What Were They Thinking?!?

My nor­mal response to the ques­tion “What was he think­ing?” (or a vari­a­tion there­of) is that there was no think­ing involved. But is it pos­si­ble there was no think­ing involved on the part of the Repub­li­can House mem­bers when they passed the Ryan bud­get? If there was think­ing, what could it be?

All but four of them vot­ed to destroy Medicare, slash lots of spend­ing that peo­ple like, and low­er tax­es on the wealthy! They did this even though there was not a chance in hell of the bud­get becom­ing law. Next year they have to run for reelec­tion while defend­ing this vote. I assume the pri­ma­ry defense will be “There was no way it would become law, so it was safe to vote for it” which, I am sure, will make every­one feel bet­ter about it.

The inter­est­ing thing about the Ryan bud­get is that if it actu­al­ly passed the Sen­ate and the Pres­i­dent signed it, it would make the deficit worse. Why? Because there is no way the “end medicare as we know it” por­tion would remain intact. The spend­ing cuts the bud­get lays out would not remain intact. But you can bet your boots the tax cut for the wealthy would stay.

And the deficit would explode.

The deficit is a seri­ous issue, but it can not be solved by pre­tend­ing that polit­i­cal real­i­ties no longer exist.

Why the Deficit Does and Does Not Matter

Sat­ur­day night I was at a char­i­ty casi­no night. Buy a tick­et, get an assort­ment of chips and try and increase them. I got my ini­tial chip allowance of “$30,000” and head­ed for the roulette wheel. At the end of the evening I had “$740,000” in chips.

This was not entire­ly luck. I used a sys­tem. One chip on odd. When I won, I bet one chip on odd again. When I lost, I dou­bled the bet. So two chips, then four, then eight, etc. Soon­er or lat­er the ball was going to land in an odd num­ber and I would win. (Try this with real mon­ey at your own risk). After a while, instead of start­ing the process with a “$1,000” chip, I start­ed with a “5,000” chip. I raised the ini­tial amount once I felt com­fort­able that I had enough mon­ey to sur­vive a like­ly (i.e. short) los­ing streak. Even­tu­al­ly, I was start­ing with a ““$15,000” bet.

I believe the clos­est I came to bust was when, start­ing with a “$15,000” bet, I did not win until I had bet “$120,000”. So I had lost three times in a row. If I had lost that fourth time, I would have been start­ing over. I did not have any­where near “$240,000” in chips left to dou­ble my bet with again.

What does this have to do with the deficit? As long as there are var­i­ous enti­ties ready and will­ing to buy bonds from the Unit­ed States, then the deficit is not a prob­lem. But when there is no more mon­ey to put back us.…

This years deficit is irrel­e­vant. It might be made rel­e­vant if the gov­ern­ment decid­ed to spend three or four more tril­lion this year (maybe a lit­tle less, maybe a lit­tle more), but giv­en the prob­a­ble deficit, even with no cuts from con­gress, the deficit is irrel­e­vant. Next year’s is too.

The peo­ple mak­ing the deci­sions on whether to buy or not buy our debt are ful­ly aware of the pro­ject­ed deficits. But even so, they still loan us mon­ey. This tells us that the mar­ket­place (where con­ser­v­a­tives usu­al­ly wor­ship) believes that our present deficits are not that much of an issue.

How­ev­er, it is rea­son­able to assume that at some point the total debt com­bined with the pro­ject­ed deficit will become too much for those deci­sion mak­ers and they will start putting their mon­ey else­where. Then we are screwed (just as I would have been screwed if the wheel came up even four times in a row). The mon­ey will no longer be there.

In the mean­time, the eco­nom­ic recov­ery con­tin­ues, slow­er than we would like, but con­tin­ues none the less. Some of the rea­son for this growth is a large fed­er­al gov­ern­ment spend­ing deficit. That deficit is stim­u­la­tive. Con­tin­u­ing eco­nom­ic growth is very impor­tant for the deficit/​debt issue as a strong econ­o­my will do much to ame­lio­rate the problem.

