Archive for category Debt ceiling

Chaos Prevails

Susan Collins, R-Maine

Susan Collins, R-Maine

Republicans and Democrats increasingly seem to be in separate worlds.   Reality is never objectively perceived “as it is.”  It is always interpreted through ones’ perspective, a prism of beliefs and past experiences.   Yet most people are convinced reality is as they perceive it, they believe they are being objective and clear, meaning that those who think differently are somehow flawed.   They may be stupid, dishonest, disingenuous, or have some kind of nefarious belief system.   The US political system depends on a smaller class of people, those who can understand diverse perspectives, and navigate to a position of common ground – even if it’s a option all can barely life with.

I’m not writing to praise Senator Collins’ political views or positions.  I agree with her on some things, disagree on others.  But I do praise the fact that she is one of those able to try to work with people of different views to craft solutions to problems – to have the intellectual capacity for multidimensional thinking, rather than the true believer mentality of the ideologues.

As I write this a wild circus is playing out in Washington DC.   As Senators Reid and McConnell, both who like Collins see past ideological cages, near a compromise, an angry house demands to pass a bill with no chance of support from the Senate or White House.  But as they plan for an evening vote, apparently they can’t come up with anything.   Confusion reigns!  Now it sounds like no vote will occur.

Boehner:  "Truth is we have no idea what we're doing, and haven't for the past three weeks!"  (Well, what he would say if under a spell to tell the truth)

Boehner: “Truth is we have no idea what we’re doing, and haven’t for the past three weeks!” (Well, what he would say if under a spell to tell the truth)

Reading the quotes of the Republican tea party Congressmen is like reading quotes from die hard communists during the Cold War.  They have their ideological world view, and anything not falling within it is, well, a ‘threat to freedom,’ ‘demolishes the Constitution’, or some such silliness.

Speaker Boehner, who is also able to bridge diverse perspectives, at this point has to find a way to balance an out of control House, the need to solve the problem, and the views from the Senate and White House.    He doesn’t appear up to the task – perhaps no one is.  It appears that the lunatics have taken over the asylum!

Consider David Vitter, (R-La)’s defense of the shutdown:  “Approximately 15,000 EPA employees are furloughed, making it less likely fake CIA agents at EPA will be ripping off the taxpayer.”    Sure – while people in the Pentagon are holding food drives for furloughed employees, Vitter sees the government as some pack of demons.

Consider Collins:  “I would encourage people, my colleagues on both sides of the aisle and in both the Senate and the House, to take a look at the proposal that we’ve been working on.  I also think that the Senate needs to act first, and that there’s more chance of an agreement being reached in the Senate and we need to lead.”   You can just hear the tea party folk hissing at her “betrayal of principle.”

But Collins is right about what it takes.   The Democrats made their point earlier in the week when they resurrected demands to roll back the sequester.  If the Republicans want to “negotiate” before opening the government or raising the debt limit, the negotiation can’t be from “the status quo” to closer to where they are – that’s hostage taking.  The negotiation has to be from the Democratic starting point, which is precisely what Reid demonstrated!

From there Susan Collins got involved and crafted a bipartisan plan.  It didn’t pass muster, but Reid and McConnell took over from there, and it appeared we were on track to get an agreement.  It would give the GOP a face saving out, but the House Republicans would have fought a quixotic cause, turning the country against them and making the tea party look like a different kind of crazy.

The Tea Party - a different kind of crazy

The Tea Party anthem album

Simply, blinded by ideology they felt justified making outrageous demands, believing they were RIGHT and fighting on PRINCIPLE!  They scoff at those who compromise as somehow “compromising principles,” not recognizing that it is a kind of psychological malady to think one needs the world to adhere to his or her principles in order to be true to them.   Then as defeat became inevitable and the scope of the damage they’ve done to their party, themselves, their movement and perhaps the country became clear, they veered off in numerous directions.

So tonight meetings continue.   Susan Collins is working behind the scenes, still a major force.  McConnell and Reid are talking – all recognize the scope of the problem.   Still, the real issue is not the debt ceiling or shutdown, but how could we let such a dysfunctional group of Congresspeople veer the country so close to catastrophe?   How could it be that people like Louie Gohmert, who said that President Obama should be impeached if the country defaults (even if his party is the cause of the default) – he’s the same guy who said terrorists were having babies in the US so the babies could commit terrorist acts in 18 years and that John McCain supports al qaeda – can be as influential as Collins?

Republican Pete King (R-NY) put it best:  “This party is going nuts…Even if this bill passed tonight, what would it have done?  After shutting down the government for two and a half weeks, laying off 800,000 people, all the damage we caused, all we would end up doing was taking away health insurance from congressional employees. That’s it? That’s what you go to war for? That’s what we shut down the United States government for?”

I predict they’ll find a way out and pass an agreement that the House will have to swallow.   More important for our future is to elect people with the insight to recognize that our system welcomes political conflict as long as the participants are able to recognize the legitimacy of diverse opinions.   Because if the tea party mentality takes root – and a similar way of extremist thinking grows on the left – our Republic will be on a downward spiral.

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Weimar America?

“We’re not going to be disrespected.  We have to get something out of this. And I don’t know what that even is.”  ” Rep. Marlin Stutzman (R-Ind.)

Rep. Martin Stutzman (R-Indiana)

Rep. Martin Stutzman (R-Indiana) – the Rodney Dangerfield of the GOP

In a thought provoking piece in The New Republic, John Judis argues that the Republican party is causing one of the worst crises in American history.   “Welcome to Weimar America,” he chides before launching into an entertaining and persuasive reflection on American history and the roots of the current crisis.  While I’ve diagnosed the “tea party” as a nostalgic movement resenting the changes in American demography and culture, Judis argues its actually a continuation of earlier movements, including the Calhounist nullification movement that led to civil war.

We’re not likely to have civil war, but there is a real danger that the current crisis reflects growing political fragmentation destined to weaken both American democracy and strength.

