Did the Democrats Cave?

If look at the left side of the blogosphere, word of an agreement between the White House and Republican leaders was met with despair and anger.   Rather than stand up to the Republicans the President gave in again, sacrificing Democratic principles of protecting the elderly and poor, while getting no tax increase at all.   It was a ‘cuts only’ approach, the same thing that he spoke out against just last week.    If this were a game of chicken, they say, the President swerved first — and before he had to.

However, a few things stand out in listening to the President announce the deal.  First, he said leaders of both parties in both chambers of Congress have approved the deal.  I assume this means that Nancy Pelosi, who has been the most adamant in not wanting the President to give in too much, must have signed on.   Moreover, the $1 trillion of cuts agreed upon over the next 10 years is something both parties agreed to early on in the process.    Everything else is uncertain.

Apparently a bipartisan commission will meet to recommend how to cut the deficit further, and report to Congress in November.   Congress will vote up or down on their proposals or have to face automatic cuts that would be very painful for both liberals and conservatives.   Speaker Boehner can’t demand revenue increases be removed, Senator McConnell can’t threaten a filibuster, and the only person who could stymie this would be President Obama, should he choose to veto the legislation.

I certainly can understand objections to this.  From the right, of course, this makes the possibility of tax increases extremely likely, something they’ve vowed to oppose.  It also suggests that spending cuts will not simply be on programs they hate, but might include favorites of the right, particularly the Pentagon.

The left has more serious objections.   First, many believe this will stifle the already limp recovery, not only dooming President Obama’s re-election, but harming the economy.   Some evn want a “stimulus II,” believing budget cuts are the wrong thing at this time.  Others point out (as I have) that the wealthiest Americans have been virtually the only ones who have benefited from the boom times of the last 30 years.   Cutting domestic spending to the “lowest level since Eisenhower was President” while taxes rates tax the rich at much lower levels than during Eisenhower’s tenure could be termed the worst of both worlds.   More money should be spent to help the poor and middle class, provide college education to students, help out states in trouble, and assure our elderly have quality lives, paid for by relatively large increases in marginal tax rates.   Finally, others note that due to the loss of productive capacity over the last thirty years of economic mismanagement, real investments in infrastructure and productivity need to be made.   You have to spend money to make money, and the only real cure to our debt is a growing economy, not just cuts.

I am sympathetic to all these arguments.  However, reality bites.   Our government debt to GDP ratio is nearing 100%.   Our total debt as a country (public and private) is about $60 trillion (about 400% of GDP), with almost $15 trillion foreign held.    Because of the hyper-consumerism of the last thirty years, particularly the last decade, we’ve created an unsustainable economy that ultimately went from bubble to bubble deluded by the ‘wealth illusion’ before things collapsed in 2008.  These are real problems requiring rapid and even radical solutions.

If President Obama had refused to make a deal, maybe the GOP would have surrendered.   Given the radicalism of especially many in the House, that’s unlikely.   More likely is that either the US would have defaulted, catapulting us to a global depression, or the President would have invoked the 14th amendment, leading to political turmoil.   That would have included impeachment, mutual anger, and no common ground at a time of immense danger to our prosperity and way of life.   Perhaps the President could have come out on top; but mutual fighting would have insured a long term partisan divide.   Either way, it was a gamble.

With this deal, the President has claimed the middle ground.   It’s clear that he gave a lot to get a deal.  The left may hate it, but I suspect independents, scared by recent tea party hyperbole, may respect it.   The US has proven that its political system is not collapsing and it’s likely we’ll keep our AAA rating.   Moreover, a big debate is set up to begin the next election campaign.   When the recommendations come out in November, members of both parties will have to take a stand, choosing between two options which neither will like.  Demagoguery will be difficult to maintain.

Here is where I simply differ with many of my friends on the left.  I do not think our debt to GDP ratio can be raised, and in fact am convinced that for the long term health of the country we need to work to start lowering it immediately.   Given the partisanship and sometimes radicalism in our political discourse, a bipartisan body of respected experts seems to me the best path towards making tough choices.    The sooner we can make those choices, the sooner we’ll re-create economic stability and shift towards a sustainable path forward.

I also think that the experience of getting here has lessons for us.   The right was wrong to embrace deregulation and radical tax cuts (let alone the Iraq war!).   Without the Bush tax cuts we’d be in much better shape.   However, government programs embraced by the left have often been dysfunctional.  Class mobility remains low in the US.   We haven’t spent wisely to create real opportunity.  Finally, with the information revolution, there are ways to envision cheaper ways of making money go farther by allowing localities more power in determining what is needed and how to implement it, rather than centralized bureaucracies in Washington creating standard operating procedures which can add red tape and cost.

This might also spur the left to engage in grass roots campaigns to reinvigorate the labor movement; relying on the government isn’t enough.   Both parties betrayed workers over the last 30 years, labor unions have to become grass roots movements again.

In short, this forces the country to start a path of renewal and revitalization.   It makes clear that while neither party has truly won, the future needs to be shaped with a different vision than the past.   Tax cuts and de-regulation were a too good to be true solution.   But government programs and regulation also didn’t solve our problems.

I do not think the Democrats caved.  I believe President Obama has put the Democrats in a fine position for the 2012 national debate on these issues.   The wildly fluctuating results of the last two elections have created a break from business as usual.   We’re starting to address the severe problems facing this country created by 30 years of bi-partisan economic mismanagement and a culture driven by consumerism and superficiality.  Transitions are never easy and usually require a break in old ways of thinking.   The optimist in me believes that’s starting to happen.

