United States: Armadebton avoided, for now
- J Brooks Spector
- 01 Aug 2011 12:50 (South Africa)
Political reporters have just about run out of metaphors to describe the meltdown in Washington, and, in acts of desperate self-defence, have been extravagantly drawing on the lingo of sports reporting to describe the stalemate on Capitol Hill over the debt ceiling. Now they will have to come up with new terms for the debt catastrophe 'solution'. By J BROOKS SPECTOR.
Washington politicians, policy analysts, important (and self-important) journalists, commentators and lobbyists routinely vacate the city in August for their favoured beach resorts like the Hamptons, Rehoboth Beach, the Outer Banks, Cape Cod or Martha’s Vineyard, for some time on the golf links or a spot of camping, hiking and fishing in the cooler mountain resorts. This time, however, few have abandoned a steamy capital city while the debt ceiling crisis continued.
By early Sunday evening, the New York Times was reporting that while no measure had yet cleared the Senate
“Last-ditch budget talks between top Congressional Republicans and President Obama continued on Sunday, as the top Senate Republican and Democrat both expressed optimism that a $3 trillion deal could be reached to avert the economic and political calamity of a potential federal default.”
Still later that night, however, after further frantic maneuvering among the party leadership of both Republicans and Democrats - and with the president - the political leaders announced agreement Sunday night on emergency legislation to avert the nation's financial default.
In specific terms, this last-ditch agreement isn’t going to make anyone totally happy. It would cut around $2.2 trillion from federal spending over the next decade, making it a very hard swallow for many Democrats, even as it will not enough for many Republicans – and especially the Tea Party types. On the debt ceiling, itself, the measure would extend the Treasury's authority to borrow until beyond the 2012 elections, something that was a key objective for Obama to keep the debt ceiling out of the mix of the upcoming presidential election. But the price he had to pay was to surrender his goal of hiking taxes on the wealthy as part of cutting federal deficits. Editorial judgment, as well as that of liberal and conservative columnists such as Paul Krugman and Ross Douthat, came quickly. The compromise meant Obama’s surrender of nearly all his previous positions.
The deal came just hours before Tuesday's debt-limit deadline for paying government bills. Or, as Obama said, it “will allow us to avoid default and end the crisis that Washington imposed on the rest of America.” The president added that a default “would have had a devastating effect on our economy.”
After calling Barack Obama to say congressional leadership had – finally – come to a compromise, Speaker of the House John Boehner immediately took up the task of selling what many Republicans will almost certainly see as a meager half a loaf. Boehner told his fractious tribe that “It isn't the greatest deal in the world, but it shows how much we've changed the terms of the debate in this town," adding that “the White House bid to raise taxes has been shut down.” House Democratic minority leader Nancy Pelosi, meanwhile, was even less cheery, issuing a statement saying “I look forward to reviewing the legislation with my caucus to see what level of support we can provide.”
Although there is now an agreement, many economic analysts remain less than convinced this kind of deal is the right kind of medicine to aid a recovery that remains feeble. The first half of 2011 was the worst half-year economic performance for America since the Great Recession officially ended in June 2009.
No votes were scheduled in either the House of Representatives or the Senate before Monday so as to give members of both parties a chance to review the package the leadership has finally agreed to. Given its contents, it is still possible, but now much less likely, that one or the other house of Congress would reject the package of measures.
Under the classic American federal government system of separated and shared powers, although budget proposals come from the president and his government, Congress is responsible for passing appropriations for government operations. Once debated, amended and passed by Congress, the president must sign or veto the resulting budgets. In a similar way, Congress must pass changes in tax rates or rules that get ensconced in law such as those special “loopholes” for favoured activities. These range from the tax deduction for mortgage interest (beloved by everyone), as well as the petroleum exploration depletion allowance that is even more beloved of the fewer people and corporations involved in that industry – or even the mohair subsidy that became long-time ABC White House correspondent (and rancher) Sam Donaldson’s favoured benefit.
Certainly in recent years, revenue and expenditure have been out of equilibrium. The government, accordingly, has been borrowing to cover the shortfall on its expenditures, or, that is to say, it has issued new treasury bonds. As an important aside, those treasury bonds are what have been the beneficiaries of that AAA rating from Moody’s or Dow-Jones and those bonds have been where investors have gone when they get worried about alternative (albeit higher-paying) investments in Mexican paper, infrastructure investments in Tajikistan or commercial paper from the Chinese companies that make Nike sports shoes, wishing to expand production. AAA, of course, means the risk is lower so the interest can be lower too. Given that rating, US treasuries have been a key part of the foundation for most strategies by big institutional investors such as pension systems and other governments so that they can service their own debt or obligations.