But Weimar America?  The electoral system of the United States works against the kind of extreme fragmentation of the German system before the rise of the Third Reich.   The Weimar Republic was a straight proportional representation system which allowed dozens of parties to compete and get representation in the Reichstag.  That required a Chancellor gain support from a large number of parties before being able to control a majority bloc of the parliament and govern.  That worked OK until 1929, then after the Great Depression hit Germany became ungovernable.    For years no government could form and President Hindenburg ruled by emergency decree.    Adolf Hitler rode the unrest, instability and confusion to power, even though he never actually was elected by a majority in a free election.

That won’t happen here.   Our system of single member districts assures we’re likely to stay a two party system; it’s a structural feature of how we run elections, and it does create a kind of stability.    Yet other aspects of our system of government create possibilities that make the Weimar metaphor plausible.   Since we do have a government divided between the executive and legislative branches (not the norm in most democracies), and the legislative branch is divided into two separate bodies of independent power, it is possible that if the culture of compromise and tradition is broken, gridlock and division could become the norm.   That would destroy the essence of systemic stability that has brought us freedom and prosperity.

Dennis Ross (R-FL)

Dennis Ross (R-FL)

“Republicans have to realize how many significant gains we’ve made over the last three years, and we have, not only in cutting spending but in really turning the tide on other things.  We can’t lose all that when there’s no connection now between the shutdown and the funding of Obamacare.  I think now it’s a lot about pride.”  Dennis Ross (R-Fl)

Ross, like other Republicans skeptical of the tactics being undertaken, recognize that the shut down and threats to default are being taken by people who have no clue what those things mean.   They mutter things like “Oh, good, shut down that horrible government,” not recognizing the real consequences for the country.   “The debt’s too high, let’s not increase the debt limit,” some bemoan, utterly clueless to what the impact would be of going into default.  These people aren’t stupid, they’re ignorant.  They are so blinded by ideology that they don’t take the time to study the real implications of what’s happening.

Ironically, John Boehner may be the best hope for avoiding disaster.

Ironically, John Boehner may be the best hope for avoiding disaster.

Luckily, John Boehner does not fit into that category.  Yet he’s dealing to what one pundit called, a Republican civil war.   Both parties have their ideological extremes, but usually they are kept in check by the establishment center.   The extremists hate the pragmatic centrists because they “compromise on principle” and aren’t driven by ideological fervor, but they’re the ones that assure stable governance.   The extremes pressure the centrists and that’s important, but in the GOP they’ve taken over the party.

And they’re mad, certain they are right, and they don’t care about the system because they’ve decided it’s “crashing and burning” anyway, and only big government lovers would suffer if the whole thing collapsed (since presumably a more “pure” America would rise from the dust).  OK, not all are that extreme, but the mix of extremism and ignorance has allowed one party to put the country and the world dangerously close to catastrophe over….pride.   Being ‘disrespected.’   Trying to change a law they couldn’t change the usual way.

As noted last week, the President cannot let that tactic work.   That would be damaging to the Republic in the long term; as bad as the short term consequences are, it would really become Weimar America if parties started to make these games the norm.   Yes, there have been government shut downs before, but the circumstances here are unique.

So the ball’s in Boehner’s court.   He has to find a way to walk the tightrope of avoiding all out insurrection from his tea party wing, but not being the man who dashed the American dream by refusing to hold a vote.   He understands the consequences.   While Obama can’t negotiate, perhaps he can give Boehner a face saving way out.   Perhaps Harry Reid and Boehner can figure out a path that gives Boehner “peace with honor.”   Because right now the Republicans are risking damaging the country immensely at a time we least need it.  This has to end sooner rather than later.

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Fear and the Tea Party

“If there is a price to be paid for this, we will recover from a government shutdown, whether it’s a day, a week or two weeks … something will get resolved, we’ll recover from that as a country.  It’s a temporary inconvenience for a lot of people. But if Obamacare is ever implemented, we will never recover from that as a nation. We can never be a free people again.”  – Rep. Steve King (R – Iowa)

Steve King (R-Iowa) - definitely not to be confused with Maine's Stephen King!

Steve King (R-Iowa) – definitely not to be confused with Maine’s Stephen King!

Hyperbole is common in politics, but “we can never be a free people again”?   Really?

Every other industrialized state has a national health care system of some sort.   A few have single payer systems run by the government, but most have some kind of mixed system.   A comparison of diverse systems shows strengths and weaknesses of each, but the bottom line is that making sure everyone gets health care does not endanger freedom.  Quite the opposite!

When in the US you have 50 million uninsured, high levels of medical cost induced bankruptcy, and many poor not getting care because they fear collection agencies, we have a problem.    Add to that the fact that health care costs nearly 18% of GDP (compared to 8-10% in most other industrialized states – about 13% in Switzerland) it’s obvious that something has to be done.

The US health care system compares poorly with many others

The US health care system compares poorly with many others, but is by far the most expensive

So we have real problems with health care in America.   We pay more, don’t get more, and leave many people uncovered and scared to access care.    Now, perhaps Obamacare isn’t the best plan, but this radical “hostage taking” approach supported by tea party folk like Senators Cruz, and Lee and a variety of people in Congress makes no sense.

Instead of making their case to the public and hoping to get a Republican majority in the Senate and perhaps a Republican President in 2016, they’re acting like terrorists threatening to shut down the government and have the country go into default if they don’t get their way to stop or delay ‘Obamacare.’   That only makes sense if they fear that once implemented the system will work well and the public will like it.   Otherwise, they’d be smarter to let it fail on its own and then say “I told you so.”   At that point they could reform it or gut it, they’d have the political winds at their backs.   Their biggest fear seems to be that maybe it’ll work and become popular!

Or maybe it isn’t rational.   King’s quote seems over the top; wild rhetoric is usually a sign of emotion.   I believe that within the tea party and among people like Rep. King there is an ideological world view that says that America is becoming something different than what it was and what they think it “should be.”

Tea party support has dipped to 22%, a new low. Most Americans do not share that vision.

Tea party support has dipped to 22%. Most Americans do not share that vision.

