Sunday, July 17, 2011

Debt Ceiling


I know that everyone wants to hear all about my life. Well too bad. This post is going to be a bit about the big news story—the debt ceiling talks. I thought it would be nice if I dropped in my two cents and helped everyone decipher the debate a bit. So I'll try to keep this concise and accessible.

First, the debt ceiling (DC) is how much money America can borrow. The $14.3 trillion debt we have is reflective of past spending. Without a budget deal, the US will not be able to pay off its debts accrued. That's right, raising the DC is actually about paying for money we have already borrowed; a borrowing spree that started with George W. Bush and continued with Barack Obama. Our debt is not a partisan issue or fault.

Much of the media and misinformed tea partiers have portrayed the DC as if it is somehow part of the current budget talks. It is not. Both parties want to raise the DC; the current debate is a matter of how the US will pay off the debt.

Second, a default on credit would be catastrophic. Any reputable economist will tell you that. The American dollar is the reserve currency for most of the world. It is also the largest economy in the world. It has maintained this status partly because of its AAA bond rating. America has always paid off its debts on time. Not doing so would have dire consequences—the deadline is August 2.

In 1979, the government ran into technical problems with processing its debt and the US failed to pay interest on about $120 million on time. The repercussions were huge. For a small technical default that creditors were unconcerned about, the US still paid a huge price. The interest rates on the loans were permanently raised by one half of one percent. “That's like making your mortgage payments on time for years, seeing one monthly check get hung up in the mail for a few days, and getting hit in response with a higher rate for the life of the loan.”

If this deal were to go south we would be facing a huge crisis, defaulting on loans would jeopardize the world market, not just the American one.

So let's look a little at history. Mr. Robert S. McElvaine wrote an excellent editorial for the Washington Post explaining how the Depression happened, deepened, and why the GOP (and me up until today) largely misread the lessons from it. To exemplify the perspective I quote Senate Minority leader Mitch McConnel, R-KY “One of the good things about reading history is you learn a good deal, and we know for sure that the big spending programs of the New Deal did not work. In 1940, unemployment was still 15 percent. And it's widely agreed among economists that what got us out of the doldrums that we were in during the Depression was the beginning of World War II.”

Somehow that point is supposed to illustrate that market mechanisms will correct themselves and 'socialist' programs are bad. In fact it illustrates just the opposite. FDR actually cut spending in 1936 after his re-election was secure because he was “fearful of a massive budget deficit.” The economy promptly took a nosedive. In 1940, when America entered WWII, government spending skyrocketed. There was no market mechanism, no spending cut that pulled the US out of its malaise. It was precisely the opposite. “The reason the New Deal failed to end the Depression is not that Roosevelt and Congress overspent, but that they underspent...The war ended the Depression precisely because it obliged Roosevelt and Congress to spend greater and greater amounts without worrying about where the money was coming from.”

Enough contextualizing, what's the state of affairs? Well, for about every dollar America spends, about 40 cents are borrowed. Currently the prevailing proposals would do almost nothing to reduce that number significantly.

Obama's proposal has been about $3 of cuts for every $1 of revenue gained. Obama has proposed basically a huge compromise, something he and his party are uncomfortable with. But 233 members of Congress have taken a pledge (created by Mr. Grover Norquist) to not raise taxes period. Even closing an estimated $1.1 trillion in tax loopholes is considered a tax hike by these members. Because passing the House would require a minimum of 218 votes the talks have stalled.

No one wants to compromise. It's a lose-lose situation truly. But there is a light at the end of the tunnel. Charles Krauthammer, writing for the Washington Post, aptly described the politics behind the debates currently. And while he takes aim at Obama (I think in the overly vicious manner of someone who knows he's lost) he does well outlining how the Obama administration has effectively outmaneuvered the GOP on this issue and they are bound to fold.

While I hate to play games of chicken and compromise, it is important to note that this is a distinctly political issue with all the 2012 big-wigs getting their poo ready to throw for the campaign. So the two parties are looking to run head first into each other and pull out at the last minute, each claiming the other the loser.

Some of the alternatives on the table might work. The clause in the 14th amendment that “the national debt shall not be questioned” possibly gives the president leeway to bypass Congress and raise the DC without approval. But that's the last ditch effort.

The second to last option is McConnell's plan, which allows the president to veto a bill twice and Republicans to vote against a raise to the DC twice and technically raises the DC at the same time. It has been called ingenious, but it is also facing huge difficulties. The 233 House members of the anti-tax persuasion will want to tack on spending cuts as riders. House Democrats are unwilling to vote for something like that, so for every Republican gained, it is probable a Democrat will be lost. Gwen Ifill said so and I believe her, “even the bare bones fall-back plan will have difficulty passing.”

Finally, what the hell is going to happen? Well, I don't really know. But hopefully, the fact that 80% of Americans are ok with tax hikes to get the budget balanced indicates that a deal will be made. My theory? We'll get a crappy deal. Social programs will be cut and reorganized drastically, to the point that the Democrats might be kicked out. Or if they leverage it well, they regain a majority in both Houses and they grow a backbone and make the necessary expenditures to truly pull us out of this mess. Just kidding, the Democrats will never do that. They can't pull that together—they are too scared.

We'll probably limp along for the next ten years staging minor comebacks contingent on our burgeoning industries but never restoring ourselves fully because the concept of sustainability is a stupid liberal trick. And we will start calling this moment the collapse of the West.

Austerity packages are transparently backwards and there isn't a big war coming that will force us out of this. Say goodbye to the American Empire and almost 7 decades at the top.

Also, if you think I'm wrong I'd like to point to the latest news in the European Union (EU) where I accurately predicted (in May) that Spain would be dropped from the list of nations about to collapse and be replaced by Italy. Sure enough, in the last two to three weeks, the EU nations in dire need are Portugal, Greece, Ireland, and Italy. Spain has apparently been dropped. NBD but I'm kind of a BFD if you know what I mean. But I still invite debate.