Back to Basics

Federal Reserve Board Chairman Ben Bernanke (Photo by Alex Wong/Getty Images)

House Budget Committee Chairman Paul Ryan challenged Federal Reserve Chairman Ben Bernanke’s policy of so-called quantitative easing – the printing of new U.S. dollars to buy government debt – and raised concerns that a weakened dollar and inflation could cause the loss of the currency’s global reserve status.

“There is nothing more insidious that a country can do to its citizens than debase its currency,” Ryan told Bernanke. “Chairman Bernanke: We know you know this. We know that you’re focused and concerned about this. The Fed’s exit strategy and future policy – it will determine how this ends.”

Ryan said he believed a “course correction here in Washington is sorely needed.”

“Endless borrowing is not a strategy,” he said. “My concern is that the costs of the Fed’s current monetary policy – the money creation and massive balance sheet expansion – will come to outweigh the perceived short-term benefits.”

“It is hard to overstate the consequences of getting this wrong. The dollar is the world’s reserve currency and this has given us tremendous benefits in the global economy,” Ryan said.

Bernanke, in his opening statement, defended the purchase over the last two years of almost $1.7 trillion in U.S. debt as having kept interest rates low and as having injected liquidity into the markets and the economy to sustain bank lending and consumer spending.

“By easing conditions in credit and financial markets, these actions encourage spending by households and businesses,” Bernanke said. “A wide range of market indicators suggest that the Federal Reserve’s securities purchases have been effective at easing financial conditions, lending credence to the view that these actions are providing significant support to job creation and economic growth.”

Bernanke said a Federal Reserve study found that the QE policy has created or saved as many as 3 million jobs.

“It could be less, it could be more, but the important thing to understand is that it is not insignificant,” he said.

He also said that the QE policy did not represent “a permanent increase in the money supply,” calling it a “temporary measure that will be reversed.”

Nonetheless, Bernanke was sensitive to concerns about inflation, though he said that “overall inflation is still quite low and longer-term inflation expectations have remained stable.”

“We remain unwaveringly committed to price stability, and we are confident that we have the tools to be able to smoothly and effectively exit from the current highly accommodative policy stance at the appropriate time,” Bernanke said.

Rep. Chris Van Hollen, the ranking committee Democrat from Maryland, defended Bernanke’s approach.

“I commend you and your colleagues at the Fed for using various forms of monetary policy to promote maximum employment and stable prices,” Van Hollen said.

Van Hollen criticized a proposal by Ryan to strip the Fed of its focus on employment and limit it to price stability.

“That would be going backwards, not forwards, on a jobs agenda,” Van Hollen said.

FILE - In this Nov. 9, 2010, file photo Republican Majority Transition team members, from right, Rep.-elect Adam Kinzinger, R-Ill., Rep. Jason Chaffetz, R-Utah, Chairman Rep. Greg Walden, R-Ore., Rep.-elect Tim Scott, R-S.C. , Rep.-elect Martha Roby, R-Ala., Rep. Jim Jordan, R-Ohio, and Rep. Tom Cole, R-Okla. talk duting a pause in their meeting on Capitol Hill in Washington. It's freshman orientation and the larger-than-usual Class of 2010, 85 Republicans and a meager 9 Democrats, is getting a crash-course on how to navigate the next two years. Come Monday, Nov. 15, Kinzinger will be setting up an interview with a prospective chief of staff, figuring out whether he wants commute or walk to work. (AP Photo/Alex Brandon, File)

The massive House Republican freshman class is poised to make their presence felt for the first time in the next few weeks, and will likely push immediate spending cuts above the goal set by House Speaker John Boehner.

The head of a large conservative bloc within the House GOP said Monday that he is going to push his party — when debate begins over a bill to fund the government through September – to cut the $100 billion in non-defense discretionary spending they promised in the fall.

“We’re at a point in American history where it’s so serious that if we don’t put it forward we’re being irresponsible,” said Rep. Jim Jordan, an Ohio Republican and head of the Republican Study Committee.

Boehner, Ohio Republican, and House Majority Leader Eric Cantor, Virginia Republican, have said they will cut much more than $100 billion before the 2011 calendar year is over, but have stuck with a smaller figure for the upcoming fight over spending in the continuing resolution to fund the government from March 4 to the end of the 2011 fiscal year.