So what should it be?   The tea party seems to have a romantic view of the 1980s.  Reagan was President, whites were the clear majority, social conservatism was on the rise, and the US was the dominant world power.   That is the world they knew and felt comfortable within.  Now, the world is strange.  A black man named Barack Hussein Obama is President.   The US fiasco in Iraq has shown the limits of American power in a post-Cold War multi-polar world.  The financial collapse of 2008, built on 30 years of growing debt and government deregulation destroyed the myth that somehow America’s economy was stronger than others in the West.   Gay marriage and changing social mores often shock them – as does the fact that changing demographics means minorities have a much stronger voice in the politics of the country.

It’s not just America that’s changed, but the world is changing.  Globalization is weakening sovereignty and creating interdependencies at a rapid pace.   The information revolution caused by the internet makes borders less relevant and democratizes knowledge, making old political practices obsolete.   The spread of weapons of mass destruction and the capacity of terrorists to deliver deadly blows undermines old military tactics.  Indeed, warfare of the future will likely be fundamentally different than in the past, military power isn’t what it used to be.

The tea party represents those who fear this new world.   That explains King’s hyperbole.  Fear.   The changes taking place threaten the core of what he’s used to, and thus he’s afraid his values will be in jeopardy.   He can’t truly believe Obama care will mean we can never be a free people, it’s part of a response to what they consider a broader assault on what they think America should be.

Fear also explains the antipathy towards Obama.   He represents and incarnates all that they see going wrong with the US.   A black man with a foreign sounding name, inexplicably getting elected to two terms, leading the country down a scary “socialist” path.    Obama is an establishment Democrat – the left wing of the Democratic party is upset with his centrism.  His health care plan was a compromise, less obtrusive than Nixon’s plan back in the early seventies.   There is nothing new or radical about Obama – except that he’s President in changing times, and the changes scare them.

Ironically, the changes they fear will be hastened if they shut down government or cause America to default.   That will further weaken and divide the polity, and despite their belief that they represent “real America,” their views are increasingly on the margin and will not shape the future.   But right now they have enough people in Congress to try to take the economy hostage and do real damage.   Hopefully Republican leaders like Boehner will have the intestinal fortitude to stand up to them.  Those most hurt by the tea party are conservatives trying to establish a vision of what conservatism must be about in these changing times.

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The Coming Government Shutdown

shutdowns

President Obama has effectively cast the debt ceiling issue on his terms.    Raising the debt ceiling is necessary to prevent a series of catastrophic economic outcomes that could push the US back into recession, make total debt even higher, and put at risk social security payments, veterans benefits and other important services.

Republicans are split on the issue.    The hardliners don’t care – they just want to cut spending.   But even moderates want to find some way to leverage their control of the House into forcing the Democrats to bend on spending.   They thought the debt ceiling would be the way to do it, but increasingly the politics around it is forcing them to back down.

But that will be very bitter medicine for the right wing of the party, especially after having failed to prevent tax hikes on the wealthy during the fiscal cliff negotiations.    John Boehner is a smart man.  He understands the issue enough to know it would be irresponsible to let the US default — most of the business community would be angry if that were to happen, and they represent a core portion of the Republican constituency.    But he also knows that he has to appease the hardliners.

In a long press conference President Obama definitively ruled out negotiations over the debt ceiling

In a long press conference President Obama definitively ruled out negotiations over the debt ceiling

Here’s what I expect:   The Republican leadership will decide, perhaps as a sudden surprise, to simply punt on the debt ceiling.     They know that not only does he now have the issue framed on his terms, but the State of the Union address gives him the ultimate bully pulpit.   He’ll set the narrative, it’ll be hard for the Republicans to react.

At the same time they will call for negotiations to begin immediately on finding spending cuts.   They’ll say that they are showing their good faith by raising the debt ceiling, and thus expect President Obama and Senate Majority Leader Harry Reid to show an ability to compromise.   If they don’t, they will warn, do not expect a continuing resolution to fund the government to be passed by the March 27th deadline.    In other words – threaten a government shut down.

Since 1981 there have been five government “shutdowns,” but the first four were hardly felt, except by federal workers.  Two lasted a day or less, the third took place over Columbus Day weekend.

President Clinton and Speaker Newt Gingrich clashed during the last government shut down

President Clinton and Speaker Newt Gingrich clashed during the last government shut down

The last time this happened was between December 16, 1995 and January 6, 1996 (and earlier between November 14 and 19, 1995).  Bill Clinton was President, and Newt Gingrich was Speaker of the House.  Gingrich had also threatened not to raise the debt ceiling, but realized the Republicans could not risk the US defaulting.

The shutdown was seen by many as helping President Clinton recover from low approval ratings and win a second term.  Newt Gingrich believes it was instrumental in pushing Clinton to compromise with Republicans to balance the budget.  To be sure, the shut down cost money, nearly a billion extra dollars.   A shut down itself doesn’t save money, even if its used as leverage to get the other side to agree.

Speaker Boehner and Majority Leader Reid would ultimately need to get their caucuses to approve any budget deal to avert/end a shutdown.

Speaker Boehner and Majority Leader Reid would ultimately need to get their caucuses to approve any budget deal to avert/end a shutdown.

Based on what happened back in 1996, here’s what to expect:

*  Social security recipients will keep getting checks, but if newly qualifying recipients may not be able to apply for benefits until the government is back up and running;

* Welfare recipients will still get checks, but again – new applications for things like food stamps would be delayed;

* National parks would shut down;

* Food testing would continue, but farm loans and benefits would cease;

* The armed services would see cut backs in civilian staff, and possible delays in payment for active duty personnel;

* The IRS would not process tax forms, except perhaps ones submitted electronically

* Passport and visa applications will be delayed, with the backlog continuing even after government is up and functioning.

As inconvenient as all that would be, it would be nothing like the devastation of a default.  It would be a high stakes drama, but one we could recover from quickly.

Unlike the debt ceiling, President Obama could embrace negotiating to help pass a continuing resolution to keep the government running.   It would provide the leverage and drama House Republicans want without the economically suicidal path of preventing the country from paying its bills.

Moreover, having won on the fiscal cliff and debt ceiling, President Obama would have cover for compromising on some issues dear to progressives.    Moreover, House Republicans loathe to compromise about anything would have the real ramifications of a shut down staring them in the face.   It’ll push them to compromise as well.

