government spending

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Default Watch: Episode 3

This is compelling theater. In a black humor kind of way.

One of the things we are learning is that a large number of people in Congress have no clue about national budgets and stuff like that. This is despite the fact that they are the ones overseeing everything. I am sure there are many Democrats who are clueless, but at the moment it is the Republicans who are revealing their copious ignorance.

A frequent riposte coming from the extremists – I am hereafter calling them the “Ultras” in honor of the anti-reform anti-democracy Tories of 1830 Britain – when challenged about the debt ceiling disaster is that we simply have to “prioritize” our payments. They all seem to liken it to their own domestic budgets.

More than one has suggested that we simply have to make a list of things we absolutely need to pay – things like interest on our debt, national parks (yes really), and veterans payments – and then make a list of things we can defer – things like unemployment payments, welfare, anything to do with environmental protection, food safety, and so on. This is, so they say, what they do themselves.

One implication of such comments is that a fair number of our Republican representatives are living beyond their means and have experience in leaving bills unpaid. Perhaps they need to take a look at their budgets? But, moving along …

The point lost on these Ultras is that the consequences are a tad different for the federal government. Reneging on its contractual obligations, all of which been approved by Congress I should add, undermines the creditworthiness of the nation under any circumstance. And, as I have pointed out, would require draconian and immediate cuts that would plunge us into a deep recession.

Plus, and this is the key: prioritization by whom?

Last I looked we were deadlocked precisely because we can’t settle our priorities. That’s without a gun to our heads. The addition of the gun has simply made things worse.

Aaah, but the Republicans are sneaky devils. They are now suggesting we do a piecemeal re-opening of the government. They are making statements like:we all want the parks open, so let’s fund them and so on, leaving only the stuff we disagree about closed”.

Wow. How reasonable.

Until you give about two seconds consideration to it. Then you realize that a piecemeal approach is simply prioritization via a different route. Either way the end result is that the parts of government the Republicans don’t like remain closed and everything else is re-opened. So its a heads we win, tails you lose offer. No wonder the White House is ignoring it.

Which brings up another point: every time we hear a plaintive and innocent call from a Republican to open “negotiations” we should all ask “negotiate what?”. It turns out that the only things they want to negotiate are things they want cut. So their idea of a negotiation is akin to hostage taking. It’s their agenda or no agenda. Nothing gets put on the table they don’t want to talk about. Like tax increases. Or cuts in defense spending. In other words the very act of negotiating is a surrender to their terms.

That’s not negotiation. No wonder the White House ignores them.

Then there’s the small matter of elections.

The Republicans are trying to set aside last years’ elections. It’s as if the results don’t apply to them. They lost. Even in the House, where they won more seats, they garnered far fewer votes – they are good at gerrymandering – and so have a tainted hold on power even there.

Here’s the point they seem to ignore: elections count. Especially in a democracy. Duh.

Yet here we are with the Republicans getting all upset that they cannot ram through their attack on social spending. So, rather than play by the rules of a democracy, they subvert it. They hold it to ransom.

That’s why they’re extremists. That’s why they’re Ultras. And eventually they’ll go the way of those original Ultras. They will disappear.

But between now and then they’ll do a lot of damage.

America’s system of government has never been democratic in any purist sense. It has always been full of choke points designed to give minorities – small states, slave states, and the countryside – a veto over the unwashed masses – everyone else. That crippled democracy is why we have today’s mess. The majority cannot win the day, and the minority effectively legislates against the majority’s will. Or, at least, it sets the agenda. Plus it can destroy the good standing of the nation by throwing a hissy fit.

It’s puerile. It’s pathetic. It’s profoundly undemocratic. But it’s America.

Great theater.

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Default Watch: Episode 2

I apologize for obsessing over the impasse in wWashington, but it is great theater and provides endless fun for those of us who watch. So, with that said, here’s a conundrum to play with as you argue with your right wing friends:

If hitting the debt ceiling is such a big deal that the Republicans think they can wring huge and spectacular concessions from the White House by avoiding it, why is it also a matter of no importance and all the fuss is merely a Democratic party effort to scare people?

Surely its one or the other.

Either its a big freaking deal sufficient to scare the White House into retreating from Obamacare in ignominious defeat.

Or.

It’s nothing to be concerned about and life will continue unaffected.

Odd isn’t it?

