Friday, July 29, 2011

An Epic Fail

I haven't made a post in a while because (a) I haven't been doing much worth writing about and (b) I've been watching the budget debacle in Washington unfold with some bated breath.  (What is "bated breath", anyway?  Is it like sticking worms in your mouth?  Why would anybody want to do that?)  I think most of us try to ignore Washington politicians as much as possible, maybe more and more each year.  This year, however, what happens there has a very direct bearing on my job prospects (subject to a separate post very soon) and general economic well-being.  What is happening in Washington right now is, unfortunately, not staying in Washington.

Back in October of last year, during that particularly nasty and deceptive election season, I took a look at the federal budget and wrote a very lengthy post about it here.  Although the specific numbers have changed for the worse, the analysis and comments are as true now as they were then.  The key points:
- The last time a Democratic President was in office (Bill Clinton, remember him?), we had a very healthy economy and a budget surplus that was projected to grow to about $900B by 2010.  We could have paid down about half our national debt by now ...
- ... except George Bush and the Republicans changed all that.  He literally gave away the federal surplus in the form of rebates, slashed taxes (particularly for the wealthy), got us into two wars, grew the size of the federal government, and expanded entitlements (especially the hyper-expensive Medicare prescription drug benefit, which was enacted without identifying where the funding would come from, over the objections of the Democrats).  During Clinton's tenure, the federal budget grew 11%; during Bush's tenure, it grew by 104%.
- Since World War II, the federal government's share of the GDP has hovered around 18-20%.  During Clinton's last years, both revenues and expenditures were balanced.  When Bush left office, federal expenditures accounted for 24% of GDP while revenues were only 15%.  We had a $1.4T deficit, which was almost the size of the entire federal budget just eight years earlier.
- Obama's two budgets have not changed those proportions significantly.  Expenditures remained high and taxes remained low as part of a bipartisan effort to stimulate the economy out of a full-blown depression.
- To return the federal government to its normal level of about 20% of GDP, we would have to cut expenditures by over $600B per year and raise revenues by over $500B per year.  Cuts would have to come from discretionary spending (including defense) as well as mandatory spending (Social Security, Medicare, and Medicaid being the big three categories).  

Since I wrote that post, things have only gotten worse, and both Democrat and Republican lawmakers have been fiddling while Rome not only burned, but was sacked by the Vandals (aka, Tea Party).  The budget process has gone from nasty to vicious to careening out of control.  I blame the Tea Party.  They have been arrogant and ignorant to amazing degrees, have shown no respect for anybody who does not agree with them (which is about 80-90% of the American people), and keep demanding more and more. Obama, Senator Reid, and the Democrats have, unfortunately, given in on nearly everything they demanded, including massive cuts in discretionary spending and entitlement programs, as well as no tax increase.  Every time they do, the Tea Partiers just demand more.  So far, their approach has been to DEMAND, DEMAND, DEMAND. No negotiation.  No two-way discussions.  No consideration for anybody else.  Just "give me what I want or I'll wreck the economy."

Tom Friedman, the brilliant New York Times columnist, called them "the Hezbollah faction of the Republican Party".  He's being overly kind.

So here we are, four days from economic Armageddon (if you believe the hype), and I see no sign that a deal will be reached.  Note that "deal" is the word: there is no "compromise" anymore, just one side demanding unconditional surrender, and the other side trying to figure out how much to give away is too much.  Frankly, I don't see any solution for the foreseeable future.

The ball is about to land squarely in Obama's court.  Congress is not providing the financial means to carry out their own budget, so the Executive Branch will have to decide on its own how to proceed.  And, contrary to what some Tea Partiers are saying, there is not enough coming in to cover what needs to be done.  What'll happen?

I see one of two scenarios playing out.  In one, President Obama will invoke the 14th Amendment, which states:
"The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." 
This amendment provides Obama with constitutional grounds to ignore the debt ceiling limit, which is a law that is being used for political purposes in a way that violates the Constitution.  He could tell the Treasury to go ahead and continue borrowing as needed.  Obama has indicated that he doesn't particularly like this option, but he has not specifically ruled it out, either.

The other scenario is much more Machiavellian.  I have heard several political pundits say that Obama is the master of the "rope-a-dope", giving opponents lots of room to hang themselves.  Possibly that's what is going on now.  With the Tea Party not giving in on anything, Obama might just let them have what they say they want: a situation where the federal government can only spend what it takes in.  In last October's post, I noted that once you subtract mandatory spending (required by law) from revenues, there's only about $200B left for all government functions; but once you add in defense expenditures, you're running a half-trillion-dollar deficit before you spend a dime on anything else.  Since we don't bring in enough to fund our legal requirements plus defense plus anything else that the government is responsible for, the Tea Party's position would soon be exposed for the fraud that it is.

This would be a very painful lesson for the nation to learn.  It's similar to the approach that Roosevelt used prior to World War II: he knew that war was inevitable, but also that the nation would not mobilize effectively without a major shock.  I don't think he knew that Pearl Harbor was going to happen, but something would, and the public wouldn't swing to his support until it did.  He was right.  In this case, Obama might be giving the Tea Party what they want, knowing that the shock will awaken the country to the truth behind their claims.

I don't know that that's what's going on in the White House.  It seems like an expensive gamble to take.  But we'll see what happens here in just a few days.

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