The CR is needed because Democrats failed to pass a budget in the fall.

The cuts so far supported by Boehner and Cantor amount to roughly $60 billion in the 2011 fiscal year. They argue that their promise to cut $100 billion in September’s “Pledge to America” was based on a full fiscal year, which will be almost half over by the time the current continuing resolution expires on March 4.

The CR will be introduced next week into the House Appropriations Committee and will come to the full House floor for consideration and debate the week of Feb. 14. It will be the first major spending fight of the year.

But Jordan, in an interview Monday, rejected the argument that the cuts should be limited to what the leadership refers to as 2008 levels.

“While I guess I understand that reasoning to some degree, I think the American people heard $100 billion, and the deficit is a record high $1.5 trillion,” he said. “We think it’s critical that you actually get to $100 billion in savings in this fiscal year, so we’re going to be pushing for that.”

And sources with some knowledge of how many in the freshman class plan to vote said the hard $100 billion figure has broad support among the 84 new lawmakers.

Congresswoman Michele Bachmann (MN-6) responded tonight to President Obama’s State of the Union address. Below are her remarks, as prepared for delivery:

Good evening, my name is Congresswoman Michele Bachmann from Minnesota’s 6th District.

Two years ago, when Barack Obama became our President, unemployment was 7.8 percent and our national debt stood at what seemed like a staggering $10.6 trillion dollars.

We wondered whether the President would cut spending, reduce the deficit and implement real job-creating policies.

Unfortunately, the President’s strategy for recovery was to spend a trillion dollars on a failed stimulus program, fueled by borrowed money.

The White House promised us that all the spending would keep unemployment under 8 percent.

Not only did that plan fail to deliver, but within three months the national jobless rate spiked to 9.4 percent. And sadly, it hasn’t been lower for 20 straight months. While the government grew, we lost more than 2 million jobs.

Let me show you a chart. [CHART]

Here are unemployment rates over the past ten years. In October 2001, our national unemployment rate was at 5.3 percent. In 2008 it was at 6.6 percent. But, just eight months after President Obama promised lower unemployment, that rate spiked to a staggering 10.1 percent.

Today, unemployment is at 9.4 percent with about 400,000 new claims every week.

After the $700 billion bailout, the trillion-dollar stimulus, and the $410 billion spending bill with over 9,000 earmarks, many of you implored Washington to please stop spending money we don’t have.

But, instead of cutting, we saw an unprecedented explosion of government spending and debt, unlike anything we have seen in the history of our country.

[CHART]

Deficits were unacceptably high under President Bush, but they exploded under President Obama’s direction, growing the national debt by an astounding $3.1 trillion-dollars.

What did we buy?

Instead of a leaner, smarter government, we bought a bureaucracy that tells us which light bulbs to buy, and which will put 16,500 IRS agents in charge of policing President Obama’s healthcare bill.

ObamaCare mandates and penalties will force many job creators to stop offering health insurance altogether, unless yours is one of the more-than-222 privileged companies or unions that has received a government waiver.

In the end, unless we fully repeal ObamaCare, a nation that currently enjoys the world’s best healthcare may be forced to rely on government-run coverage that will have a devastating impact on our national debt for generations to come.

For two years President Obama made promises just like the ones we heard him make tonight. Yet still we have high unemployment, devalued housing prices and the cost of gasoline is skyrocketing.

Here are a few suggestions for fixing our economy:

The President could stop the EPA from imposing a job-destroying cap-and-trade system.

The President could support a Balanced Budget Amendment.

The President could agree to an energy policy that increases American energy production and reduces our dependence on foreign oil.

The President could also turn back some of the 132 regulations put in place in the last two years, many of which will cost our economy $100 million or more.

And, the President should repeal ObamaCare and support free market solutions like medical malpractice reform and allow all Americans to buy any healthcare policy they like anywhere in the United States.

Remarks of Congressman Paul Ryan (R-WI) – As Prepared for Delivery
House Budget Committee Hearing Room, Washington, DC
January 25, 2011

Good evening. I’m Congressman Paul Ryan from Janesville, Wisconsin – and Chairman here at the House Budget Committee.