It’s odd to call your own latest supposed nuclear weapon a pop-gun when everyone starts to worry about the nuclear wasteland you’re threatening to create. It’s almost as if you’re suddenly aware of the catastrophe you’re causing, so you try to pretend it isn’t a problem after all.

How do we account for all those Republicans who littered the media last weekend trying to downplay the impact of default? Are they clueless? Are they lying? Are they scared? Are they waffling because they have no idea of what else to say? Are they secretly hoping to destroy the government? Are they playing mind games with us? Are they super dumb? Are they simply ill-informed about the budget? Are they lost in right wing think tank ideology? Are they just lost?

Yes.

Just another fun episode in the default saga.

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Who Cares About Default?

In this fast moving and ridiculously puerile crisis of ours we are being treated to an equally fast paced run-through of right wing fantasy. As each layer of their beliefs is peeled away and revealed as absurd, another is quickly located to defend, often for only a few hours, the destructive and profoundly anti-American path the Republicans are leading us down.

But: when is a fantasy not a fantasy, but a goal?

I am trying to think of an appropriate way to describe GOP policy at the moment, it clearly isn’t “policy” in any respectable sense of that word. I am not sure what to call the stream of ad hoc tactical adjustments spewing out from Republicans currently, but whatever they are they reveal basic truths we ought to consider carefully.

Today’s hot topic is that the default crisis is not a crisis at all. Apparently it is all made up to scare voters. It is, in other words, yet another in a long line of conspiracies cooked up by the Democrats to divert the honest folk of America from the imminent socialist/Islamist takeover being masterminded in the White House. The extremists are, naturally, our last line of defense against that ghastly prospect.

Really.

Well, no, but it sounds that way if you watch Fox News.

But there are now emerging a sizable number of more extreme Republicans arguing that potential US debt default is no big deal. Indeed some are arguing it will be healthy, not just here but worldwide. And, from what I can tell, they actually mean it. I call it the Republican “non-default” strategy.

Their thinking goes this way:

After the US hits the debt ceiling the only change is that it can no longer issue new debt. There will still be a steady stream of income flowing in from taxpayers, so the Federal government simply will have to trim its expenditure down to fit within that income stream. Plus, the Treasury Department can prioritize its payments, thus ensuring that its pays our creditors first. Thus, hey presto, there will be no default. The current debt gets paid on time, and the financial markets world wide can breath a sigh of relief.

This is all true. That could happen.

But, last we all looked, the stream of taxpayer income is insufficient to pay for all the things Congress has told the government to buy. Ummm. That’s why we have a deficit.

Now, if we prioritize paying creditors on the debt and we have to force federal expenditures to within the current revenues – i.e. we cannot issue more debt – the implication is that we have to cut a lot of government spending. Since this has been to goal of the extremists all along, you can see why many of them think hitting the debt ceiling is a good thing.

Let’s play with the numbers, using the 2013 budget as our yardstick.

  1. Federal revenues are $3,003 billion
  2. Federal spending is $3,771 billion
  3. That’s a deficit of $768 billion
  4. Our goal is to fit everything under that $3,003 revenue cap so we don’t issue more debt, but we have to avoid default. That implies paying the interest on the current debt, which is $321 billion
  5. Thus, to avoid default, our budget for everything else is $3,003 – $321 = $2,682 billion
  6. So, what can we afford? Well, the current spending is this: Defense, $676 billion; Social programs and unemployment, $2,502 billion; Energy/Environment/Transport, $169 billion; Other stuff (including Justice/Foreign Aid/Agriculture) $207 billion
  7. I doubt the Republicans are thinking of defense cuts, so that has to be paid next. This leaves $2,682 – $676 = $2,006 billion for everything else
  8. Let’s assume that the Republicans want to keep Social Security payments flowing, so they are paid next and amount to $808 billion. So, here we go: $2,006 – $808 = $1,198 billion. That’s not much left!
  9. Let’s assume that the Republicans also want to keep Medicare and pay Veterans benefits, they add up to $670 billion. So let’s pay them too: $1,198 – $670 = $528 billion
  10. Let’s also assume that they want to keep the Justice department running, pay Congressional wages, and keep the government buildings heated etc. That costs $86 billion. Let’s also say they keep transportation so they can build roads in their own states and bridges to nowhere (as in Alaska). That’s another $110 billion we need to spend. Oh, and we can get rid of all foreign aid (only $57 billion) except the $8 billion to Israel since they are our best friends ever anywhere. Do the math: $528 – $110 – $8 = $410 billion.
  11. So after all this prioritization we still have $410 billion to spend! That sounds like a lot. But Medicaid alone costs $386 billion; education costs $102 billion; unemployment aid costs $538 billion; the energy department costs $15 billion; we spend $39 billion on the environment; not to mention the $33 billion we spend on science research and space … oh dear