So if you need a passport, apply sooner rather than later — because while I don’t think Republican leadership is irresponsible enough to not raise the debt ceiling, they aren’t going to give up on their core issue of cutting the deficit.   So don’t be surprised if in just over two months the crisis du jour is a government shutdown.

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Debt Ceiling or Platinum Option?

debtceiling

Let me be blunt: if the Republicans threaten to not raise the debt ceiling unless the Democrats agree to spending cuts, they are the functional equivalent of terrorists, holding a gun to the head of the economy and demanding the President give in to their demands.

Here’s why: If the US cannot make payments on money it owes, then our credit rating crashes, our bonds become more expensive, the budget would be made much harder to balance and we could dive into another global recession.  You don’t make that a bargaining chip.   The President’s biggest first term mistake was to allow himself to be suckered into bargaining on the debt ceiling, thinking he could get a deal.   He cannot repeat that mistake.

Note: Congress has already voted to spend this money.   It’s not like the President wants to increase debt and Congress doesn’t.   This is money the Republican House has voted to spend – it’s a debt they’ve approved.  For them to not raise the debt ceiling or to blame the President for the higher debt is objectively wrong.   That’s why for the good of the country the President cannot negotiate around the debt ceiling.   He should work to make it that neither party ever can.

Don’t get me wrong – there should be real talk on deficit and debt reduction.   We need to take a hard look at demographic change and the long term sustainability of so-called “entitlements.”   The Republicans are not all wrong in this discussion.  You just don’t threaten the life of the US economy in order to get your way.

GOP leaders have publicly stated they want to use the debt ceiling as leverage, holding the global economy hostage unless the Democrats give into their demands

GOP leaders have publicly stated they want to use the debt ceiling as leverage, holding the global economy hostage unless the Democrats give into their demands

Last time this came up many people thought that perhaps the President could use the 14th amendment to unilaterally raise the debt ceiling.   Coming just before an election year with the Republicans sure to start impeachment hearings by claiming that would be a misuse of that power, that was an option the President could not risk.   But his legal team should seriously consider it, the political conditions have changed.

There is also the so-called platinum option.   The President does not have the power to print money, only the Federal Reserve can do that.   But there is power given to the Secretary of the Treasury:

The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

Should the Treasury issue a trillion dollar coin like this?

Should the Treasury issue a trillion dollar coin like this?  What if Monty Burns steals it?

You see why laws are so complex – if you don’t word them right you can leave enormous loopholes.   The purpose of this law is to make it possible for the Treasury to issue platinum collector coins.    But what if the Secretary of the Treasury minted a $1 trillion dollar platinum coin and deposited it with the federal reserve?   And what if he threatened to keep doing so until the debt ceiling limit was raised?   That would keep us from reaching the debt ceiling and thus avoid default.

That might risk inflation – minting trillion dollar coins adds greatly to the money supply.  But the Treasury secretary could make clear that those coins would be withdrawn in response to a raising of the debt ceiling.   Better would be to abolish the debt ceiling issue — it’s insane to make it possible for a manufactured crisis to threaten the world economy — and at the same time rewrite the  above law so the loophole is closed.

If Congress votes to spend money, they are voting to borrow enough money to spend what they want.   There should be no secondary ‘debt ceiling’ vote.   The platinum option is probably too absurd to be used, but when the global economy is being held hostage it might be necessary.

The President must address this issue forcefully in his State of the Union speech

The President must address this issue forcefully in his State of the Union speech

The President must make this an issue in the State of the Union address – he must call the Republicans out as recklessly threatening the country by holding the debt ceiling hostage as a way to gain leverage.   He must take control of this issue, and put the Republicans on the defensive.   This should be the first shot in the 2014 campaign – if the Republicans purposefully crash the economy, the public should make them pay.     He shouldn’t call them terrorists (though I think that’s what they’d be doing), but he has to crystallize the issue for the country and show leadership.

At the same time he must offer real negotiations on the budget and show his good faith.  But those two issues must not be linked, it may take longer to reach a budget compromise and that’s OK.    The President wants his legacy to be putting the US on the path to fiscal responsibility, not sky high deficits.  The Republicans know it.   Risking the economy on a phony issue is insane.

As the debt ceiling deadline nears, if the GOP tries to play that game the White House should seriously explore and discuss options like the 14th amendment or the platinum coin.   Given the dynamics in 2011 I think the President was right to go with the sequestration — it actually set the Democrats up for a big win on the fiscal cliff.   But for the sake of the country he can’t allow Congress to hold the US economy hostage in order to try to get their way.  It’s un-American.

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Going Over the Cliff!

Going over the fiscal cliff?

Warnings are everywhere that we must avoid the fiscal cliff or else face recession.    The fiscal cliff is a series of tax hikes and spending cuts resulting from an inability to achieve targets on deficit reduction set in 2011.   The spending cuts hit 1000 government programs, touching ones dear to both Republicans (military spending) and Democrats (Medicare).

Most of the cliff involves repeal of the payroll tax cut (which expires in December) and the Bush tax cuts (which expire January 1).   The argument is that the mix of tax increases and spending cuts will seriously damage the economy and cause growth rates to plummet into recessionary territory.

The impact of the “cliff”

All this is set up by the negotiations around the debt ceiling back in 2011.   The Republicans refused to raise the debt ceiling unless budget cuts were made to halt the increase in the deficit.    President Obama entered into negotiations with House Speaker John Boehner to try to reach a grand bargain to do just that.   The talks failed.  The “grand bargain” that the Republicans walked away from would have been about 85% spending cuts and 15% tax increases.

Republicans rejected any tax increase, making a deal all but impossible to reach.   236 of the 242 House Republicans, and 40 of the 47 Republican Senators have signed a pledge to Grover Norquist’s “Americans for Tax Reform” organization promising not to raise taxes ever.    Many Republicans figured that if they held out they could take the Presidency and Senate in 2012  and then craft their own measure with no need to compromise or raise taxes.