President Obama just addressed a Congressional chamber filled with many new faces. One face we did not see tonight was that of our friend and colleague, Congresswoman Gabrielle Giffords of Arizona. We all miss Gabby and her cheerful spirit; and we are praying for her return to the House Chamber.

Earlier this month, President Obama spoke movingly at a memorial event for the six people who died on that violent morning in Tucson. Still, there are no words that can lift the sorrow that now engulfs the families and friends of the fallen.

What we can do is assure them that the nation is praying for them; that, in the words of the Psalmist, the Lord heals the broken hearted and binds up their wounds; and that over time grace will replace grief.

*****

As Gabby continues to make encouraging progress, we must keep her and the others in our thoughts as we attend to the work now before us.

Tonight, the President focused a lot of attention on our economy in general – and on our deficit and debt in particular.

He was right to do so, and some of his words were reassuring. As Chairman of the House Budget Committee, I assure you that we want to work with the President to restrain federal spending.

In one of our first acts in the new majority, House Republicans voted to cut Congress’s own budget. And just today, the House voted to restore the spending discipline that Washington sorely needs.

The reason is simple.

A few years ago, reducing spending was important. Today, it’s imperative. Here’s why.

We face a crushing burden of debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead.

On this current path, when my three children – who are now 6, 7, and 8 years old – are raising their own children, the Federal government will double in size, and so will the taxes they pay.

No economy can sustain such high levels of debt and taxation. The next generation will inherit a stagnant economy and a diminished country.

Frankly, it’s one of my greatest concerns as a parent – and I know many of you feel the same way.

*****

Our debt is the product of acts by many presidents and many Congresses over many years. No one person or party is responsible for it.

There is no doubt the President came into office facing a severe fiscal and economic situation.

Unfortunately, instead of restoring the fundamentals of economic growth, he engaged in a stimulus spending spree that not only failed to deliver on its promise to create jobs, but also plunged us even deeper into debt.

The facts are clear: Since taking office, President Obama has signed into law spending increases of nearly 25% for domestic government agencies – an 84% increase when you include the failed stimulus.

All of this new government spending was sold as “investment.” Yet after two years, the unemployment rate remains above 9% and government has added over $3 trillion to our debt.

Sen. Pat Toomey introduced a bill Tuesday aimed at laying out a path for the federal government to avoid default on its obligations if the debt limit is not raised in the coming months.

“We need to take the default scare tactics off the table so both sides can sit down at the table and have a serious and honest conversation about cutting spending and instituting structural reforms to put our country’s finances on a sustainable path,” said Toomey, a newly elected Republican from Pennsylvania.

“The Full Faith and Credit Act will allow us to have that conversation by eliminating the possibility for default in case the debt ceiling is not raised,” he said.

The text of Toomey’s bill is only 98 words long. It is co-sponsored by 16 other Republican senators, including six out of his 13 members from the current freshman class. It is intended to give the Treasury Department instructions on prioritizing the use of taxpayer funds in the event that government debt, which is closing in on $14.1 trillion, hits the debt limit, which is $14.3 trillion.

There is disagreement among congressional Republicans over whether Toomey’s idea is legitimate, with some of the GOP’s most expert and authoritative voices on spending matters highly skeptical that it would work.

The essence of Toomey’s idea, some Republican staffers said privately, is to take the administration’s “sky-is-falling” trump card off the table. They are trying to deprive the White House of the upper hand in the showdown over spending that will arrive in a few months when the debate over the debt limit begins in earnest.

Conservative Republicans still remember how the $700 billion TARP bailout was passed in late 2008 when then-Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke went to Capitol Hill and told top lawmakers that the consequences of not passing the spending package were literally unthinkable.

Toomey’s bill would “require that the government prioritize all obligations on the debt held by the public in the event that the debt limit is reached.”

“In the event that the debt of the United States Government, as defined in section 3101 of title 31, United States Code, reaches the statutory limit, the authority of the Department of the Treasury provided in section 3123 of title 31, United States Code, to pay with legal tender the principal and interest on debt held by the public shall take priority over all other obligations incurred by the Government of the United States,” the bill says.