Basically to follow through on this “there is no default if we cut spending” strategy we have to eliminate whole swathes of government immediately. $768 billion’s worth. It is fanciful at best to imagine we could do that. It is laughable to imagine Congress could come up with a plan to accomplish such a set of cuts. They cannot even negotiate the current budget with far fewer cuts. Who is going to agree to these even greater cuts? There would simply be a new crisis as the extremists tried to force draconian cuts down everyone’s throats. No one would agree.

No one.

It’s a pipe dream. It is Republican fantasy as they try to avoid the consequences of their extreme talk.

Besides, if we managed to cut $768 billion immediately the economy would plunge into recession. That’s a 5% reduction in GDP overnight. Plus that doesn’t take into account to knock-on effect as all that money stops flowing through the pockets of the thousands of businesses that sell to the government. Those businesses will be forced to close or shrink. That will add to unemployment. The recession the cuts will cause will spiral downwards. This will reduce the economy’s total incomes, and hence reduce tax revenues to the government. Guess what? That reduction in revenues will force further cuts to government spending – don’t forget we are trying not to raise new debt – and so another round of GDP shrinkage will begin. The post “non-default” recession will be deep, long, and very nasty because the federal government will not be paying unemployment, and will be furiously cutting jobs to keep within its ever shrinking budget. The private sector will be slammed by the sudden cut-off in revenues. A depression will loom.

So. The “non-default” strategy is ridiculous. The outcome is scarcely better, if at all, than a default would be.

But, for today at least, it is keeping some Republicans focused away from the ludicrous nature of the path they have thrown us all down.

What fantasy they will come up with tomorrow?

One good thing emerges from pulling on the strands of GOP fantasy: it reveals their goal. They were never, ever, concerned about the budget deficit. They have always been focused on a total defunding of government, especially the roll-back of social programs. The exercise above is thus one they would actually like to set in motion for real. This is why some of them look at the “non-default” strategy with misty eyes. It’s what they want to happen. And they are so close to arriving at their preferred destination.

Which is why they have dug in and are driving the timid Republican leadership over the cliff.

Addendum:

Here’s a link to some quotes from Republicans who believe in the “non-default” strategy. It’s pretty clear from some of them that they have no idea of the enormity of the impact of the cuts needed to make “non-default” viable.

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First Debt Ceiling Rumbles

With the Republican shutdown now into its third day, and with last night’s attempt at reconciliation a total and bitter failure, the odds that the shutdown and the debt ceiling fight are rising sharply. Whilst the former is a huge nuisance and could lop about 1.0% of GDP this quarter if its doesn’t end soon, the latter is far, far more threatening. It could dwarf 2008. The problem – as ever – is that there are enough extremists in the Republican ranks to cause us to blunder over the cliff.

And I mean blunder.

So far the sane analysis seems to be that the Republican leadership, as opposed to the extremists, calculated that they would be able to extract concessions from the White House and thus keep the shutdown short, or, perhaps, avoid it all together. They saw this shutdown in the same light as the last one. If this was their calculation, and it appears it was, then it was a major error in judgement.

The point being that what they are seeking to extract this time is the total annihilation of the Obama presidency and the end of his signature legislation. To say the least this is an extraordinary expectation. To expect total capitulation by the White House to GOP extortion is both naive and stupid. It was never likely. It is an impossible request. Negotiations based on such asymmetric outcomes are called ransom demands, or hostage taking. They are not negotiations.

But the Republican leadership thought they could succeed. Worse, they sold their very excitable and extreme base on the notion that they could succeed.

Now that they have failed – so far – they are thus stuck. If they retract their extreme demands and negotiate more reasonably they appear to have crumbled and deserted their base. If they persist they run the risk of driving us all over the cliff.

Damned if they do. Damned if they don’t. Their approach is a terrible example of rotten decision making It was an epic blunder, from which there is no way back without humiliation of some sort.