At the time people thought the Republicans had bested the President.   He was ridiculed by progressives as having been naive, willing to bargain with Republicans when their goal was to do whatever they could to defeat him in 2012.   He was called spineless for not invoking the 14th amendment to circumvent Congress and raise the debt ceiling unilaterally.  Obama’s lowest ratings were in the wake of the breakdown of those talks.   In retrospect Obama looks like a strategic genius – the Democrats have set up a situation where they hold the best cards, thanks to the sequestration deal and the automatic expiration of the Bush tax cuts.

So will the fiscal cliff cause a recession?   Perhaps, but the damage will be limited.  A couple charts:

Note how quickly the economy recovers after the sharp dip

And:

Note that the damage is mostly in Q1 2013, cliff or no cliff the prognoses for the rest of 2013 are similar

Beyond that, growth after 2013 is robust, even if we go over the cliff:

By 2014, things could be improving dramatically

Going over the cliff could enforce a kind of restraint that would yield long term benefits.  At the very least it would unclog the gridlock preventing real solutions to the budgetary and economic crises.   Letting the Bush tax cuts expire would render the pledge to Norquist meaningless — taxes would go up automatically and any agreement to cut taxes to the middle class would be a tax cut, not a tax increase.

So why all the alarm?

Besides the fact that the slow down in 2013 would be real, there is concern about the cuts themselves.   Many important government programs will be cut, angering the left.   Defense spending will be cut, angering the right.   Good!  This will force them into meaningful negotiations.

The Republicans essentially demanded no tax increases or defense cuts, but steep cuts to entitlements, social welfare programs, education and programs Republicans disliked (such as PBS).   In the heady days after the 2010 election that might have seemed feasible, especially if they were going to win back the Presidency and Senate.   Now it’s a pipe dream.

President Obama was re-elected, the Democrats remarkably gained two Senate seats and even though the Republicans still hold the House, the majority is smaller and overall Democratic candidates for the House received more votes than did the Republicans.    The Democrats have every incentive to make a deal now, while the Republicans would prefer to come up with a piecemeal deal to push the issue down the road to when political conditions are more favorable.   The farther they can get from the 2012 election the better it will be for them.

If we go off the fiscal cliff, the GOP will be forced to deal quickly.  To prevent tax increases on the middle class there may be a will to increase capital gains taxes – something that could raise significant money.   Those low tax rates are why Warren Buffet pays a lower rate than his Secretary and why Governor Romney  thought it more harmful to release his tax returns than to keep them secret.

Nothing should be off the table.    Each side could recover from political hits by the 2014 election, better to act sooner rather than later.   Going over the cliff will make both sides eager to reach a deal.

Expected tax increases should we go off “the fiscal cliff”

The danger in that is that the Democrats could make the mistake the Republicans did and overplay their hand.    In 2014 it is unlikely the Democrats will gain the House, and if this deal goes bad due to Democratic intransigence the Republicans could have another big off year election.    The Republicans blew it by not making a deal when they were in a position of strength, the Democrats can’t afford to make the same mistake.

It could be that the cliff is the only thing that will force both sides to actually make structural reforms that can lead to a sustainable budget.     It’s not just about the money.   The Democrats can “give” on issues like taxes and defense in part in exchange for tougher regulations on Wall Street and less resistance on appointments to agencies like the FHFA (Federal Housing Finance Agency).

Perhaps the Monster has a good heart?

Ultimately we all lose if there isn’t bold action as quickly as possible to get the government to a sustainable budget with a modicum of bipartisan support.    Fear of the cliff stands in the way of making bold choices and creates the danger of kicking the can down the road to deal with at a later date.   Go off the cliff.   Face reality.   A sharp down turn will be short and followed by growth.   The pain will be limited, and it just might force the politicians to make difficult choices.

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John Boehner Loses Control

The Republicans in the Senate were getting nervous.   The House had passed an extension of the payroll tax holiday for a year in a bill so overly partisan that it had no chance to pass in the Senate.   They believed the Democrats were engaging in demagoguery by saying that the Republicans refuse to raise taxes on the very wealthy but don’t mind the working middle class paying more.

Nobody liked the idea of a two month extension, but intense negotiations between both parties, which included John Boehner, yielded that compromise.  It would buy time for them to reach broader agreement on a year extension after the holidays.   The deal sailed through the Senate 89-10, with overwhelming bipartisan support.   Speaker Boehner indicated the House would vote the deal through as well, and it appeared that the two sides managed to avoid giving the middle class a higher tax bill in January.

Then the rumbling started.   Republicans in the House complained that they shouldn’t yield again to the Senate, and that a two month extension was meaningless.   Lead by the tea party freshman, the House GOP revolted against Boehner and soon he was backtracking.   The House turned down the extension and called for a Conference Committee to come together to patch up the differences between the Senate and House bills.

For Democrats, that’s a non-starter.  First, the Senate bill was a compromise, negotiated between the two parties with Boehner indicating he approved of the agreement.   Given that, a conference committee would not only be inappropriate, but if they couldn’t quickly come to agreement then both parties would share blame for not being able to extend the tax break.   Why should the Democrats risk that?   This way the onus is solely on the GOP.

If the Senate GOP hadn’t sided with the Democrats (with many Republican Senators urging the House to pass the two month extension) then the Republicans in the House would have some political wiggle room.   As it is, they are finding it impossible to spin this as a failure of both parties — it’s a failure of the House Republicans.

Republicans who supported the measure in the Senate include budget hawk Tom Coburn, tea party stalwarts Pat Toomey and Marco Rubio, and of course Mitch McConnell (who was reportedly convinced Boehner would be able to get the measure through).    Only seven Republicans voted “no.”   This was a done deal.

Perhaps the House GOP thought that they could play Russian roulette with this issue like they did with the debt ceiling earlier this year, forcing the Senate and President to cave to some of their demands so they could claim victory and make the President look weak.   Yet the debt ceiling was a serious issue.  If it hadn’t been raised there would have been global economic turmoil and havoc for the US economy.

On this issue Democrats see themselves as having little at risk.   They’re the ones who are calling for an extension, they worked out a bipartisan compromise, President Obama was ready to sign it, and the Republicans in the House moved the goalposts.  Many Democrats see this as the first pivotal moment in the 2012 election cycle, whereby the Democrats nail home the argument that it’s GOP obstruction and extremism that is causing dysfunction in Washington politics.