The Repub­li­cans want to slash cur­rent spend­ing which will have a depres­sive effect on the econ­o­my and cost jobs and will have a small effect on the cur­rent deficit and might eas­i­ly increase the deficit over the next cou­ple of years (due to the slowed econ­o­my). It is dif­fi­cult to under­stand exact­ly what the Repub­li­can objec­tive is oth­er than they want to hand­i­cap the eco­nom­ic recov­ery hop­ing for a dou­ble dip reces­sion and that the vot­ers blame Obama.

It is their only hope for win­ning the white house in 2012.

Delegating Powers to the Vice President in the Mubarek Administration

OK, that does not roll off the tongue as nice­ly as rear­rang­ing deck chairs on the Titan­ic. But either metaphor serves in the case of our elect­ed fed­er­al offi­cials and the deficit.

Let us begin with an old chart from the Con­gres­sion­al Bud­get Office via our, ahem, good friend Ross Perot:

This chart is a bit dat­ed, but the curves have not changed much. Future deficits are the result of medicare/​medicaid and inter­est. The last being the same as say­ing future deficits are the result of future deficits. If future deficits can be brought under con­trol, then the inter­est pay­ments will take care of themselves.

Want some­thing more recent?

This is from Feb­ru­ary 25th, 2011. It assumes that the Bush tax cuts will expire and that the Oba­ma stim­u­lus tax cuts also expire. Note that the growth of health spend­ing goes from over eight per­cent of GDP to 12% of GDP while the total deficit at that point is 3.2 per­cent of GDP. So the entire pro­ject­ed deficit in 2021 could be attrib­uted to the growth of med­ical spending.

The Afford­able Care Act (Oba­macare) actu­al­ly includes sev­er­al mea­sures intend­ed to bring down med­ical costs. The CBO grades the Act as low­er­ing the deficit even though they did not take many of the cost sav­ing mea­sures into con­sid­er­a­tion on the grounds that the mea­sures had not yet shown they would work (they were not even law at the time…).

So the only seri­ous deficit reduc­tion effort in Wash­ing­ton today is the Democ­rats defense of health reform. Oba­ma freez­ing spend­ing and the Repub­li­cans talk of cut­ting spend­ing amounts to noth­ing more that del­e­gat­ing pow­ers to the vice pres­i­dent in the Mubarek administration.

Oh yes. If you want to clear up the short term deficits, this chart might prove useful:

For good or for ill, the spend­ing that the Repub­li­cans want to cut is there for a rea­son. Peo­ple like it. That spend­ing is pop­u­lar. War, the Bush tax cuts, and the reces­sion dri­ve the short term deficit.

Even if the wars end tomor­row, the sav­ings there will be min­i­mal. Some­thing else will come along. It always does.

Many of the cuts the Repub­li­cans pro­pose would actu­al­ly weak­en the eco­nom­ic recov­ery and so increase the deficit.

The Bush tax cuts should be allowed to expire. All of them.

GOP Misdirection

Claim­ing to be con­cerned about the deficit, the GOP pro­pos­es 61 bil­lion in cuts in this year’s spend­ing. These cuts will like­ly lead to the loss of one mil­lion jobs and slow the growth of the econ­o­my by 1.5 to 2 per­cent­age points in the sec­ond and third quar­ters of 2011.

There are two things that are absolute­ly nec­es­sary for there to be any hope of a bal­anced bud­get. One of those is a strong econ­o­my. In the over­all scheme of the US bud­get deficit, sav­ing $61 bil­lion this year is noth­ing. Risk­ing a strong eco­nom­ic recov­ery is a lot.

The Repub­li­cans either do not real­ly care about the deficit, or they sim­ply do not under­stand the sit­u­a­tion. The ques­tion is, is the GOP mis­di­rect­ing us or themselves?

The Pendulum Gets Shoved

Back in June of 2009, I post­ed about the “death” of the Repub­li­can Par­ty and who would save it. Today, as pre­dict­ed, the Repub­li­can Par­ty is resur­gent and I read sto­ries of how the repub­li­cans are going to threat­en demo­c­ra­t­ic con­trol of the sen­ate and the pres­i­den­cy. Who will save the Democrats??

