U.S. Debt Ceiling Show Baloney
Interest-Rates / US Debt
The mainstream media are all a-twitter. Speaker of the House John Boehner has given up in the President’s offer of a solution to the deficit crisis: a $4 trillion deficit reduction package. Oh, the horror! Oh, the pigheadedness of the Republicans!
Oh, the chicanery of the media. Maybe you have noticed the game that the media manipulators play: they announce a Big Government Deal in the headline, only to add later in the story these words: “over the next decade.” This is the baloney factor.
To take away the hype, divide by ten. Then try to find a breakdown of the figures. Without exception, most of the savings or benefits in the heralded breakthrough are scheduled for the last three years. The package is back-loaded.
With spending cuts, this decade gives Congress plenty of time to write new laws that spend far more than the proposed savings promised in the last three years.
Here is how one media outlet presented the story. It describes the Republicans.
Tax hikes, by any name, are a nonstarter for a party that forged its brand on the mantra of lower taxes and less government, and Boehner’s willingness to talk rates with President Barack Obama – particularly in the context of House Majority Leader Eric Cantor’s (R-Va.) refusal to do so – raised eyebrows within his conference. The uproar among Republicans, on and off Capitol Hill, forced Boehner to back away from the “grand bargain,” setting up a testy White House meeting where little was accomplished Sunday night.
Ah, yes: the “grand bargain.” Let us examine this bargain. The $4 trillion reduction deal meant on average $400 billion per fiscal year of reduced deficits. But the country is running a $1.6 trillion deficit this year. This is the new normal. Take away $400 billion, and the deficit is $1.1 trillion. Give the government the benefit of the doubt: $1 trillion a year for the next decade. That is the package that Boehner abandoned. He was supposedly forced to do this by Cantor.
Cantor walked away from a round of debt-limit talks led by Vice President Joe Biden when Democrats asked Republicans to identify taxes they would be willing to raise in exchange for spending cuts of as much as $2.4 trillion over 10 years. Then Boehner and his top aides worked with Obama and senior White House advisers to try to find a sweet spot. Cantor and his top aides were then letting it be known on Capitol Hill that he was not supporting the large-scale deal, terming it a tax hike – with the implication that Cantor was plainly not with Boehner.
The story is presented as one of political intrigue, of back-room deals, of closed covenants secretly arrived at.
They’ve long shared a frosty rapport, which extends to their top aides. And this episode serves to illustrate that Boehner has a No. 2 who is unafraid to go his own way on an extremely tricky issue. It wasn’t the first split in recent weeks. Boehner told House Republicans in a closed-door meeting last week that he was not going to provide details of the negotiations to the full conference. Cantor, for his part, wanted lawmakers to be kept apprised of the blow by blow of the discussions.
Nowhere in the article is there one word about how the United States government could fund the proposed deficit of a trillion-plus dollars per year. “The biggest question in Washington – and Wall Street – now is what happens next.” (http://bit.ly/GrandBargain) The issue is described as “tricky.” It is not described as fundamental to the survival of the government.
Note what the biggest question of Washington supposedly isn’t: How will the Treasury get the money to keep the doors open over the next decade?
FREE LUNCHES ARE SO EXPENSIVE
The media want to play up the political aspect of the kabuki theater that is being performed in Washington for the rest of the month. There is no open discussion about which programs will be cut and by how much if there is an impasse over the deficit debate.
There are so many thousands of invisible Federal programs that should be cut by 100% on a permanent basis. The voters should not worry about these cuts for fiscal 2011. The government could easily shut down these programs, and the voters would not feel the pain. A few voters would: the ones on the receiving end of the subsidies. They would feel the loss substantially. But the broad mass of voters would not.
The biggest sinkholes of spending – Medicare, Medicaid, Social Security, and the military – are the big problems. They constitute almost 70% of the Federal budget. If the deficit of $1.6 trillion were eliminated, which is 40% of the budget, there would have to be cuts in one or more of the big four. The politicians are not ready for that kind of Big Deal.
This is why the debate over the deficit is a sham. It is political theater. There is no majority in either political party to balance the enormous budget of the U.S. government. To do so would require a drastic shrinking of expenditures.
