year from a political standpoint:

10.  The Crazy New York Mayor's Race
Anthony Weiner's weiner was back on display with sexting abounding.  Christine Quinn was handed a gimme and proved to be an absolutely abysmal candidate.  Bill de Blasio, the boring looking white guy with the hip interracial family (I mean, come on, who doesn't love Dante and his afro?) sneaks in to win a resounding victory.

9. Cory Booker Takes the Next Step
There are quite a few of us in the political realm that have been watching Cory Booker for some time and think that he is probably Presidential timber.  Some in the past have questioned his sexual orientation, but I frankly think that is MUCH less of an issue on the national stage than it was 20 years ago and it is one he has handled adeptly.  Booker has moved his political career at a deliberate pace, choosing to stay as Mayor of Newark for over 7 years, when he almost surely could have moved to a larger office sooner than that.  With his election to the Senate by a solid (although less overwhelming than some imagined) 11 point margin, Booker immediately becomes at the top of the 2016 VP candidate list and near the top of the 2020/2024 Presidential prospects.

8. Democrats Win in VA, Republicans in NJ
The results of an actual election would typically top the year's stories, but this year's results were largely affirmations of things that we already knew.  First, in Virginia, when you run a wing nut in a swing state, as the GOP did, you generally lose, even when you are running against a horrible candidate, which Governor-Elect Terry McAuliffe certainly was.  In New Jersey, Chris Christie proved again that center-right pragmatism CAN win in the northeast - maybe a model for a national election?

7. The Death of Nelson Mandela
First, a word of explanation.  Nelson Mandela deserves to be much higher than number 7 on virtually any list that you could conceive.  His story is amazing, from violent revolutionary to prisoner to quiet, forgiving, strong leader that ushered South Africa peacefully and successfully into the post-apartheid era, Mandela is one of the largest figures on the global stage in the past century.  Mandela's story largely happened in prior years, however, with his biggest moments coming after his release from Robbin's Island and his rise to lead the first post-apartheid government and share a Nobel peace prize with apartheid leader F.W. De Clerk.  Mandela was a great man, worth remembering.  His death is a loss to the world.

6. Pope Francis
The first Latin American (although ethnically Italian) pope has made his mark early, casting a strong contrast with his predecessor by urging the church to de-emphasize condemnation of abortion and homosexuality (although he has maintained the existing church doctrine) and focus instead on serving the poor and presenting a more modern, positive image of the church.  This is a huge and badly needed shift for the church and one that will have political impact both in Europe and the US.

5. The Boston Marathon Attacks
For a brief moment, we were all reminded in a most horrific fashion how free nations will always remain vulnerable to terrorists.  This story hit me personally as I was staying in Boston at the time of the attack.  Since September 11 through a combination of good intelligence, smart preventative measures, a weakened Al Qaeda and some good luck, we have had a precious few damaging attacks.  The Tsarnaev brothers unfortunately changed that for reasons which are still not entirely clear.

4. Syria - Airstrikes / No Airstrikes
In one of the most bungled pieces of foreign policy in recent memory, President Obama declared that the US would conduct limited air strikes in Syria and that he didn't need Congress' permission to do so.  He then sought that permission, didn't get it and didn't conduct the air strikes.  Syria then bailed him out by agreeing to dismantle it's nuclear program (we'll see.)  It's an odd world.

3. Gay Marriage Everywhere
My favorite story of the year.  First, Maine, Washington and Maryland brought in the new year by becoming the first three states to legalize gay marriage by public ballot.  Then, Rhode Island, Delaware, Minnesota, Hawaii and Illinois all legalized gay marriage via bills passed by state legislatures and signed by their respective governors.  Then, the SCOTUS struck down a key provision in the Defense of Marriage Act and essentially forced the federal government to recognize gay marriages performed by states where it is legal for federal benefits.  While the ruling stopped short of legalize gay marriage nationally, the reasoning of the fifth vote for the 5-4 decision from Anthony Kennedy made it pretty clear to most of us that SCOTUS inevitably will make such a ruling but was simply buying some time.  On the back of the SCOTUS decision, judges in New Jersey, New Mexico and Utah have forced those states to legalize same-sex marriage.

All told, in December of 2012, there were only 7 states that had legal gay marriage.  There are now 18.  Anyone want to bet whether we make it to 50 in the next 2-3 years?

2. The Shutdown
In the most visible show of disfunction in at least 20 years, the federal government partially shut down as a budget deal seemed elusive.  We learned a few things in the debacle - the Tea Party was willing to push for its agenda even in the face of certain defeat, John Boehner was unable to control his caucus against the Tea Party (he has since lashed out at far right interest groups - I think he has had enough), shutdowns actually cost more than the government running and Democrats ruled the day....that is until our #1 story took place.

1. The Obamacare Mess
Oh what a disaster in the execution.  Democrats and the President have given up untold capital and the Affordable Care Act has given up massive credibility as the federal government failed to be able to design a website with over 3 years warning.  While I don't think that the initial execution is indicative one way or another as to the prudence or long-term success of the law, it will surely cost the President any hope of driving the congressional agenda next year and will undoubtedly cost the Democrats seats next fall.  Any dreams of regaining the House that Democrats may have had after the shutdown are gone and whether they retain the Senate or not is a open question at this point.

Happy New Year, everyone!

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Saturday, December 14, 2013

Why Everyone Punted on the Sequester

In a rare moment of bipartisanship, Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA) this past week reached a budget compromise that is actually quite moderate in nature.