The Repub­li­cans!!! With the last elec­tion results being dri­ven most­ly by the econ­o­my, unem­ploy­ment specif­i­cal­ly, the repub­li­can con­trolled House of Rep­re­sen­ta­tives has not yet done a thing to address that issue.

With the nation­al debt stand­ing as one of the impor­tant issues of our time, the Repub­li­cans are con­tent with address­ing it by slash­ing domes­tic non-secu­ri­ty dis­cre­tionary spend­ing, i.e., spend­ing they do not like. In oth­er words, they do not care about the deficit (there is not enough mon­ey in domes­tic non-secu­ri­ty dis­cre­tionary spend­ing to do much for the deficit), they are just hap­py to use the cri­sis as an oppor­tu­ni­ty to cut spend­ing they do not like. (Remem­ber how unhap­py they were when Oba­ma talked about crises pre­sent­ing opportunity?)

Of course, Amer­i­cans like the spend­ing and are still unhap­py with the unem­ploy­ment sit­u­a­tion. If this keeps up, I expect the Democ­rats to win big.

The Certainty of Uncertainty

Uncer­tain­ty seems to be one of the favorite words for repub­li­cans to pull out when they are try­ing to explain why a par­tic­u­lar sit­u­a­tion is bad. Last month they were very con­cerned about the uncer­tain­ty busi­ness had to deal with over the up in the air sta­tus of the Bush tax cuts.

The one cer­tain­ty of this uncer­tain­ty is that it is a load of crap.

In the first place, when was there ever certainty?

Fur­ther, the exten­sion of the tax cuts for two years appar­ent­ly did away with the uncer­tain­ty. Any busi­ness per­son can tell you how he or she only con­sid­ers the next two years when con­tem­plat­ing invest­ing tens of thou­sands, or hun­dreds of thou­sands, or mil­lions of dol­lars. Even if the two years was enough cer­tain­ty, that “two years of cer­tain­ty” only exist­ed for a few days. Then the two years start­ed and now it is less.

And if extend­ing the tax cuts for two years did away with uncer­tain­ty, would not have allow­ing the tax cuts to lapse have also done away with uncer­tain­ty? I did not hear any repub­li­can men­tion­ing that.

Anoth­er exam­ple is the health care reform. It passed. It is law. That is as cer­tain as it is going to get (again, not all that cer­tain, but…). Repub­li­cans have gone on and on about how they are going to undo the law with few specifics about how they would change it. Who is intro­duc­ing uncertainty?

There have been rum­blings from Repub­li­cans to not vote to raise the debt ceil­ing. What might hap­pen if the debt ceil­ing is not raised? Seems like there is plen­ty of uncer­tain­ty there.

There has been enough rhetoric on both sides to sug­gest that it is not beyond the pale that the gov­ern­ment could well be shut down some­time in the next two years if agree­ment on bud­gets can not be reached. A gov­ern­ment shut­down presents all kinds of uncertainty.

Final­ly, soon­er or lat­er, the fed­er­al debt, if allowed to con­tin­ue grow­ing at present rates (or even Bush rates!), will cause sig­nif­i­cant prob­lems for the US econ­o­my. Most agree we are still sev­er­al tril­lion dol­lars away (a few years) before such prob­lems become plau­si­ble, but no one real­ly knows. The debt is prac­ti­cal­ly the def­i­n­i­tion of uncer­tain­ty. But Repub­li­cans con­tin­ue to pre­tend that the deficit can be solved with dis­cre­tionary spend­ing cuts and tweak­ing of enti­tle­ments. It can­not be solved this way. Until the deficit is seri­ous­ly addressed, there is no end of uncertainty.

Happy Independence Day

Bart Gragg points me to an arti­cle about Noreen Evans, an Assem­bly Mem­ber in Cal­i­for­nia. Cal­i­for­nia, as I under­stand it, is in the midst of a seri­ous bud­get cri­sis. Evans is quot­ed in the arti­cle as saying

This mantra out there ‘live with­in our means,’ while it sounds real­ly nice, while it sounds real­ly sim­ple and it sounds real­ly respon­si­ble, it’s meaningless.