There are rumors about this or that Grand Bargain, or Mini-Bargain, but the bargains all involve enormous deficits for the next decade and presumably far beyond 2020. The government’s budget-related agencies simply refuse to publish the numbers beyond 2020. The politicians have no intention of dealing with the #1 issue of the deficit: the size of the proposed deficits in relation to the available private capital required to finance them, year after year.
We hear about the size of the deficit in relation to gross domestic product. But the GDP includes government spending at all levels. What if the Federal deficit were discussed in relationship to the net domestic product: the private sector? The private sector is Atlas. He holds up the public sector.
Atlas legally can shrug. Investors can refuse to buy Treasury debt at any time. Because the economy is still stagnant and getting more stagnant, investors buy Treasury debt because they believe it is the lowest-risk investment available. It is the most liquid asset. They think they can sell their T-bills, notes, and bonds at any time at close to face value. The average maturity of the Federal debt is in the range of 50 months. Investors prefer safety to profitability. This is why Treasury interest rates are so low. Investors are afraid, and for good reason.
Every dollar lent to the U.S. government is a dollar not invested in a potentially productive venture. The government is a sponge for private capital. The Treasury Department is the source of that giant sucking sound.
The media do not explain the deficit in terms of the fundamental economic truth about the Federal deficit. It sucks.
The recovery is weak because it is not being capitalized. Small businesses are the source of job creation, and owners of small businesses remain pessimistic about business conditions. They are not borrowing money to expand.
We are in a Keynesian-induced productivity trap. The government is absorbing capital on an unprecedented scale for peacetime. There is no light at the end of this tunnel. The government is becoming the borrower of last resort. Businessmen see the future. The future is marked by slow increases in the productivity of capital, high unemployment, and lethargic demand. The so-called wealth effect of rising home prices is now operating in reverse.
The American housing market has lost at least seven trillion dollars since 2006. Zillow, a private firm that specializes in monitoring residential real estate prices, puts the loss at $9 trillion.
This much is sure: most people feel poorer whose homes were their major capital asset. People who were in debt for their homes were leveraged. They have seen their equity fall like a stone. This has harmed 80% of the 20% of the nation who are the main investors. The super-rich are not feeling much pain, since they were not in debt. The average investor does feel the pain. The middle class has been decimated. Its hoped-for capital reserves are gone.
As growth slows and unemployment rises, two years after the recovery officially began, there are signs that 2012 will be worse. Business opinion is pessimistic.
Economic growth is the supposed source of salvation – deliverance – from debt. The optimists recite the mantra, “deficits don’t matter,” because they have faith in the ability of economic growth to enable the government to meet its interest payments. Even if it can’t, the Federal Reserve will be the lender of last resort. So we are assured by the experts.
This theory is being sorely tested in full public view for the first time since 1944. The economists who shrugged off a deficit of 2% of GDP are finding it hard to shrug off a deficit of 10% of GDP. But they are doing it. They have risen to the challenge. There is no hue and cry from economists to balance the budget. Only the Austrian School has opposed Federal deficits as a matter of economic analysis. All other schools of opinion call for deficits in recessions. But today’s economy is said not to be a recession. This makes it more difficult for economists to stay quiet in the face of today’s 10% of GDP deficit – not impossible, of course, just more difficult.
The effect of a series of trillion-dollar Federal deficits for the next decade is obvious: reduced economic growth. So, the system’s savior is growing weak. Atlas looks like he will shrug at today’s interest rates whenever the demand for capital rises. He will demand higher rates of interest to persuade him not to shrug.
Investors search for lower risk. They buy Treasury debt. But this guarantees reduced economic growth. This threatens to produce a permanent deficit. If things ever do get better for the prospects of businesses, the result will be higher rates for the government. The only thing keeping Treasury rates low is the rotten economy.
To attract more loans, the Treasury will have to raise rates. The return of optimism will assure this result. There will be competition for funds. But this will create a nightmare for Washington. The increase of the debt, when facing 5% or higher rates, will lead to a worse deficit. The interest component of the debt will rise. This is the Keynesian productivity trap.
