Archive for July, 2011

Debt and Democracy

Sunday, July 31st, 2011

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.


Saturday, July 23rd, 2011

There are actually two battles going on with the debt ceiling debate.  The first is between the Democrats who feel that deficit spending does make sense during economic hard times and Republicans who feel that reducing the deficit is the best way to stimulate the economy.  The second is between Republicans who feel that it is fiscally irresponsible to fail to raise the debt ceiling and Republicans who feel that it is fiscally irresponsible to raise taxes.

The second “civil war” is the new and interesting development on the political landscape.  To characterize it as only a squabble between the old guard Republicans and the new brash Tea Party is to miss a more fundamental point.

This is a philosophical battle in which fiscal responsibility appears to have become decoupled in the Republican Party from fiscal conservatism.  To some degree it represents a battle for the soul of the Republican Party.

On one side are the pragmatists who understand that business is driven by the opportunity to make a profit, and profit is generated when revenue exceeds expenditure.  They want government to follow fiscal policies which are friendly to business.  That generally means less regulation, cheap money, and low taxes.  In the simple business equation that means more profit.  That because when costs go down, as long as prices remain steady, profits go up.

On the other side are the anti-tax absolutists.  They are convinced to the point of obsession that tax cuts will always pay for themselves by generating economic growth.  They believe that the higher revenues generated through economic growth will more than make up the difference.  The theory is that even though individual and corporate rates go down, my tax bill goes up because I’m paying a smaller percentage of a larger number.

Both revere Reagan.  He was a pragmatist who was an early advocate of the anti-tax credo.

In 1981 Ronald Reagan laid out one of the clearest articulations of fiscal responsibility in his Inaugural Address: “You and I, as individuals, can, by borrowing, live beyond our means, but for only a limited period of time. Why, then, should we think that collectively, as a nation, we are not bound by that same limitation?”

He cut taxes dramatically reducing the top rate from 70% to 28%, but he also closed many tax loopholes, raised Social Security taxes, and broadening the tax base.  He increased the deficit more than any previous President raising the debt ceiling 17 times.  In summary his actions would likely have invited attacks from the same anti-tax crowd which idolizes him in the abstract.  The whole political spectrum has moved so far right, that by the current definition used by fiscal conservatives, Reagan was a RINO.

So we are left with the debate within a debate.

On one side, advocates of fiscal responsibility want to use this leverage to make the biggest deal possible – spending cuts, entitlement reform, revenue increases, and maybe even tax hikes.  They are willing to compromise on the latter in order to maximize the former.

On the other, anti-tax fiscal conservatives want to use this as an anti-tax litmus test to separate the true believers from the apostates.  True believers won’t be swayed by the prospect of a government default.

This debate will continue well past the debt ceiling.  It will be played out during the Republican primary campaign of 2012, but it won’t really be resolved until at least the 2012 election.  The American people have to decide whether they are comfortable with the dogmatic stance of the current crop of financial conservatives, or would prefer those who have demonstrated by their actions that they understand what it means to be financially responsible.




Tuesday, July 19th, 2011

We’ve had plenty of good examples of apocalyptic cults the come to unfortunate ends.

At Jonestown 909 members of Jim Jones’ Peoples Temple all drank Kool-Aid laced with cyanide because they felt that they were under attack from the CIA.  The dead included children and infants who were poisoned by their parents.

At Waco, David Koresh and seventy-six Branch Davidians died when their compound burned after a 51-day siege by the Bureau of Alcohol, Tobacco, and Firearms.  The government got involved because of claims that child abuse and polygamy were occurring at the Davidian compound.  Later investigations proved that some of the seventy-six victims died of gunshot wounds including children who were killed by their parents who then committed suicide.

I’ve always wondered how someone could come under the sway of group to the extent that they would not only sacrifice their own life, but also the lives of their children.  Psychologists in the seventies suggested that cult leaders may have used brainwashing techniques and other coercive methods to first alienate cult members from their families and then bind them so closely to the cult leaders that they could willingly commit suicide.  Later studies suggest that these cult members were not brainwashed or intimidated.  They took the steps they did because it was the only logical conclusion based on the way that they had learned to look at the world.  They were so afraid of what they truly believed was the end of the world as they knew it, that they committed suicide rather than face a future even more terrifying.