In simple terms we are being held hostage to protect the egos, and political prestige, of a few men like Boehner, Ryan, and Cantor. They are placing themselves above the rest of us. This, by the way, is thus no longer an argument about the merits or demerits of health care reform – if it ever was – but is now about the political survival of a few hapless and dumb politicians.

Which is why the impasse could take a while to resolve. It may need a crisis to provide cover for a retreat “for the good of the country”. No matter that the crisis was artificially created by the very men who are in retreat.

If you follow this logic, then you arrive at the conclusion that the shutdown and the debt ceiling fight will meld and that we will default – technically – on our debt sometime two weeks from now. Then all hell breaks loose.

Thus far the stock and credit markets have been remarkably calm about the prospect. The thinking seems to be that recent history is full of Republican hostage taking and each has been resolved at the last minute with relatively little economic damage. The savagery of the sequester didn’t rock Wall Street types too much so they can ignore that instance, and focus on all the other spats instead.

But this one would be different. A debt default would slam Wall Street and any other place used to seeing the US as a safe investment haven. So Wall Street is beginning to worry that the Republicans have no way back and that the debt ceiling fight might reach crisis proportions.

The first inkling of real worry is showing up in the cost of four week Treasury bills: interest rates have started to rise as the risk of default gets more concrete. This is no panic. It is the kind of minor shift that sometimes presages a future panic.

We have had our first debt ceiling rumble.

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The Austerity Flop

A very quick thought:

The obsession with the federal deficit is misleading if you want to consider the effect of austerity here in the US. State and local government makes up a very sizable chunk of total government spending, and is, obviously, beyond the control of Washington. That means fiscal policy can be altered by decisions all across the country. This makes it difficult to assess the effects of things like the 2009 stimulus with precision.

When you look at government spending in this way, in total, you see that it has been declining for a while, and especially since around the middle of 2010. The much debated federal stimulus was offset by massive state and local government reductions. So government spending has been on a steady downward track for the past three years – in sharp contrast to the overheated invective you hear from Washington.

What does this mean?

It means that we have been pursuing austerity style policies.

And how’s that working for us? One way to look at it is to take the spending gap – the difference between where spending might have been without the cuts, and where it is in fact – and try to estimate its impact on GDP. After that you can, very roughly, figure out how many more or fewer jobs there are. In other words you can prove or disprove the claims of the austerity advocates.

If you do these calculations – as Krugman has on the back of an envelope – you arrive at the not unsurprising conclusion that austerity is a major flop. I say unsurprising because there were a number of us who said this was the likely result all along. Krugman’s numbers appear to say that the entire reason we have lingering high unemployment is due to austerity. Even if he’s off quite a bit, it’s clear austerity is a significant drag on the economy.

There are two points to make consequent to this analysis:

  1. Austerity advocates have been shown to be wrong. They have no credibility going forward. We should ignore them. They argued that less government spending would somehow impel a surge in private activity sufficient to offset the lost demand due to austerity. It didn’t. The private sector has recovered in many respects – consumer spending is top, so is investment – but by nowhere near enough to get the economy out of the doldrums.
  2. The political advocacy of austerity was not about austerity as a way of freeing up the private sector, but was about reducing government as a factor in the economy. It was not an economic policy at all, it was an expression of an ideological position. Austerity advocating economists were simply providing cover for a deeper anti-social motive, that is now exposed clearly. Most of those economists are now silent, but none are retracting their work. Why should they? Their job is done.

The battle has now shifted. We are now reading constantly about the next wave of attacks on government spending. This time in the guise of affordability. Or lack thereof. The focus is public worker pensions. Cities and states across the US are considering ways to eliminate or reduce their pension obligations to municipal workers. That these obligations are contractual is no obstacle. Compliant courts appear willing to set aside those contracts. The issue stems from years of tax cutting. So unwilling are many local governments to raise taxes that they have had to cut services to the bone in order to keep paying their pension obligations. This manifests itself as far fewer teachers, fewer police and fire fighters, and sundry other things such as less clean streets, parks and so on. The citizenry is now upset by the lost service but is unwilling to pay the taxes to restore it. Those pension obligations stand between a normal service and low tax rates. So they have become a target.

So not only has austerity hammered the national economy it has undermined local services, and in some cases, safety.

I call this the austerity flop. Its advocates call it a victory for freedom from government.

I think I am more accurate.

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