In the past, when this borrowing has threatened to go beyond the authorised limit on borrowing – i.e. beyond the debt ceiling – the US Congress has “relatively routinely” passed an increase in the US government’s debt ceiling, allowing yet additional treasury bond issuance. Keeping that triple-A rating has allowed the US to borrow money at less cost than almost any other source of sovereign debt, given it has essentially not defaulted (except for a few days for technical reasons) since 1790. Not too many other places on the planet can say that – and that has spoken volumes - at least until now.
“Relatively routinely” means, for example, that during George W Bush’s two terms as president, Congress repeatedly voted increases in the debt ceiling without so much as a rhetorical ripple or two from people who sounded a lot like Congressman Ron Paul. It was only a few years ago that vice president Dick Cheney famously said a deficit didn’t mean much, even when income taxes at the upper end had been lowered to the evident pleasure of some Bush supporters, and the wars in Iraq and Afghanistan had had to be financed somehow.
But that was then, this is now. In the wake of the bruising political fight to pass health care reform after Barack Obama’s presidential election victory; following on the near-collapse of the stock market and its impact on pension savings; the bank bailouts of the Troubled Asset Relief Program (initiated by the Bush administration) and Obama's stimulus; the growing litany of home loan foreclosures; a more general flatlining of the residential housing market; the automobile manufacturing industry bailout and a stubbornly high unemployment rate hovering around 9% a growing number of Americans began to believe the country – or at least the government – was headed in what pollsters like to define as “the wrong direction”.This is the weathervane those pollsters and politicians use to help divine support for or against a president.
It was this kind of feeling that fed the statements those same pollsters were all hearing, the ones that began with: “The government doesn’t care about people like me because….” With those flames being fanned by right-wing television and radio “talksters”, it was just a short step to the Tea Party revolt of 2010 that regained Republican control of the House of Representatives from the Democratic Party – replacing California congresswoman Nancy Pelosi with Ohio Republican John Boehner. The Republican Party clearly had achieved a notable victory, but it came at a price. More than 80 of new Republican congressmen and women were, in the main, supporters of Tea Party ideals and had partaken of Americans for Tax Reform’s Grover Norquist’s “no new taxes pledge”.
Even the Economist – no bastion of left-liberal thinking - didn’t have much sympathy for this new Tea Party/Republican position. As their Washington columnist wrote this past weekend
“Er, hang on. The "something" the Republican House has come up with is a non-solution (since the Senate cannot buy it) to a problem entirely of the Republicans' own making. The reason for this crisis is that instead of just raising the debt ceiling in the customary way so that the government can pay the bills Congress has already run up, the Republicans decided to point a pistol at the American economy and threaten to pull the trigger if they did not get the spending cuts they wanted.”
“Sure, America needs to tackle its burgeoning entitlement programmes. But not now, when cutting spending will make an insipid recovery worse, and more especially not like this, hijacking a routine procedure and using it to bring the country to the edge of downgrading or default. At least the Republicans have done something? Gimme a break.”
Over the past several months, as the impact of this shift to the right from the November 2010 election in the Republican Party’s congressional delegation sank in, as that party gained a majority in the House of Representatives, and after Barack Obama had conceded “we got a shellacking” in the election, the pressure to shrink government expenditures picked up new impetus. At first, as a result of the Bowles-Simpson Commission, the debate was framed in terms of harsh realities: the need to cut expenditures, the need to close some of the more egregious tax loopholes for special interests, the importance of resetting the way social welfare spending for mandated Medicare and Social Security spending was organised and even the necessity of raising tax revenues through a more general reform of the tax code.
But, once Republican budget hawks entered the debate in Congress, the argument became a simpler, more rough-hewn mantra: Cut down the government - cut spending, cut taxes. (Or, at the very worst outcome, never raise taxes ever again. This was the view despite the inconvenient facts that tax rates in the US are at a significantly lower level than prevailed in the recent past as well as now being significantly lower than in other OECD nations as well.) By this time, House Republican majority leader Eric Cantor and Budget Committee chairman Paul Ryan were pushing the Obama administration hard. Cantor was pushing for what Democrats saw as a treacherous grand bargain over taxes, spending and the government debt that was kind only to fat-cat billionaires as well as budget cuts Democrats argued would “gut” the social welfare net constructed since the New Deal of the 1930s.