That means the Treasury would prioritize interest payments on government debt, ensuring that there is no default, and then pay for whatever else in the federal budget it could. Someone or some programs would likely be shortchanged, whether it was contractors due payment, or Social Security recipients, or government employees.

Toomey argued in the Wall Street Journal last week that such a scenario is not his preference, and that while it would not result in default, it would force spending cuts probably beyond what even he and most conservatives want to inflict, at least in such short order.

“If we do not raise it, the government’s tax revenue will enable us to fund roughly two-thirds of projected expenditures, including interest payments,” Toomey wrote.

In this photo provided by CBS, Sen. Jeff Sessions, R-Ala., is interviewed on CBS's "Face the Nation" in Washington Sunday, Dec. 19, 2010, about the year ahead 2011. (AP Photo/CBS, Chris Usher) NO SALES. NO ARCHIVES.

Sen. Jeff Sessions struck a defiant tone Monday toward President Obama in advance of the State of the Union address, saying he does not think the president is serious about deficit reduction and that the GOP should fight him the same way that Newt Gingrich fought Bill Clinton in the mid-90’s.

Describing the looming battles that lay ahead over the coming year on spending, the Alabama Republican said in an interview: “I hope it won’t be as contentious as 94, but the stakes are higher financially, and it appears the differences may be greater.”

“That was a long two or three years of contentious political debate,” Sessions said of the clashes between the Clinton White House and the Republican House headed by the Republican speaker from Georgia.

“And what result? A balanced budget. And who deserves credit for it? Bill Clinton claimed credit, but Gingrich and company shut the government down over spending, they fought him every step of the way, month after month, bill after bill, and they put this country on a sound financial footing and deserve a lot of credit,” Sessions said.

The 1995 government shut down is widely seen as having damaged the Republican Party politically and as having revived Clinton’s fortunes, propelling him toward a second term. Most Republicans, and definitely GOP leadership in both the House and the Senate, have expressly avoided talking about any similar sort of standstill.

But Sessions, a third-term senator who will be an influential voice in the year ahead as the ranking member on the Senate Budget Committee, made clear he does not think the president will go far enough in his speech to a joint session of Congress Tuesday night to forestall the nation’s runaway deficits and debt.

“I frankly doubt that the president has it in him,” he said.

“I think he’ll make some proposals for spending reduction that will sound good, and I hope I’m wrong, but I don’t think they’re the kind of spending restraints necessary to get this country off the wrong road,” Sessions said.

He laid out a rough sketch of how he believes Republicans should move after the State of the Union to heighten a contrast between Obama’s proposals and their own.

“The numbers have got to be driven home. We’ve got to invest a great deal of effort in helping the American people see that things are not as easily fixable,” he said. “It requires very severe, very serious actions to reverse the trends.”

After the president’s speech, Sessions said, the GOP should “compare what has to be done with what he’s proposing, and if he meets the task, we should thank him, shake hands and move forward in partnership.”

“But if this is another spin, then that has to be exposed,” he said. “We cannot concede an issue, and we cannot allow them to spin false information.”

Sessions was on a media blitz of sorts Monday, writing a Washington Post op-ed and appearing on Fox News and ABC News’ online political show “Top Line.” In each setting, the senator warned that the U.S.

FILE - In this Jan. 27, 2010, file photo President Barack Obama delivers his State of the Union address on Capitol Hill in Washington. When Obama first addressed the joint session about two years ago he had big plans, and a Democratic majority in Congress to help him carry them out. At Tuesday's State of the Union he will speak to a radically reshaped Congress, its Democratic ranks slashed by voters last November, and Republicans sworn to slash spending by as much as $100 billion. (AP Photo/Pablo Martinez Monsivais)

President Obama is set to announce support for lowering the corporate tax rate in his State of the Union address Tuesday, Senate Minority Leader Mitch McConnell said Sunday.

“I’m told he’s going to come out for lowering the corporate tax rate,” McConnell said on “Fox News Sunday.”

“We have the second highest corporate tax rate in the world right now. It’s not competitive; it doesn’t help us create American jobs in America,” McConnell said.

A White House spokeswoman did not respond late Sunday to a request for comment.

But McConnell’s disclosure is the first substantive detail about the president’s speech to emerge to date. Obama has been talking for days about his intent to improve the economy and create jobs, but has yet to provide any details on how he plans to do so.

