If it can be said that the devil is in the details, Barack Obama is on the side of the angels. It has been legislative tradition for the party out of power to complain with piss’n’vinegar about raising the debt ceiling on American borrowing, and even in symbolic fashion to vote against the rise, as pre-presidential Obama did to his lasting regret. In the end the vote is anti-climatic. The debt ceiling is raised and despite promises to do better, politicians relying on the short memories of their constituents go their merry way. Depending on which party is in power, they continue to tax and spend or merely to spend.
But summer ‘11 is different. Unlike most Julys, this is not the Silly Season. The fresh crop of Republicans has that most dire of all political virtues: sincerity. It is not that these freshmen are insane or are terrorists, as flame-throwers on the poetic left suggest. Rather they share a perspective on government that, even if it is not always explicitly or candidly presented, is certainly a legitimate view of how a quasi-libertarian state should be organized. As boisterous tea party rebels, they are children of Ron Paul and, with less intellectual gravitas, of Milton Friedman. It is the task of Speaker John Boehner to hide their deep desires – currently unlikely to be enacted – from the public. These politicians wish broad principled cuts. Call them “radical” if you reject them, but, after all, this rhetoric mirrors the self-enhancing distinction: I am firm, but she is stubborn. As the Speaker’s plans evolve, it is increasingly unclear when and where these billions of cuts will derive. One can’t but imagine that this is a shell game with the American public as the marks. Boehner is the adult in the room, but like so many parents, he tries to misdirect his offspring’s attention hoping against hope that the promises will be forgotten.
Still, there is no doubt that whoever wins this financial drama (and it may prove to be a lose/lose opportunity, benefiting only gold bugs), the libertarian right has won the rhetorical debate. The President and Harry Reid are playing on the Tea Party turf, even if they are attempting to con without being caught. There are a lot of things that might describe the whole debate, and mendacity is surely high among them. Majority Leader Harry Reid’s ploy to count planned defense reductions as new cuts was too clever by half, unpersuasive to all and revealing just how much he scorns the Tea Party rubes.
But ultimately it all comes down to the President. Despite his intelligence, Obama has revealed himself to be, unlike Carter or Clinton, a man who prefers to out-source economic policy to those with partisan interests. This was the tragedy of the Stimulus Package (Porkulus, as christened on talk radio). Rather than use the stimulus for a grand civic purpose, such as rebuilding our crumbling infrastructure, the money was sprinkled about, landing on the desks of tenured faculty to support their research assistants, as well as for other cheery, but not quite essential, purposes. Perhaps it prevented a Depression, but in contrast to FDR’s alphabet agencies, the country looks no different now that the money is spent.
And this brings us to our grave week. It is fair to speak of balance, but what does this mean? We have a clearer sense of how Obama would increase revenues, raising tax rates on those millionaires and billionaires earning over $200,000. “Today this planless plan seems burdened as public policy by its absence of detail.” But we know less where and when, specifically, he would cut. Might 2017 be a good place to start? Is this more smoke and mirrors, more peas and shells. For this reason Congressional Republicans argue, sensibly from where they sit, that the cuts must occur now, there must be spending caps in place, and a constitutional amendment requiring a balanced budget be sent to the states. Once burned, twice shy. Ten times burned, we don’t shy from financial calamity.
Today the adults in the room are all wearing capes, waving wands, and pulling rabbits from hats. But the kids have seen it all before. What they hope for, but are unlikely to receive, is reality television. The Tea Party movement was sparked by Rick Santelli’s rant on CNBC, and perhaps it will be on that same financial channel where we will all end. Promises are no longer enough for those who have been plied with – and played as – suckers. Now is the time for the adults to tell what will be cut and how will we verify. Today it is the adults who are playing games.