We’re seeing some evidence that the Tea Party, at least from a political perspective, has turned into an apocalyptic cult.  They have already painted the picture for themselves of what will happen to our government if we don’t renounce policies like economic stimulus, healthcare reform, and legal abortion.  They are requiring politicians to sign pledges in order to prove that they really are true believers.

The “Taxpayer Protection Pledge” for example, not only requires signers to oppose all tax increases, but also oppose any other activity that will increase government revenues unless those increases are matched dollar for dollar by additional reductions in tax rates.  In other words, in order to close any of the tax loopholes that wealthy people were able to get past Republicans (or Democrats) to insert into the tax code over the past two decades, the government must also agree to a balancing tax cut for somebody else some place else.  Those who signed this pledge would oppose eliminating existing subsidies to oil companies or agribusiness unless those subsidies are replaced by tax cuts which could essentially duplicate the subsidies that were the target of reform to begin with.  Almost all the Republican presidential candidates have signed this pledge.  That means that they have agreed that they will give up their right to exercise any independent judgment during their term in office regarding the tax policies of this country, even though every unbiased analysis states that any credible deficit reduction plan has to include increased government revenue.

The “Pro-Life Leadership Pledge” is another example.  It demands complete opposition to abortion for any reason.   This is not just a personal opposition to abortion, but a pledge to eliminate abortion as a legal option for every woman in this country regardless of the circumstances of the pregnancy or the implications for the health of the woman.   The only major Republican candidate who hasn’t signed this pledge is Mitt Romney.

The bottom line is that the Republican Party through its Tea Party affiliates has established an intellectual barrier for admittance to the Presidential race. Independent thinkers need not apply.  If you believe in global warming, revenue enhancement, stimulus programs, gay rights, the occasional need for abortion, or even the value of scientific thought when it comes to things like evolution, you have two choices – either stay home or lie.

The risk is that the Tea Party actions may actually bring about the collapse that they seem to fear.  Like other cults before them, they have become so invested in the belief that tax and spending reductions are the only way to avoid financial Armageddon that they would willingly drive this country to default rather than compromise.  Tim Pawlenty and Michelle Bachmann have both gone on record saying that they don’t support raising the debt ceiling.  They are also both on record supporting the proposed “Ryan” budget which projected a raise in the debt ceiling.  So which one is it?

Michelle Bachmann was recently interviewed in some detail on the potential consequences of a failure to raise the debt ceiling and basically rejected most expert opinion on how the markets will react.  She feels that the government has the money, can pay all of the important bills, and won’t default.  She has nothing to support her claim, other than her unshakable belief that the President is lying and the experts are wrong.

As Richard Cohen recently said in his column in the Washington Post, “This intellectual rigidity has produced a GOP presidential field that’s a virtual political Jonestown. The Grand Old Party, so named when it really did evoke America, has so narrowed its base that it has become a political cult. It is a redoubt of certainty over reason and in itself significantly responsible for the government deficit that matters most: leadership. That we can’t borrow from China.”




Tuesday, July 12th, 2011

It is time for the Tea Party and conservative Republicans to put up or shut up.

They created the hysteria around deficit reduction through apocalyptic predictions of future financial ruin.  They used that fear to get a Republican House majority in the last election

They used that majority to hold the economy hostage by refusing the increase the debt ceiling.  As ransom, they demanded deficit reductions.  President Obama called their bluff by doubling the deficit reduction target including cuts to Social Security, Medicare, Medicaid, and Defense spending.  These programs have been thought untouchable.  He also added new revenue from closing loopholes that Corporations and the wealthy were able to get inserted into the tax code.

Conservatives told the American voter that deficits and spending reductions are the key to reviving the economy.  The latest job report, however, indicates that companies aren’t hiring fast enough to offset the massive government layoffs caused by spending reductions at the local, state, and federal level.  When you did a little deeper into the private sector numbers, many businesses have returned to pre-recession production levels but with higher profits.  They have taken the tax breaks that conservatives said would produce jobs and purchased new more efficient machinery instead.  As a result, manufacturing productivity and profits are up while employment stagnates.