Lowering the federal corporate tax from its current top rate of 35 percent would be a significant move to attract business investment in the U.S. But to date, lowering the corporate rate has been proposed only in the context of eliminating tax breaks and loopholes for business at the same time.

The president’s fiscal commission recommended lowering the corporate rate to between 26 and 28 percent, depending on how many tax exemptions and loopholes – commonly referred to as “tax expenditures” – were eliminated.

And conservatives have signed on to the idea of broad tax reform. House Ways and Means Committee Chairman Dave Camp, Michigan Republican, said last week he is in favor of ceasing to designate “congressionally blessed” companies.

Thomas Bell, chairman of the U.S. Chamber of Commerce, said that despite reluctance on the part of many member corporations who “have their own specific tax accoutrements that they love and want to hang on to,” the nation’s largest business lobby is backing broad based tax reform.

The government forgoes just over $1 trillion in revenues due to tax loopholes and deductions, according to Obama’s deficit commission.

President Barack Obama and GE CEO Jeffrey Immelt visit the birthplace of the General Electric Co., to showcase a new GE deal with India and to announce a restructured presidential advisory board , Friday, Jan. 21, 2011, in Schenectady, N.Y. (AP Photo/J. Scott Applewhite)

Critics of the administration raised questions Friday about the timing of a continuation of funding for the F-35 Joint Strike Fighter (JSF) Extra Engine, implying that GE CEO Jeff Immelt may have been named chair of the president’s new Council on Jobs and Competitiveness only after the White House agreed to extend funding for the project through March.

The administration dismissed this, saying that a December 21 letter from White House budget chief Jack Lew to Sen. Sherrod Brown, Ohio Democrat, was not an intervention that changed policy, but rather an explanation of existing policy.

And Pentagon spokesman Geoff Morrell said in an interview that the Defense Department was as intent as ever on eliminating the program in the next several months.

“We’re still wrestling with how to proceed with the extra engine in this [continuing resolution] environment. But we are still committed to ultimately killing it,” Morrell said.

The CR is the means by which Congress has continued to fund government operations since last fall, when the Democratic-controlled House failed to pass any of the annual spending bills it is required to. The current CR expires in March, and Congress will have to decide whether to pass another one for the remainder of the fiscal year through September, or to go another route.

Morrell said that the Pentagon is able to strike the F-35 funding if the government is funded for the rest of the 2011 fiscal year with a CR.

“We don’t believe our hands are tied. We believe we have the latitude to fund or not fund. We are trying to make a decision in the short term how to deal with it,” he said. “Ultimately we are as determined as ever to kill it.”

Morrell pointed out that C-17 cargo planes were bought in past budgets, and could be purchased under the CR, but have not been.

Spending is being done on a “case by case basis,” he said. He said he could not comment on why the Pentagon had not just eliminated the program from the current CR.

But Morrell’s description of the administration having discretion to change and redirect spending under the CR runs counter to the line from the administration, that Lew’s December letter to Brown was simply stating the existing policy, and that all spending continued essentially unchanged from past appropriations.

And ABC News reported Friday that Lew’s letter was a “green light” for the spending project on the heels of a $9 million “lobbying push” from the influential corporation.

The arrival of Chinese President Hu Jintao in Washington Tuesday evening brought the U.S. face to face with the leader whose nation many Americans believe will supplant them as the world’s most dominant super power.

Time will tell whether China fades like once-cocky Japan did in the 1980s or whether it does indeed replace the U.S. at the top of the global heap. But one thing has been clear from China’s behavior over the past year: they believe they are in the driver’s seat.

“The Chinese now have a new boldness on the world scene,” said Steven Dunaway, an international economics senior fellow at the Council on Foreign Relations.

The financial crisis of 2008 in particular altered the dynamic between the U.S. and China. It accelerated the decline of the U.S. and the rise of emerging economies such as China’s, sharpening the contrast between the debtor and consumer American culture and China’s exploding mercantilist growth.

“The global financial crisis further gave the Chinese leaders and foreign policy analysts a sense that the U.S. was in decline and, you know, for some, that the moment for China was now and so they ought to seize the moment,” said Elizabeth Economy, director of CFR’s Asia Studies program. “As the United States seemed to be receding, China seemed to be expanding.”