Moreover the symbolism of the Republicans caring more about avoiding tax increases on the wealthy than imposing them on the middle class make this a dream issue for the Democrats going into 2012.   If class war is being waged, it looks like the Republicans in the House want to wage it on the middle class.   Exasperated Senate Republicans are furious, both at the tea party wing in the House, but also at Boehner for breaking another promise.   It’s not that Boehner wants to break promises, it’s just that his caucus won’t follow him.   The result is a Christmas gift for the Democrats.

John Boehner is proving to be a weak Speaker of the House.   He got lucky with the debt ceiling debacle because even though he had indicated to the President he wanted a grand deal that could include closing tax loopholes, the President got punished in public opinion polls when Boehner couldn’t deliver.   This time he’s not going to be that lucky.   If he can manage to pass an extension early next year and make the issue go away as soon as possible he might limit damage.  Otherwise, 2011 ends with the House GOP delivering a self-inflicted wound that could have profound ramifications for the 2012 election.

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The Democrats Must Fight

“It should have been evident to clear-eyed observers that the Republican Party is becoming less and less like a traditional political party in a representative democracy and becoming more like an apocalyptic cult, or one of the intensely ideological authoritarian parties of 20th century Europe. This trend has several implications, none of them pleasant.”
Republican operative Mike Lofgren, upon retirement  (full article here)

I have been amazed at the change in the Republican party during my life time.   Today’s Republican party looks nothing like what it used to be.    That’s also the message of Mike Lofgren’s parting shot at a party he served for over thirty years, driven by his amazement that the GOP could engage in what he called “economic terrorism” in the debt ceiling crisis and other issues.    Where once Eisenhower could defend extremely high marginal rates on the wealthiest taxpayers (up to 90% on the highest incomes), now when Obama suggests closing loopholes during a time of crisis to pay to create jobs — keeping taxes on our wealthiest the lowest in the world — some make the claim that’s “class warfare.”   More accurately class warfare is refusing to close loopholes so that the poor do all the suffering in a time of crisis!

Here’s another interesting bit from that article:

“A couple of years ago, a Republican committee staff director told me candidly (and proudly) what the method was to all this obstruction and disruption. Should Republicans succeed in obstructing the Senate from doing its job, it would further lower Congress’s generic favorability rating among the American people. By sabotaging the reputation of an institution of government, the party that is programmatically against government would come out the relative winner.”

That kind of cynicism — to try to foster distrust of the institutions of democracy for electoral gain — is profoundly and deeply anti-American and of course anti-democratic (with a small ‘d’).   So are the arguments made recently that only those who pay taxes should vote, or here in Maine wild hysterics with no supporting evidence that Democrats were ‘stealing elections.’   Vote suppression has become a tactic across the country, embraced proudly by Republicans who believe that making it harder to register and to vote will help them at the ballot box.

After listing some of the vote suppression efforts, Loftgren notes the purpose – to stop “those people” from voting.

“You can probably guess who ‘those people’ are. Above all, anyone not likely to vote Republican. As Sarah Palin would imply, the people who are not Real Americans. Racial minorities. Immigrants. Muslims. Gays. Intellectuals. Basically, anyone who doesn’t look, think, or talk like the GOP base. This must account, at least to some degree, for their extraordinarily vitriolic hatred of President Obama. I have joked in the past that the main administration policy that Republicans object to is Obama’s policy of being black. Among the GOP base, there is constant harping about somebody else, some “other,” who is deliberately, assiduously and with malice aforethought subverting the Good, the True and the Beautiful: Subversives. Commies. Socialists. Ragheads. Secular humanists. Blacks. Fags. Feminazis. The list may change with the political needs of the moment, but they always seem to need a scapegoat to hate and fear.”

Lofgren charges the media with being complicate in this attempt to subvert democracy.    Thanks to Fox news there is pressure to be ‘fair and balanced,’ which means treat each side the same.   Be no more critical of one side than the other, and blame both parties when things go wrong.   A commenter to my blog (classicliberal) has accused me of the same thing.   Beyond that, the far right uses talk radio and emotion-driven media to get their themes through.  Having studied German history I find I cannot listen to people like Limbaugh and Hannity.   To call them “entertainers” and dismiss their over the top vitriol understates just how much their methods, use of emotion, demonization of whole classes of people and simplification of the world into “us good, them bad” are so much like the tactics of Joseph Goebbels.

The author also blames the Democrats for ceding ground to the Republicans on this (again, echoing classicliberal’s criticisms of Obama’s center-right drift in comments on this blog).    The result is a country with dysfunctional politics, a major party that is in the hands of extremists who sound like any taxation is bad, play to fears (of Muslims, the poor needing assistance, Obama, etc.) and refuse to compromise because their goal is not to solve the country’s ills but to take power to realize their ideological vision.

All this coming from a Republican insider who knows what’s happening behind closed doors gives it immense credibility.   The author also doesn’t believe that most Republicans, not even most Republican politicians, share such a perverse perspective.   In Maine neither of our two Senators, my GOP State Senator nor my state Rep are like that — they reflect the true values of the Republican party.   However, at the national level the party seems to have been taken over by extremists who are so caught up in their own cause that they ignore the impact this has on a country that has functioned by competition between two parties who realize solving the nation’s problems is more important than electoral politics.

I am coming around to realizing that classicliberal was right.  I still defend Obama’s pragmatism — it demonstrated an effort to treat the Republicans as an opposition that should be taken seriously.   Perhaps they spat in Obama’s face more than he should have tolerated, but no one can accuse him of not making trying.   And on the debt ceiling Obama had to ultimately give in — the Republicans were crazy enough to sabotage the economy if he did not, the 14th amendment was not  a constitutionally valid approach (to do that to win a political fight would have been the equivalent of what the GOP was doing — to save the constitution you can’t abuse it), and it made clear who was at fault for the impasse.   It’s no surprise that since then the ratings of Congress and the tea party have plummeted.