Months ago, as discussed on Deliberately Considered, the major rating agencies issued watches and warning about the possible downgrading of the United States’ credit rating. This has had nothing to do with the current debt limit “crisis.” It has everything to do with the trajectory of U. S. debt, the amount of unfunded liabilities the government has, and the actuaries views on the problems within the Social Security and Medicare programs. Nothing has really changed. There is a lack of appetite to deal with these issues, and if meaningful changes in terms of structure and process, the credit rating may be downgraded. This may have tremendous unanticipated consequences that will impact the world for a decade or more; and yet, there is no serious attempt to recognize the issues and deal with them. The distraction of the debt limit “crisis” has allowed attention to be diverted from the bigger issue, the likely downgrading of the U. S. credit rating. A financial default, in my opinion will not happen in the near term due to the continuing strength of our cash flows which can service our debt but not our total payables. What will happen when the world’s reserve currency is no longer “AAA” rated? My guess is that an alternative to the U.S. dollar as the world’s reserve currency will be seriously considered, and if this status is lost, the mechanisms to sustain the mounting debt with be severely restricted potentially creating a crisis of even larger proportions. Is this perspective too alarmist? I don’t think. The most basic principle in responsible financial management is to protect the credit rating. We seem to have lost sight of this.
Michael, the problem of the deficit is not only a matter of spending but also of revenues, as Richard Alba demonstrated here last week, but Fine belittles in his post. And beyond the deficit: the near term challenge is to get our economy moving again, with the long term challenge to address the increasing inequality in American society, which fundamentally blocks American growth. Alba will consider such issues tomorrow in his next post.
I should add that I think Fine is right about the deep libertarian ideological commitments of the Tea Party, which is defining the agenda of the Republicans. But I observe that the American political system is damaged by such ideological politics. More on this in my “Week in Review” post which I am now preparing.
I agree that a debt solution involves dealing with both spending and revenues; however, an economic recession triggered by over leverage is unlikely to be remedied by debt escalating at a dangerous rate. I don’t see anyone looking at spending and revenues in a serious manner. Missteps on taxation may yield lower economic growth, and further complicate the recovery. In my view, addressing inequality is best done through addressing all of the policies that drive the economic growth: particularly those that deal with our natural resources and re-industrializing America. It is highly unlikely that we can provide adequate outcomes unless we build a base for realizing potential and opportunities. A service oriented economy is not likely to provide adequately paying jobs and be able to fund benefits long term. Virtually all investments are based upon estimates of risk and after tax cash flows. When barriers are put in place to delay or prevent them,the beta increases and the requirements for returns increases. Cash flow returns are negatively impacted by the length it takes to complete a project and the amounts of cash absorbed by taxes, When cash flows diminish or slow, returns become unattractive and don’t get done; and people seek alternative investments. The net result frequently is the loss of good paying jobs and the migration to other countries. I feel this perspective is getting lost in the side show of the debt ceiling crisis which is a diversion from the major issues. The de-industrialization of America is a major cause of persistent inequality in my opinion.
I certainly don’t belittle revenues, certainly not nearly as much as the Senate or the White House. Right now – should anything be done – there seems to be little hope for revenue enhancement. Perhaps they should, but they won’t be. But we should never forget that marginal tax rates are not given by the divine, they are proposals that can pass a legislature: there is nothing sacred about 32%, 35%, 39%, 44%. Part of the problem is that, as I write this, we are watching a drama – a farce – in which the House is struggling to pass legislation, just so it can be defeated in the Senate, but we have a group of Republicans who are so sincere that they won’t even vote for a bill that they dislike that will tomorrow go down in flames, and we have a President who has consistently refused to present a clear plan that the nation can evaluate and a Senate that seems unlikely to reach consensus. And in the process, the financial solvency of the nation hangs in the balance.
What seems clear this Friday morning is that after last night’s debacle, if a debt limit extension is to be passed, it will require the support of House Democrats. Nancy Pelosi will be the politician of the hour: who would have thunk it. It is hard to imagine that if Speaker Boehner could not get enough Republicans to pass his own plan, it seems impossible to believe that there would be enough support among Republicans to pass a plan agreed to by Harry Reid and the President. A substantial number of Democrats in the House will be essential. And so the nation survives or falls on Nancy’s determinations.
I often have wondered why a coalition of reasonable people in the House couldn’t come up with a compromise solution, along with the coalition represented by the “gang of six” in the Senate. Now, perhaps, that is about to happen. The reason why such a solution is less the ideal for Boehner is that his leadership of the Republicans will then be under attack from the Tea Party true believers. Not sure that Pelosi will play such a central role as Gary suggests. This, in my judgment, is when the President comes in, revealing why his not having a plan, the critical mantra of the Republicans, may have been wise. The President is about to speak. “Only time will tell.” (A cliche I am particularly fond of).