Feeling the heat, Obama’s natural effort to find the political centre and regain the support of independent voters that had been the key to his victory in 2008 was to edge closer to that grand bargain, but in a way that would still preserve most Democratic Party first principles in government spending. But once Obama had accepted the logic of the grand bargain, he had little political space left to protect the Keynesian ideal of spending on infrastructure to pump-prime a country out of the economic doldrums, despite the preferences of the more leftist wing of the Democratic Party in Congress.
In fact, Obama’s “State of the Union” and “Budget” messages to Congress at the beginning of the year had proposed new infrastructure projects that would – in theory – have helped catapult the country into a range of new, greener technologies, even as it put money in the hands of contractors, entrepreneurs and workers to order and purchase goods and services that would kick start the rest of the economy. We don’t talk about any of these ideas anymore.
The Republican Party’s heroes have long since stopped being people like Alexander Hamilton with his programme for national infrastructure improvements, Abraham Lincoln and support for a transcontinental railroad even during the Civil War to knit the country together or even Dwight Eisenhower’s advocacy of the national interstate highway system. The Republican/Tea Party’s current vision seems to be one of living within one’s means, a balanced budget amendment for the constitution and the lowest possible tax regime that cuts back taxes as far as possible for the richer portion of the nation. This is so that they, theoretically again, would invest rather than just salt their lucre away until there is a better investment climate. The snarl-up has turned into a kind of American domestic political kabuki theatre – lots of hands writhing in agony, arms waving and shouting - plus all those mischievous and misleading sports metaphors.
After the failure to achieve that grand bargain between the Republican congressional leadership and the president, the House of Representatives passed a bill that would raise the debt ceiling in part now and in part just as the 2012 election was at hand, but only at the specific decision of the president. It would have also added some serious spending cuts of course and would have held the line on tax rates and loopholes – tax relief for the yacht-owning, polo-playing set. But this proposal only won on a straight party line vote and numerous Tea Party types refused to vote at all. This was a smack across the teeth for John Boehner who clearly couldn’t deliver his party to the cause. The House’s Republican leadership establishment learned who was holding the whip, the reins and setting the course. In addition, there was the news the Democratic-held Senate would not support this deal, and the president would veto it anyway – so the bill was DOA even before it went to the Senate.
The Senate, meanwhile, had the Republican minority leader Mitch McConnell making a series of proposals that would set a new debt ceiling and push all the hard choices on taxes and spending onto a special committee that would make choices that the government would have to uphold. The Democratic majority under Harry Reid had somewhat different ideas, but this seemed to describe progress on an agreement. On Sunday, Senator Mitch McConnell said this movement would happen “soon”, and influential Democrat Charles Schumer said the mood on Capitol Hill now was one of “relief” that the nation would not default on its debt obligations, let alone new debt to pay its bills. Reid’s bill may be defeated, but a further compromise bill was seen as likely to pass – at least by the Senate.
Meanwhile, Washington insider newsletter, Politico, emailed its readers on Sunday evening that: “The emerging deal has massive spending cuts and no new revenues - but President Obama is happier about it than many Republicans are. A senior administration official emails: ‘We have divided government, so no one gets a win, but this is a good deal.’
“--A top Democrat close to the negotiations: ‘This deal will include upfront spending cuts in defence and domestic(sic) that everyone agrees to on both sides, the debate is still over how to create an enforcement mechanism that compels both sides and can pass both Houses, that's not easy. The key achievement is the GOP has been forced to give up their key demand for a second debt limit vote that would have allowed them to attempt to force massive cuts in Medicare, Social Security and Medicare in a few months. That's a game changer for the next 18 months.
“The debt ceiling increase is not contingent on action by the committee.
“This is crucial re revenues: Remember, the Bush tax cuts expire at the end of 2012. So if the committee doesn't report out a balanced approach with revenue, the President will be able to veto the any extension of the Bush tax cuts for the wealthy."
But, even now that Sunday has generated a bill that has bipartisan support, and even if that bill can then pass the two houses of Congress, also with bipartisan backing even in the face of a Tea Party caucus’ thumbs down, and even if the resulting bill gets to the president and he signs it, there still remains the possibility (albeit a shrinking one) that the whole business would not get done in time to avoid a technical default by 2 August. The virtually unthinkable has happened. The American political system – or at least some part of it - has chosen to push a political position right to the wall and ignore the broader impact of its behaviour on the nation’s financial position, its role in the world economy and the impact of a faction’s decisions on the country’s and the world’s economic recovery. Although, to be fair, some economists say a technical default would be better than allowing government drift on fixing the tax/spending basics.
