Monday, August 8, 2011

Fault Lines

This is a cut-and-paste job from various sources, updated in parts by me, to best convey my thoughts on recent economic events and what led us to this point.  I borrowed “liberally” from The Washington Monthly, Talking Points Memo and Politico.  The majority of the words are not mine, but the opinion is.

Before the end of this month, I will begin teaching my oldest daughter how to drive a car.  An early lesson will include safely turning the vehicle from a straight course to the left or the right.  I will coach braking, proper speed, hand over hand turning and then acceleration.  I will insist that she use her indicator to warn others around her of the coming directional change.  What I will not teach her is to cut the wheel sharply, without warning, and hope for the best.  I will not teach her to play a game of chicken with a 2,000 pound automobile going at speed.  I will teach her to act as the Republican Party should have acted since regaining control of the House.  They didn’t, they grabbed the wheel and they have crashed the car.

In today’s main stream media, there is a bias, and that bias is to give both sides of any argument equal weight.  Misstatements of fact by either side are reported and allowed to stand as if just because they were spoken aloud by someone with a microphone, they must have a shred of truth.  Both sides have a point of view worth giving full weight, we are told, even when one side has lost its bearings on reality.  Being fair is not always warranted, particularly when the facts are clear that the GOP stands responsible for the downgrade of the U.S. credit rating.

Yes, I blame the GOP for the downgrade and the resulting economic upheaval.  I believe this was the GOP plan all along.  Americans elected lunatics to help run Congress; they launched a reckless scheme; and now they appear to have sabotaged our fiscal credibility and standing.  Mission accomplished. 
S&P's own explanation of their decision to downgrade the U.S credit rating slams the GOP's intransigence over letting the Bush tax cuts expire.  Overall, it paints a bleak picture of the whole political system.

“The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

“Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.”

S&P was looking for revenue mechanisms, which the GOP would not allow, regardless of their merit.  S&P wanted entitlements addressed, which the Democrats put on the table as a bargaining chip.  The “Grand Bargain”, that included entitlement cost reductions, was rejected by a minority group in the House who could dictate the terms of the debate.  This minority group turned against their House leadership.  It is their fault.

Let’s look at the broader picture of fiscal competence over the years, and judge whether or not the rhetoric from the Right matches their actions:

1980: Ronald Reagan runs for president, promising a balanced budget

1981 - 1989: With support from congressional Republicans, Reagan runs enormous deficits, adds $2 trillion to the debt.

1993: Bill Clinton passes economic plan that lowers deficit, gets zero votes from congressional Republicans.

1998: U.S. deficit disappears for the first time in three decades. Debt clock is unplugged.

2000: George W. Bush runs for president, promising to maintain a balanced budget.

2001: CBO shows the United States is on track to pay off the entirety of its national debt within a decade.

2001 - 2009: With support from congressional Republicans, Bush runs enormous deficits, adds nearly $5 trillion to the debt.

2001:  First of Bush tax cuts passed, advertised by the President as a return of “over-taxation”, money the government could safely return in a period of surplus.  At the same time, the GOP argued that tax cuts would increase revenue, thereby self-sustaining a surplus.   Huh?

2002: Dick Cheney declares, “Deficits don’t matter.” Congressional Republicans agree, approving tax cuts, two wars, and Medicare expansion without even trying to pay for them.

2009: Barack Obama inherits $1.3 trillion deficit from Bush; Republicans immediately condemn Obama’s fiscal irresponsibility.

2009: Congressional Democrats unveil several domestic policy initiatives — including health care reform, cap and trade, DREAM Act — which would lower the deficit according to the CBO. GOP opposes all of them, while continuing to push for deficit reduction.

September 2010: In Obama’s first fiscal year, the deficit shrinks by $122 billion. Republicans again condemn Obama’s fiscal irresponsibility.

October 2010: S&P endorses the nation’s AAA rating with a stable outlook, saying the United States looks to be in solid fiscal shape for the foreseeable future.

November 2010: Republicans win a U.S. House majority, citing the need for fiscal responsibility.

December 2010: Congressional Republicans demand extension of Bush tax cuts, relying entirely on deficit financing. GOP continues to accuse Obama of fiscal irresponsibility.

March 2011: Congressional Republicans declare intention to hold full faith and credit of the United States hostage — a move without precedent in American history — until massive debt-reduction plan is approved.

April 2011:  Sen. Chuck Schumer (D-N.Y.), who leads the Senate Democrats’ messaging efforts, expressed anger that Boehner was searching for leeway on the debt limit.

“The speaker seems to be testing out how far he can venture onto a frozen lake before the ice breaks. He should listen to business leaders who are telling him to watch his step. Messing around with the debt ceiling just to satisfy the tea party will lead to higher interest rates and an economic cataclysm.”

July 2011: Obama offers Republicans a $4 trillion debt-reduction deal. GOP refuses, pushes debt-ceiling standoff until the last possible day, rattling international markets.