But no more.   With all due respect to my conservative friends, Republicans who I believe do not represent the extremes and have legitimately skeptical views of many government programs, the Democrats and the President have to go on the offensive.  Call it class warfare if you want, but they have to point out the fact I’ve shown in this blog that the middle class have been net losers while the wealthy have had their incomes expand dramatically in the last thirty years.  Our taxes are the least progressive, our wealth distribution the worst in the industrialized world, and the wealthy haven’t made jobs with their gains, but produced bubble after bubble as the country went greater into debt and lost its productive edge.  Our infrastructure is falling apart — in part because that’s one of the things you need government to do!   In education we rank near last in the industrialized world in terms of PISA scores (standardized tests given to 15 year olds), and our country is in serious decline.

Cutting taxes and government won’t solve this.  Removing regulations isn’t some kind of simple miracle cure that will magically produce jobs (indeed de-regulation was a major cause of this crisis).   Easy, simple, painless answers have been GOP stock in trade (or pain only for those whose benefits are cut — people often dismissed as freeloaders anyway).   The Democrats have to shift tone to a more aggressive defense of their proposals, challenging the GOP.

However, they can’t become like their opponents.   They can’t ignore the middle ground to pursue their own ideological war.   They have to recognize that, as I think President Obama clearly enunciated in numerous speeches, the American people deserve better from their politicians.   But he has given the Republicans every chance to compromise and has shown a willingness to work with them to solve problems.   They’ve responded with insults, holding the economy hostage, and deriding the President.    The Democrats have to fight back.   Hard.

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A Bit of Optimism

It is now August 2011 panic grips the financial sector.   Despite budget cuts and new austerity, Italian bond yields rise and investors flee.    Will southern Europe take down the Euro?   Can and should the wealthy European states bail them out?  In the US politicians fight over simply approving the borrowing of money to pay bills that need paying; and bring the world’s largest economy on the edge of default, and to a credit downgrade.  The Dow gyrates at a pace not seen such the crisis began in 2008 as panic sets in on fears of further downgrades and a ‘double dip recession.’

Given my continual bearishness on the global economy, you might expect an “I told you so, now its really going to hit the fan.”    Yet I’m starting to think that the worst may be over.    Job growth was up in July, especially in the private sector.   New unemployment claims came in lower than expected in the last two weeks, under 400,000.   Corporations are starting to report plans to hire and that they are seeing an uptick in business.

Governments have recognized the seriousness of this crisis world wide and have proven remarkably capable of compromising and acting to try to change policies and turn the global economy around.   The idea that this is ‘just another recession’ has given way to the recognition that it is a ‘depression like crisis’ with no quick and easy answer.  Realism is trumping ideology in most of Europe, and I suspect it’s about to do so in the US.   Average people are making better choices too.  They are saving, planning, and adapting to new conditions in a very practical and sensible way.  Hyper-consumerism, rather than being a cultural depravity set to bring down the West, may have simply been a fad that blossomed due to the bubble years.

To core cause of this crisis is crystal clear and easy to understand.    We are in a recession that is a natural part of the business cycle.   However, this recession coincides with the fact that the accumulated debt of the industrialized West — public and private — has become unsustainable.     This debt helped avoid the recessionary corrections necessary in 1991 and 2001, but increases the scope and intensity of the one we are now experiencing.   Think of high debt as steroids — we’ve got a recession on steroids!

Originally, people thought the recession was simply another downturn and that much like the ones in 1991 and 2001; a strong stimulus along with cheap credit would again put us back on track.   This led to a belief that a stimulus alongside expansionary federal reserve policies would catapult the economy back into overdrive.   That didn’t work.   Debt had become unsustainable and counter-productive.

Others, mostly on the right, focused on debt as the sole cause of the problem, not recognizing the reality of a deep recession (correcting imbalances that began at the end of the last true recession in 1983) and the fact that spending cuts could spiral us down into depression.  To them the solution was to cut spending and get the budget in order.     They don’t get that alongside fiscal discipline there is a need for government to actively combat the recession and invest in the country.   Even though tax increases harm the economy less than spending cuts, ideology pushes them to demand only the latter, making it more difficult to reach political agreement.

In other words, many have very clearly seen half the problem, but ignore or deny the other half.  That’s starting to change.   The President embraced a strong and I believe relatively well designed stimulus program which has paid dividends.    The country was bleeding jobs in the early months of 2009, now it has gone to creating them.

And compare it with this longer term view:

(See these graphs came from this site, which also had an interesting discussion: Reflections of a Rational Republican.)

A couple of things stand out.   First, job growth late in the Bush Presidency (before the recession) was about the same as job growth after we came out o f the recession.   The recovery may be weak, but it’s symmetrical.  The decrease in job loses was swift in 2009 when the stimulus took effect.   With the good numbers for July and new unemployment claims dipping below 400,000 two weeks in a row, the economy is perking up.

Now, if you want it to grow faster you could say “add more stimulus” and expect the numbers to rise.   However, that ignores the debt issue, part two of this crisis.   There would be no down grades, no fear of defaults, and no difficulty in addding stimulus if the debt to GDP ratio was considerably lower.   That means that stimulus is not the answer to the second step of solving this crisis.   The budget must be restructured.

I expect job growth to continue into 2012, mostly because cuts will not take affect before then and the stimulus is starting to take hold.   Despite the fear and uncertainty on Wall Street, we have reached a point of capitulation where the markets stop reacting out of panic and start truly assessing the state of the world economy.

If the US passes a mixture of tax increases and budget cuts that promise a significant dent in debt, not only will the AAA rating be restored, but private investors will be more comfortable taking risks in the economy.   If the Europeans stabilize the Eurozone (or, less likely, make it smaller), countries like Germany, the Netherlands, Sweden and Norway — all of whom are handling the recession relatively well — can help motor Europe forward.   Lost in the whole controversy is that the unhealthy European economies are the minority, dragging the majority down.   As a continent, Europe is actually in better shape than the US.