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  1. #1 by thebigweasel on August 1, 2011 - 03:11

    Scott, the early reports in the Guardian strongly suggest that the deal is through 2013, and that the trillion in cuts is the ONLY other specific in the deal.

    If this is the case, Boehner must have caved completely.

    In that form, it can get past the Senate. In the House, the determining factor will be the more mainstream Republicans.

  2. #2 by classicliberal2 on August 1, 2011 - 07:11

    The yardstick for “caving” is very simple: if Republicans get anything at all from it, it’s both a cave, and an insanely stupid and unforgivable move. Democrats will rue the day they set this precedent with regard to blackmail over the debt ceiling.

    And, really, what’s been the point of having Democrats in office the last 4 1/2 years?

    “I do not think our debt to GDP ratio can be raised, and in fact am convinced that for the long term health of the country we need to work to start lowering it immediately.”

    Austerity measure destroy jobs and destroy economies, Scott. Destroy the economy and revenues plummet.

    Neither of those sentences offer controversial propositions.

    Here’s another fact: While the deal reportedly involves $1 trillion in cuts over the next decade, discontinuing the Bush-era tax cuts would generate $3.9 trillion in that same time, and, contrary to the false assertions that this would wreck the economy–a Republican lie that was embraced by the Obama–only those at the top end of the income scale would even notice much of a difference. Median annual household income in the U.S. is just over $46,000. The Bush tax cuts gives a household in that range a cut of about $916:

    Less than $18/week from the paycheck.

  3. #3 by Black Flag® on August 1, 2011 - 15:03

    Scott

    Because of the hyper-consumerism of the last thirty years, particularly the last decade, we’ve created an unsustainable economy that ultimately went from bubble to bubble deluded by the ‘wealth illusion’ before things collapsed in 2008

    Let’s see.

    You are blaming government mismanagement on the People who are merely spending their money the way they want on the themselves…..

    You do not blame government mismanagement on government spending other people’s money on themselves….

    *sigh* Typical misapplication of economics and of responsiblity.

    • #4 by Scott Erb on August 1, 2011 - 15:07

      Money is a collective product. Therefore its use can be regulated, it can be taxed, and no one truly earns or can control everything the market might give them. The simplistic illusion that somehow one has truly earned all the money they manage to get has been part of this national disease. People doing that, and then spending it as they wanted has created more harm than what the government has done. That is why regulation for the collective good is necessary; radical individualism leads to evil.

      • #5 by Black Flag® on August 1, 2011 - 16:00

        Scott

        Money is a collective product.

        Money is merely the most desired economic good in a marketplace.

        Government does not make money, though it can make something desired enough to make it money.

        Therefore its use can be regulated, it can be taxed, and no one truly earns or can control everything the market might give them.

        Government can regulate anything, tax anything and under any such system, no one earns or owns anything.

        The simplistic illusion that somehow one has truly earned all the money they manage to get has been part of this national disease.

        Money is an economic good.
        I trade my effort in production for the production of others.
        Money merely is the easiest economic good to trade.

        If people hold to your perverse understanding, total economic confusion is the consequence – as you amply demonstrate.

      • #6 by Black Flag® on August 1, 2011 - 16:02

        People doing that, and then spending it as they wanted has created more harm than what the government has done.

        “People spending their own money are more harmful then people spending other people’s money.”

        There has been no clearer statement demonstrating the perversity of your economics and politics then the statement above.

  4. #7 by Black Flag® on August 1, 2011 - 15:52

    Scott

    Transitions are never easy and usually require a break in old ways of thinking. The optimist in me believes that’s starting to happen

    Nothing changed.

    The debt got larger and the spending got larger. How you see this as a beginning to change is beyond me.

    An individual can change without requiring pain – though is very rare. For most individuals, it requires a painful experience to motivate a change of behavior.

    A country made up of millions of individuals cannot change without massive pain – if even a small but vocal minority resist change, no change will happen willingly. Thus only massive, systemic, pain will change the country.

    This “debt” ceiling is the example – nothing was cut, and the painless increase in the debt was chosen. The moving of mouths was all for show, and the dough was still spent.

    When finally the “end” of the charade comes, it will not be by design or by desire but by the unrelenting, unrepentant market forces – and will be painful indeed. And now that this has been delayed-again-into the future, that pain will be far worse than would have been today.

    It is probable that by the time the forces of the market deliver the Reckoning, it will be so deep, so broad, so painful that the consequences may rupture society and the nation as we know it.

    Hayek, in predicting your future, Scott….
    [audio src="http://media.mises.org/mp3/interviews/Hayek_MeetThePress_06-22-1975.mp3" /]

  5. #8 by Black Flag® on August 1, 2011 - 18:29

    Most investors prefer to seek safety in the IOUs of a liar.

    We live in an era of trust in government.

    Even when confidence in the government declines, this has no effect on investors. They still think the US government’s IOUs are the safest port in every storm, even a storm created by the U.S. government.

    This faith will fade.

    Treasury rates will climb.
    That will mark the beginning of the end of the American Empire. When cheap money does not flow into the Treasury, the day of reckoning will be at hand.

    Even talk of a default could not shake the faith of investors in the Treasury’s debt.

    Now it is clear that there will be nothing to stop Congress from spending.

    The deficit will not be reduced.

    The debt ceiling will be raised whenever necessary, but the supposed cuts in spending are far in the future that will never come.

    The public made it clear in the crisis that it wants no cuts in Medicare and Social Security. The public cares little about the deficit. It cares about its welfare checks. Congress got the message.

    The future of the debt is clear: no relief.

  1. Did the Democrats Cave? | Brucetheeconomist's Blog

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