The following graph came from the Washington Post.
It demonstrates in fairly stark and simple terms that much of the deficit problem that has us on the brink of default started during the recent Bush administration. It has also been well documented that many of the Republicans who oppose raising the debt ceiling today, supported raising the debt ceiling seven times during the Bush administrations two terms.
Now some looking at this graph are going to say that both the Bush tax cuts and the wars in Afghanistan and Iraq are now Obama’s responsibility. That is certainly one opinion. The perspective of this graph, however, is who STARTED the policies that have created the current debt crisis. The reality in Washington, as we’ve learned, is that it is MUCH more difficult to stop something than it is to start it.
The Tea Party folks are saying that they bear no responsibility for this spending either and were voted into office to rein it in. It is certainly convenient for them to blame Republicans as well as Democrats for the current debt, but the reality is that the vast majority of current Tea Party members voted for Bush and helped give him the Republican majorities he needed to implement his programs. Bush took those majorities and passed things like the unfunded expansion of Medicare and the disastrous tax cuts that form the foundation for the current deficit problem.
Now the Tea Party feels empowered to change the way business is done in Washington, but as Fareed Zakaria points out, it has not been a change for the better. That’s because the Tea Party rejects the fundamental element of democracy, which is compromise. Their view of government is totalitarian. This “my way or the highway” view of government is at the core of the polarization which has rendered the current congress dysfunctional. It is this dramatic breakdown in the democratic process that has the business community concerned about the ability of the US government to manage itself responsibly.
Those who embrace this Tea Party philosophy have rejected the notion of compromise and instead are willing to hold government and the country hostage until their demands are met. As Zakaria points out, our elected representatives are SUPPOSED to act in the best interests of the country as well as their constituents. That requires a level of sophistication and maturity when a particular piece of legislation fails to muster the necessary support across the political spectrum. Rather than threaten to burn something down or blow something up, it is the responsibility of all elected representatives to craft a compromise that can pass. That compromise respects the fact that this is a big country with diverse political opinions each of which through their elected representatives deserves just as much as respect as every other.
Polls have consistently tracked strong Tea Party support at roughly 20% of the country. Yet the Tea Party faction of the Republican Party has acted as if their fanatical tactics are in defense of a majority opinion. It clearly is not. Instead, as Paul Krugman of the New York Times points out, we are behaving more like a banana republic than a proud 235 year-old democracy.
We are already starting to see the consequences of this breakdown in the democratic process. The stock market has dropped about 5%. Economic growth was flat the last quarter. Unemployment remains a major unaddressed problem. The dollar has hit an all time low against the Swiss Franc. While that does make our exports more attractive, it makes imports like oil that much more expensive. Interest on short-term US Treasuries have hit a six month high because investors are dumping their holdings in anticipation of a failure to resolve the debt crisis problem. That increase in interest rates at last weeks sale of US Treasury bills cost the taxpayer an additional $1.7B.
Mitch Stapley, chief fixed-income officer for Fifth Third Asset Management, was quoted in an MLive article saying he is “stunned” at the political brinksmanship unfolding on Capitol Hill.
“I cannot believe we are having this discussion. It is absolutely stunning to me,” he said.
Regardless of what happens in the next few days, Stapley said the U.S. credit rating is likely to decline from AAA to AA due to the failure of Congress to address long-term debt issues. Negotiations to cut as much as $4 trillion over 10 years appear to have died a couple weeks ago.
Any decline in the US Credit rating by the major rating agencies is likely to have a ripple effect through state and municipal bonds that to one degree or another depend on federal funding. That means that the already strapped cities and states will have to pay higher interest rates too.
This situation is not easily repaired either.
The rise in interest rates that the US suffered as a result of the government shut down in 1995 took several years to recede. That’s because investors are going to wait for the US government to prove that it is able to govern in a predictable responsible manner. Our first opportunity to demonstrate that is going to be in 2012, when hopefully voters will punish the Tea Party for their attempts to dismantle the democratic process.