Treasury Secretary Tim Geithner acknowledged this dynamic in a speech he delivered a week ago to lay out the Obama administration’s economic platform heading into the U.S.-China summit in Washington.

“That crisis has left lasting scars that will take years to repair. And it has left a growing gap between the growth trajectories of the large developed economies and the rapidly growing emerging economies,” Geithner said. “We are likely to grow at about half the rate of the major emerging economies.”

He added that the U.S. will grow at “about twice the rate of Europe and Japan.” But that will hardly be an accomplishment.

Experts said that Hu’s visit – in addition to likely being at a significant moment in world history – also brings into focus the way the U.S.-Sino relationship has changed since Obama took office.

“There’s been a pretty significant shift … in the way that the U.S. is approaching China now,” Economy said. “I think at the outset of the Obama administration there was a lot of hope about potentially expanding the U.S.-China relationship from what had taken place during the Bush years, raising it to a new level.”

But, she said, a series of developments over the past 24 months – Beijing’s suspected involvement in hacking into Google and Western governments, their sometimes lackluster approach toward restraining North Korea, an increasingly aggressive Chinese military, and their outburst at the Nobel committee for awarding the Nobel Prize to political activist Liu Xiaobo – all convinced the Obama administration that “being nice to China wasn’t the answer.”

“In fact, Chinese respect strength,” she said.

A number of the House GOP’s leading conservative members on Thursday will announce legislation that would cut $2.5 trillion over 10 years, which will be by far the most ambitious and far-reaching proposal by the new majority to cut federal government spending.

Rep. Jim Jordan of Ohio, the chairman of the Republican Study Committee, will unveil the bill in a speech at the Heritage Foundation on Thursday morning.

Jordan’s bill, which will have a companion bill introduced in the Senate by Sen. Jim DeMint, South Carolina Republican, would impose deep and broad cuts across the federal government. It includes both budget-wide cuts on non-defense discretionary spending back to 2006 levels and proposes the elimination or drastic reduction of more than 50 government programs.

Jordan’s “Spending Reduction Act” would eliminate such things as the U.S. Agency for International Development and its $1.39 billion annual budget, the $445 million annual subsidy for the Corporation for Public Broadcasting, the $1.5 billion annual subsidy for Amtrak, $2.5 billion in high speed rail grants, the $150 million subsidy for the Washington Metropolitan Area Transit Authority, and it would cut in half to $7.5 billion the federal travel budget.

But the program eliminations and reductions would account for only $330 billion of the $2.5 trillion in cuts. The bulk of the cuts would come from returning non-defense discretionary spending – which is currently $670 billion out of a $3.8 trillion budget for the 2011 fiscal year – to the 2006 level of $496.7 billion, through 2021.

Going back to 2006 levels would reduce spending by $2.3 trillion over ten years. It is a significantly more drastic cut than the one proposed by House Republican leadership in the Pledge to America last fall, which proposed moving non-defense, non-mandatory spending for the current fiscal year back to 2008 levels, which was $522.3 billion. Jordan’s proposal includes the recommendation from the Pledge for the current fiscal year, which ends in September.

The proposal would cut the federal work force by 15 percent and freeze automatic pay raises for government employees for five years.

The RSC boasts a membership of 165 members out of 242 total House Republicans. Majority Leader Eric Cantor, Virginia Republican, is a member, as is House GOP Conference Chairman Jeb Hensarling, Texas Republican, and Chief Deputy Whip Peter Roskam, Illinois Republican.

None of the three chose to comment on the proposal when asked about it through spokesmen on Wednesday.

It was not clear Wednesday whether the bill would be pushed hard by leadership, though the prospect seemed unlikely, at least for the moment. Cuts of such magnitude will undoubtedly come under heavy fire from Democrats and liberal interest groups, and Speaker John Boehner has for the most part avoided specific stands on spending cuts, seeking to minimize exposure to attacks from the opposition.

President Obama, in addition, will have the chance in next week’s State of the Union address to speak to a national audience about the country’s fiscal situation, and could point to such cuts as too costly to services for many Americans.