Now the Tea Party has an opportunity to demonstrate whether they mean what they have been saying about the deficit.  Do they deserve the trust that 2010 votes placed in them, or are they going to kill their hostage because they don’t like the way the ransom has been packaged?

Hopefully voters will remember this moment when they again have an opportunity to voice their opinion in 2012 about who can be trusted to run this country in a responsible manner.


Fit to Govern

Thursday, July 7th, 2011

 We are witness to a fascinating period in our country’s history.

It is the rise of a particularly ideological segment of conservative republicans who appear to be convinced that they possess the only good ideas in this country.

This goes well beyond political positions.

In our democracy, politicians and parties normally take political positions in order to set the boundaries for an eventual compromise. They don’t expect to get all that they propose, but they are able to represent their constituency while at the same time using their position to influence the ultimate policy that becomes law. That essence of compromise is the wisdom of democracy. The country finds its way by following the middle path between more extreme positions. The elder statesmen in our government help craft those agreements based on the political realities of the balance of power between the parties. The voters either endorse or reject policies based on the platforms of the individuals and parties for whom they cast their votes. Power ebbs and flows based on the practical realities of how the country is doing under the leadership of either Democrats or Republicans.

That’s not what we are seeing in the current debates about raising the debt ceiling, but first a little quick background.

The basic problem that we are facing is that we spend $1.3T more a year than we collect in taxes. How did we get to this point and why are we screaming about the deficits and debt? When Carter left office in 1981, our total debt was less than $1T. When Reagan left office, it was approximately $3T; when GHW Bush left office, it was $4.2T; when Clinton left office, it was $5.7T; when GW Bush left office, it was $11.2T. This was the result of deficit financing; there was a gap between revenues and expenditures. Most of this was produced by tax cuts without spending cuts.

The logical solution to this problem is to reduce spending and rescind the Bush tax cuts. That would at least get us back to the income levels during the Clinton administration when we were able if only for a brief period of time to balance the budget.

Because of the political position that conservative republicans have taken against any increases in taxes which lately have extended to even closing generous tax loopholes and subsidies, Democrats have offered Republicans what amounts to the deal of the century. In return for their vote to raise the debt ceiling, the Democrats are offering Republicans a pledge of maintaining the current basic tax rates, and agreeing to spending reductions at the rate of 3-1 for every dollar of revenue increases through eliminating loopholes and subsidies.

As conservative NYTimes columnist David Brooks has said, “This is the mother of all no-brainers”.

If they accept this deal, the Republicans can claim a huge victory, save the country from a calamitous financial default, and set the stage for serious progress in deficit reduction. They would also strengthen their position in the next election cycle as the party that CAN get things done and bury the last vestiges of the free spending Bush II legacy when VP Cheney famously said, “Deficits don’t matter”.

The problem is that according to Brooks, “the Republican Party may no longer be a normal party. Over the past few years, it has been infected by a faction that is more of a psychological protest than a practical, governing alternative.”

This fraction seems prepared to ignore the advice of scholars and thousands of impartial experts who predict that a default on our financial obligations would be catastrophic, orders of magnitude worse than a small raise in tax revenues.

They don’t seem to even have the basic moral decency to stand behind the financial commitments that this government has already made to our creditors.

They don’t have any economic theory to support their position. Instead they have become fixated on taxes as the only important element in economic policy. They are willing to cut any and all federal spending including education and research in order to reduce personal and business taxes. At the moment, businesses are taking those tax cuts and investing them in more efficient machinery rather than jobs. The result is increased business profits and manufacturing output, while manufacturing employment actually shrinks. They claim that as long as they continue to bring tax cuts to the altar of their new god, it will somehow all work out.

The good news is that our system of democracy is also self-correcting. If the Republican Party does pass up this deal and force the country into default, they will have proven themselves unfit to govern. The blame for the problems (that could include another recession or depression brought on by a rapid increase in interest rates) that follow will fall squarely on their shoulders. Voters will again banish Republicans to the political wilderness as they were after FDR led the country out of the depression. They will turn even more strongly than they did in 2008 to the Democrats for financial leadership and we will enter another generation of dominance by the Democratic Party.