Conservatives got the two things that were most critical to them - no tax increases (although there were some fee increases, which I feel are defacto tax increases - more on that later) and restoration of some of the sequester budget cuts.

Liberals got two more years without entitlement cuts as the agreement leaves Social Security, Medicare and Medicaid untouched.  They also got higher overall spending caps (by $63 billion) over the next two years than the sequester allowed, although part of that increase will go to defense.

In theory, the package is deficit reducing, but probably not in reality.  The package allowed $63 billion in additional spending over the next two years, offset by $85 billion in cuts (primarily from federal workers and military pension contribution changes) and fee increases (most notably an increase in the fee on airline tickets) over the next 10 years.  So if the world stays utterly static over the next ten years, the deficit will go down, but the reality is that the package increases the deficit by $45 billion over the next two years versus the sequester agreement and it is a near 100% certainty that budgeting over the following 8 years will change.

This is a small-ball bargain that largely preserves the status quo.  It does not touch in any meaningful way the three biggest drivers of the deficit, which are entitlement spending, defense spending and revenues.  But that might actually be okay - the federal budget last year was $680 billion, way down from the recession heights of $1.4 trillion+ and clocks in at only 4.0% of GDP, close to a reasonable level.  In order to keep the debt to GDP ratio constant, the deficit can be as high as the inflation rate plus the rate of economic growth.  If one assumes modest 2% inflation and 2% GDP growth, then a 4% deficit will essentially keep debt flat in real terms.

Unfortunately, the math above only works if you never have a recession.  Recessions cause huge spikes in spending and decreases in revenues that shock the system.  In order to pay for these approximately once per decade shocks, in the good years, governments need to be running deficits of a lot less than 4%, ideally budgets would be balanced or even slightly in surplus.

The brief modern history here is that the US exited World War 2 with major debt from war obligations, with debt to GDP running as high as 120%.  We steadily "paid down" this debt, no so much through absolute reduction but though inflation and economic growth and by the end of the Carter administration, debt had fallen to 35% of GDP.  The next 12 years of Reagan and Bush (although H.W. did eventually agree to tax increases) saw major increases in defense spending, no cuts to social spending and large tax decreases, all of which, combined with the 90-91 recession, spiked debt to almost 70% of GDP.  The Clinton administration saw tax increases (his idea) and large cuts in defense (his idea) and social spending (Newt Gingrich's idea) which combined for budget surpluses and took debt down to 55% of GDP.

Then W. Bush took over as President and immediately slashed taxes, instituted prescription drug benefits for Medicare and ramped up defense spending in the build-up to wars in Afgahnistan and Iraq.  Debt was already up to over 70% of GDP before the recession hit and spiked to over 80% of GDP by the time Bush left office as massive outlays for bank bailouts and social benefits hit the federal coffers as the recession hit.

The first year of the Obama administration saw continued large outlays for the bailouts coupled with a large stimulus bill that spiked the debt by almost 10% in a single year.  Now the debt has stabilized right around 100% of GDP.

We really need to get back to about 50% of GDP to be able to absorb comfortably the next recession, since debt levels over 100% of GDP are reaching towards the saturation point where credit downgrades and loss of investor interest cause a spike in interest rates.  And a 1% interest rate increase on a 100% of GDP debt increases the deficit by 1% of GDP, meaning that we are very susceptible to interest rate risk if rates rise off of their current historic lows.

This deal won't accomplish any of that - it doesn't deal with tax reform, entitlement reform or defense spending reform.  But it does give the markets certainty, prevents another government shutdown in the near term and at least maintains debts and deficit at a stable level.

It is also significant in that conservatives agreed to new sources of revenue.  An increase in the airline ticketing fee is effectively a tax, since it is a direct charge to you as a consumer when you purchase an airline ticket.  Calling it a fee and not a tax is politically expedient, but the effect is the same - airline consumers pay more to the government.

The deal passed overwhelmingly in the conservative-dominated House, by a roll call vote of 332-94 with 73% of Republicans and 84% of Democrats backing passage.  It seems likely to pass the Senate, although, oddly, Republican opposition in the Senate seems a lot stronger than in the House and the vote next week may be much closer than the House vote.

For Republicans, this deal provides political cover to focus the debate on Obamacare, where they perceive themselves to have a big advantage given the struggles with the website and anger over policy cancellations.  For Democrats, they get a higher spending level and clear the legislative agenda to discuss other items that are non-budgetary, such as immigration reform, where they perceive they have a public opinion advantage.

This deal was expedient bipartisanship, but welcome bipartisanship nonetheless.

Obamacare Enrollment Improves Some
Obamacare enrollment increased dramatically in November, with the total now enrolled nationally reaching 365,000 by the end of the month, up from under 30,000 in October.

The basic benchmark of success is 7 million enrollments by the time open enrollment ends on April 1st.  Clearly, enrollment will not happen evenly across the months and will ramp up as the deadline gets closer.  Even so, October was clearly a dramatic failure.  The November numbers are less clear.  On a straightline basis, if every other month (December, January, February, March) only saw the same level of enrollment as November, enrollment would reach less than 2 million.  But, as I said, that is not the likely scenario.  It is still TBD to me if the administration comes close to its goal.

An additional 803,000 people have qualified for expansions in Medicaid and SCHIP, another key element of the law's expanded access.

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