August 2011: S&P downgrades U.S. debt, citing GOP refusal to consider new revenues. Republicans rejoice and blame Obama for fiscal irresponsibility.

The downgrade, in other words, was the direct result of Republicans playing a hopelessly insane game with the full faith and credit of the United States, and then refusing to consider even a penny of tax increases on anyone at any time. Worse, GOP leaders have spent the week boasting of their intention to do all of this again, for as long into the future as they can.

Yes, that is a fact.  Mitch McConnell plans to do this again.

McConnell said this week, “I think some of our members may have thought the default issue was a hostage you might take a chance at shooting.  Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming. And it focuses the Congress on something that must be done.”

The U.S. economy is a hostage worth ransoming, according to GOP leadership.  This man is the Minority Leader of the United States Senate.  What is crystal clear from this strategy is that the GOP has no idea how to govern – they only know how to campaign. 

I blame the GOP; however, for the GOP presidential candidates it's pretty clear where the blame really lies. You guessed it: with President Barack Obama.

What's interesting, though, is that they haven't quite settled on a common line over whether the President is responsible for the downgrade by being too active or too inactive.  This is standard from the Republicans.  Obama is too weak (he “dithers”), or he is too strong, a ruthless dictator surrounded by thugs with plans to take over private business.  He is both extremes, depending on the audience or the situation.  Sadly, some of the nonsense sticks. 
Arguably one of the most dramatic Democratic dilemmas of 2011 and 2012 is overcoming the realization that Republicans are getting their way on economic policy and then denying any responsibility for the results.  Indeed, it’s a rather extraordinary con: GOP officials see much of their agenda implemented, then see it fail, and then blame Obama when their policies don’t work.  Bush tax breaks in effect for a decade? Check. No more stimulus? Check. Massive debt-reduction package approved? Check. States and municipalities forced to cut back and fend for themselves? Check.

The Republican pitch in response to economic anxiety and recession fears is, “See? It’s time to try things our way.”  What goes largely overlooked is the fact that we already are trying things their way.

Earlier this year, for example, House Speaker John Boehner (R-Ohio) was asked about his spending-cut plans and the fact that the cuts would force thousands of public-sector workers from their jobs. “So be it” the Republican said.

In other words, deliberately making unemployment worse wasn’t seen as a problem. This is a feature of the GOP model, not a bug.

These identical Republicans then complain bitterly when unemployment gets worse, and blames Democrats for the job losses the GOP chose not to prevent. Worse, Republicans then try to persuade the public that “out-of-control spending” is to blame for the weak economy.

It’s quite a feedback loop.

David Frum notes that Obama’s only tax increases — those contained in the Affordable Care Act - do not go into effect until 2014. Personal income tax rates and corporate tax rates are no higher today than they have been for the past decade. The payroll tax has actually been cut by 2 points. Total federal tax collections have dropped by 4 points of GDP since 2007, from 18+% to 14+%, the lowest rate since the Truman administration.  If so minded, you could describe Barack Obama as the biggest tax cutter in American history.

The Affordable Care Act won’t be fully implemented for a few years. Oil production has increased. The right may want to blame Dodd-Frank reforms, but the economy grew, Wall Street went up, and more jobs were created after its passage. Conservatives like to whine about spending, but as Frum noted, the right’s economic theory rests on the notion that excessive spending leads to inflation, and inflation is basically non-existent.

Now, I realize for much of the country, this level of analysis is beside the point. For many Americans, Obama is the president, the president is supposed to be powerful, and conditions are poor. Ergo, blame the guy in the Oval Office, whether it makes sense or not. That kind of thinking may prove persuasive, and may even cost the president re-election.

But for those interested in a credible debate, Frum’s question is a good one. Republicans blame Obama, but can they explain why without baseless bumper sticker slogans?

What the S&P announcement boils down to is this: this was a condemnation of American politics, not American finances. No one seriously doubts whether the United States, the single wealthiest country on the planet by a large margin, will have the financial resources available to pay its bills, but the question under consideration is whether our political system will undermine our ability to be responsible.  One would like to think the ratings agency used some kind of economic/fiscal/monetary measurements, applying a rigorous a test to draw an objective conclusion.  The bad news is that the market panic now demands a calm, adult voice.  Instead, it will be dominated by campaign hysteria as the GOP tries to win back power by shifting blame.

I started with the analogy of teaching my daughter to drive safely.  It is an analogy that works for me, even though I can admit that Obama’s narrative of the GOP “driving the economy into a ditch” and then asking for the keys again has gotten tired for me.  At the risk of using George Bush’s favorite saying, maybe on the economy, the Democrats should have been allowed to “stay the course”, instead of being bullied into jerking the wheel at precisely the wrong time.

I blame the GOP for the downgrade and the resulting economic upheaval.

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