As The New York Times reported: “ ‘We have an opportunity now to get ahead of this and we might not in a few years,’ said Christopher Whalen, who writes the Institutional Risk Analyst news letter. ‘If a democracy requires more time, then take more time. I don’t think a default is as big a deal as people say it is because where do investors go?’”
For a sizable chunk of the Republican Party, winning the whole loaf seems to have become more important than achieving the kinds of compromises Americans always tell the pollsters they want from their elected representatives. It is possible that this resulting measure ultimately represents a big defeat for the Tea Party – for their future place in the political firmament – depending, of course, on the future economic impact of this measure and if the result can be pinned on them in the end. The thing of it is, this increasing use of sports metaphors, making that winning score, the clock is running out, the need for a “Hail Mary” pass to score a last second, desperation touchdown, holding the line, and all the rest have cheapened political discourse in an already hyper-politicalWashington. This language helps convince many that politics is an all or nothing game. You win or you are the “goat.”
Many of these newly elected Republican congressmen and women seem to be fond of harking back to the supposed original intent of the US constitution and its founding fathers as a source of guidance in their deliberations. But the American constitution is virtually silent on the virtues of winning at all costs, and, by contrast, it is pretty expansive on the values and necessity of compromise. And über-founding father, George Washington, despairing of the growing split between Jefferson, Madison and others on one side and Hamilton and Adams on the other, by the end of his second term chose to warn his country of the dangers of “faction”.
And just maybe these new Republican leaders could benefit from a crash course in conservative political philosopher Edmund Burke’s ideas, when he told the electors of Bristol what elected representatives must do in favour of the national interest. Or as Burke said back in 1774: “But his [the representative’s] unbiased opinion, his mature judgement, his enlightened conscience, he ought not to sacrifice to you, to any man, or to any set of men living. These he does not derive from your pleasure; no, nor from the law and the constitution. They are a trust from Providence, for the abuse of which he is deeply answerable. Your representative owes you, not his industry only, but his judgement; and he betrays, instead of serving you, if he sacrifices it to your opinion….
“Parliament is not a congress of ambassadors from different and hostile interests; which interests each must maintain, as an agent and advocate, against other agents and advocates, but parliament is a deliberative assembly of one nation, with one interest, that of the whole.”
Burke’s speeches and essays might be useful summer reading once they get to the beach, in addition to their obsessive study of Ludwig von Mises, Ayn Rand and Frederick van Hayek. DM
For more, read:
- It's a deal: Obama, Congress will avert default in the AP;
- Obama announces deal on US debt limit in the Financial Times;
- US plan falls short of ‘balanced approach’ in the Financial Times;
- The President Surrenders (Paul Krugman’s column) in the New York Times;
- The Diminished President (Ross Douthat’s column) in the New York Times;
- Obama: Agreement has been reached on raising debt limit in the Washington Post;
- Obama and Leaders Reach Debt Deal in the New York Times;
- Senate Blocks Reid’s Debt Ceiling Plan; Talks Continue in the New York Times;
- Rightward Tilt Leaves Obama With Party Rift in the New York Times;
- The debt ceiling - Whom to blame in the Economist;
- Jefferson’s Tea Party Moment, an historical analysis of debt as a political issue in the New York Times;
- Congress closing in on a deal to avert US default on AP;
- Senate Blocks Reid's Debt Ceiling Bill in The New York Times;
- Harry Reid's debt deal defeated in The Washington Post;
- McConnell Sees Debt Deal ‘Very Close’ as Senate Nears Vote in The New York Times;
- Deal May Avert Default, but Some Ask, ‘Is That Good?’ in The New York Times;
- Tempest in a Tea Party (a Maureen Dowd column) in The New York Times;
- The National Commission on Fiscal Responsibility and Reform (The Bowles-Simpson Commission report);
- White House, McConnell ‘very close’ to debt deal in The Washington Post;
- In Montgomery County, disgusted taxpayers long for security, not gridlock in The Washington Post;
- A Deal is Close Enough that Top Officials Believe Default Danger Has Passed - $3 trillion; lasts through '12; big cuts, no tax increases - Super-committee means tax reform on fall agenda in Politico;
- Prospects for a Debt Deal Darken as Republicans Point the Finger at Obama in Time;
- Edmund Burke, Speech to the Electors of Bristol at the University of Chicago.
Photo: Traders work on the main trading floor of the New York Stock Exchange July 29, 2011. U.S. stocks dropped for a fifth straight day on Friday after weak data on the economy and a setback on a debt deal discouraged investors, pushing the S&P 500 briefly below a key technical level. REUTERS/Mike Segar
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