The total payments by the government in 2011 are about $400 billion. This is in the range of 10% of the budget, This comparatively low percentage creates no sense of fear in Washington or on Wall Street. But if this percentage doubles in response to higher interest rates, the extra payments will have to come from somewhere. Where?
The political pressure to cut spending is minimal. The media are opposed to a deficit freeze. So is the economics profession. So are the politicians. Most college-educated voters have adopted some version of Keynesianism. The politicians cannot ignore the tea party, but they need not take unpopular stands. A fringe group of voters is up in arms over spending, but that is because the promoters of a freeze on the debt ceiling have not identified where the spending cuts must come from.
NO PAIN, NO CHANGE
I learned basic politics from Bill Richardson, the state senator in California who created the lobby, Gun Owners of America. I worked with him from time to time in the late 1960s. He is the author of the classic book on politics, What Makes You Think We Read the Bills?
Richardson’s lobbying efforts inside the state were legendary among political operatives. They were based on this principle: the most important goal of politicians is to avoid electoral pain. If you can inflict pain, you can get them to change their votes.
Richardson adopted this tactic in his direct-mail campaigns. He was the state senator who ran them on a regular basis. (He had been in advertising before he went into politics.) In the district of a gun control advocate there may have been a strong majority favoring gun control. It would have been wasteful to target him on gun control. So, Richardson would identify an issue on which the voters were opposed to something the guy voted for. The local voters just did not know that he had voted for it. So, Richardson would do a direct mailing into the guy’s district exposing his vote on whatever it was. The guy would know who did the mailing. He would come to Richardson and beg him to back off. Richardson, who cared little about how the guy voted on the vulnerable issue, would agree, in exchange for a vote against gun control, or whatever issue Richardson was promoting. On some issues where the vote was going to be close, it paid Richardson to adopt this tactic.
There is no well-organized voting bloc that is adamantly in favor of spending cuts. There is a bloc that is opposed to raising the debt ceiling. There is no voting bloc that is in favor of massive spending cuts to balance the budget.
This is why the debate in Washington over the debt ceiling is really about forcing one party or the other to face the music on either spending or borrowing. The Republicans seek to pin the tail of big spending on the Democrats. The Democrats are trying to pin the tail on the elephant for spending cuts on the middle class. Both parties are big spenders, which is why we are facing a long-term crisis of debt. But the public feels no pain on debt yet. Voters feel the pain of unemployment, job insecurity, rising food prices, falling home prices, and curtailed dreams for their children. They do not relate big spending and big deficits to these issues. They fear cuts in old age spending, which they are counting on for their old age.
This is why the debate over the budget is without substance. Nobody is identifying those voters who will be asked to bear the pain of cuts.
The greatest pain that threatens a politician is the Medicare-Social Security pain. This is felt by the middle class. Medicaid will at some point go onto the table, because Medicaid is paid mainly to the poor. Obamacare added a few million middle class voters to the ranks, but in general, the program is for the poor. The Middle class would be willing to make these cuts if the pain of the deficits ever hits them. But it won’t. Anyway, the voters’ knowledge of economic cause and effect is so minimal that the rise in spending in the programs they love will not be perceived as the cause of rising interest rates, rising unemployment, and all the other negative outcomes of the deficits.
Where there is no pain, there will be no political change. Where the cause of any pain is not understood as the inevitable outcome of existing programs, there will be no political change.
The debate over the debt ceiling is political theater. There is no commitment to cut spending, because cutting spending creates negative voter responses by specific groups who vote as a bloc. Politicians will not risk this. They prefer to vote for another increase in the debt ceiling, because the pain is diversified over millions of unorganized voters. These voters do not perceive the increased deficit as an immediate problem causing intense pain. They prefer to have Congress kick the can. That is what Congress will do.
There may be a few weeks in which the government is forced to balance income with outflow by cutting spending on marginal programs. When I say “marginal,” I mean programs whose cancellation does not produce voter bloc pain. This is Washington’s definition of “fat.”
These programs are the equivalent of a diet soda on the tray of the 300-pound person who has filled the tray with potatoes, biscuits, fried chicken, and a piece of pecan pie.