However, the result will be continued slow growth as the global economy rebalances.   More power and wealth will shift to countries like China, Brazil and others.   Globalization will limit the impact of domestic policies — does a tax cut in the US stimulate the American economy, or does it stimulate the Chinese economy if the money is used to be Chinese consumables?   We won’t be partying like we did in 1999 (or 2006) when growth appeared permanent — bubbles create wild illusions!  That economy was a house of cards built on sand.   But a slow restructuring with jobs dribbling rather than surging back could mean the development by the end of the decade of a strong, restructured stable US and world economy.

Anyone who has read my blog for the last three plus years knows I’ve been pretty bearish on the economy.  I was a contrarian back in the heady days of 2006 when people believed that deregulation of financial markets and American innovation had heralded in a new economy.   It was debt, the current account deficit and hyper consumerism that caused that view.   Now the current account is back to just over 3% of GDP — too high, but tolerable.  Consumerism has given way to saving and paying off debt.   Both parties are serious about debt reduction.   In Europe and the US illusions of this being “just another recession” have given way to recognition that this is a time of systemic transition rivaling the 30s.

It’s always darkest before the dawn.  It may well be that August 2011 is remembered as the turning point in restructuring the global economy.   We won’t get the rah-rah consumerism and bubble games of the 00s, but we might get a sustainable economy and even learn that community trumps consumption.

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Downgrading America: Frustrati vs. Tea party

The historic downgrade of US Bonds by Standard and Poors — with a threat of a further downgrade if nothing is done to reduce debt, is a moment that should wake Americans up.   This crisis is serious and it’s real.   We can’t stimulate the economy with greater spending because bond downgrades will do more harm than the good any stimulus might do.  There are structural flaws in the US economy that need to be fixed, and the only politically possible way to do so is for both parties to find a way to compromise.

The economic imbalances are real.   Government debt to GDP is at 100%.   Private and government debt to GDP combined is near 400%, and foreign held US debt is between $14 and $15 trillion.    This is serious.   Years of debt, current account deficits and bubble economy delusions have led us into a pit from which there is no easy way out.   It’s not just “another recession,” or part of the business cycle.   It’s not something we can stimulate ourselves out of and return to growth.

President Obama should call on Congress to return and take decisive action.   Standing in the way of doing this are two groups.   The tea party folk are well known — they oppose all tax increases (and would prefer cuts) and many wouldn’t have minded if the US defaulted on its debt.  They generally believe government is bad and thus demand massive spending cuts.   Another group, called ‘the Frustrati’ by blogger Norbrook, believe that the President needs to stand up for purely progressive ideals, protect virtually all government spending, raise taxes and cut only defense.

Both the frustrati and the tea partiers think the establishment of their parties has sold out to “Washington insiders,” and by being more ideologically pure they can achieve true success.    Many on the left are furious with Obama for agreeing to spending cuts at all, and believe that if only he had been stronger and more forceful things would be different.

However, Obama has stared down the frustrati and made it clear that he isn’t giving in to their demands, no matter how much they threaten to withhold money and support.   He knows that the progressive wing of the Democratic party is no more popular than the tea party; Americans want compromise and centrism.   John Boehner, on the other hand, worried about the fragile state of Republican unity in Congress, has done everything he could to keep the tea party satsified.  Boehner has not led, he has followed.

Many on the left don’t really recognize the true scope of the crisis and tend to interpret things in partisan political terms.   They think the problems we face came from President Bush’s wars and tax cuts, and all we need to do is fix that and get back to the happy days of the late 90s when the country ran a surplus.   The problem is that the brief surplus was built on a bubble, while private debt, accumulated foreign debt, and the current account deficit continued to build.   Things weren’t all rosy and sweet in 1999.

The tea party, however, is even more off base.  During the last thirty years we’ve also seen a hollowing out of the middle class, a vast shift of wealth to the wealthiest, and a consumer base that survived on debt and cheap Chinese products at Walmart.    One chart that demonstrates how the growth we did have was misdirected is here:

Note growing productivity since 1989 — that produces more wealth and value.    But middle class and working wages stayed low, both public employees and private sector workers barely kept up with inflation.   This is not what happened in most other countries; in Germany working class wages have gone up significantly since 1985.    I’ve posted other charts that show the same thing: the gap between the rich and the poor has been growing dramatically, during the recent boom most of the country’s income hasn’t even kept up with inflation.

This state of affairs is very bad for the economy.   The wealth imbalance fed the bubble economy, but didn’t grow the economy at home.    A huge chunk of that wealth goes to consumption of  foreign produced goods; even the argument that it gets invested back in the economy is misguided — in our global age most investments do not stay in our borders.   If that wealth was being spent by a viable middle class consumer base it would do far more to stimulate growth and create a sustainable economy.   This shifting of wealth to the elite resembles third world economic relations, and has led to a fundamentally dysfunctional economy.

This is where the tea party is way off base.   We need to address this imbalance in part by taxing the wealthy in order to create incentives for job creation and increased wages for the middle class.   To cut government spending in a way that hurts the poor and elderly while protecting the wealth gains of those who have made off so well in the last twenty years is utterly insane.   The tea party’s core ideals are based on a complete fantasy — it’s ideology on steroids, resistant to facts, evidence and reality.

The President needs to address the nation again and lay out the seriousness of the challenge.   He has to tell Congress that they must undo the damage done by the downgrade by agreeing to his $4 trillion deal and accepting tax increases.  He has to make it a priority to not just create jobs, but to assure that the working and middle class get paid fairly.   Relying on the market to do it alone doesn’t work; markets are not magic.    The frustrati have to accept entitlement reform, cuts to programs they believe are valuable, and a downsizing of federal government.    The tea party has to accept higher taxes, more regulation of the financial sector, and cuts to military spending.

That’s not easy.  If a couple has been living beyond their means, how do they adapt?   At first each one might want to keep doing what they’ve been doing and have the other cut back.  Ultimately, that doesn’t work.    Politically there is no other alternative then a compromise than neither side finds acceptable — but one that actually works to address the problem rather than put it off.

Restructuring the economy will take time.   As I noted in January, power may shift from the federal government to state and local control.    It may be years before we get back to unemployment levels back at 5 or 6%.   It may be a decade before we see the economy described as “healthy.”   This is real and the longer we wait to do something significant, the harder it will be to pull ourselves out of the hole we’ve been digging.

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