My first thought is that Mr. Coupal, of The Howard Jarvis Tax­pay­ers Asso­ci­a­tion, did not give enough con­text for the quote. I found a You Tube video of Evans’ com­ments. She added to the quote above:

Our means are com­plete­ly with­in our control…In good times we rou­tine­ly give away tax­es and in lean times we nev­er replace those tax deduc­tions or close those loop­holes. We con­tin­u­ous­ly bor­row, which is an enor­mous cost that we shift on into future years and we find our­selves now with a deficit, an ongo­ing struc­tur­al deficit that we sim­ply can’t close.

It is not clear who put the video togeth­er, but it is clear it was not done by some­one in agree­ment with Evans. I give cred­it to who­ev­er did it for pro­vid­ing a fuller context.

OK. That appears to be what was said. In my book, giv­en the con­text, Evans is cor­rect (but also wrong). Since the gov­ern­ment con­trols what the means are, to live with­in one’s means is, at best, a slip­pery con­cept. The prob­lem here is that it is still nec­es­sary to live with­in the means, whether it is by increas­ing the means or decreas­ing the living.

My grasp of what is hap­pen­ing in Cal­i­for­nia is slim at best and most­ly ground­ed in Jay Leno jokes (and I have not watched Leno in sev­er­al months). So from here on out I am talk­ing in the con­text of the fed­er­al government.

No one in gov­ern­ment will use the con­trol of the means so that we live with­in our means. 

No one. Not the Democ­rats and not the Repub­li­cans.* I want so much to write:

The Democ­rats vote to maintain/​add pro­grams and raise tax­es while the Repub­li­cans want to cut pro­grams and cut tax­es and some­how this results in lots of pro­grams and low taxes.

But that would not be true. Repub­li­cans say they want to cut pro­grams and cut tax­es, but the empha­sis is cut­ting tax­es and the real­i­ty is cut­ting tax­es. Cut­ting pro­grams just gets lip ser­vice. It is my under­stand­ing that even Rea­gan man­aged to elim­i­nate only one pro­gram in eight years.

Democ­rats can­not raise tax­es suf­fi­cient­ly to pay for all the pro­grams because Repub­li­cans will raise hell and, we the peo­ple vote the Democ­rats out and the Repub­li­cans in and the tax­es get cut but not the pro­grams. Gen­er­al­ly, the Repub­li­cans are hap­py to run with deficits as long as tax­es are low and the deficits are not caused by any new programs.

The Democ­rats run on the issue of need­ed new pro­grams and we the peo­ple agree and vote them in. Pro­grams get added, some tax­es get raised (but not enough and deficits con­tin­ue) and Repub­li­cans run on cut­ting taxes.….

Note that the com­mon­al­i­ty in both sides of the prob­lem is we the peo­ple.

We the peo­ple like our pro­grams. We the peo­ple would of course rather have low­er tax­es than high­er tax­es if giv­en the choice. What’s a con­gress­man and sen­a­tor to do?

Two hun­dred and thir­ty three years ago, fifty six men, rep­re­sent­ing the thir­teen colonies, signed the Dec­la­ra­tion of Inde­pen­dence. Their sig­na­tures appear just below the last sentence:

And for the sup­port of this dec­la­ra­tion, with a firm reliance on the pro­tec­tion of Divine Prov­i­dence, we mutu­al­ly pledge to each oth­er our lives, our for­tunes and our sacred honor.

Their lives, for­tunes and sacred hon­or.

Our con­gress­man and sen­a­tors today are not will­ing to put their own reelec­tion on the line, let alone their lives, for­tunes and sacred hon­or. And there you go. We the peo­ple want pro­grams with­out tax­es and our elect­ed offi­cials are not will­ing to dis­il­lu­sion us for fear we will not reelect them.

Three days ago I post­ed A Sea of Red Ink. My hope expressed there is that by run­ning the deficit/​debt up to unprece­dent­ed lev­els, our reps will then have no choice but to show some back­bone, risk reelec­tion, and fix the problem.

In the mean­time, if you com­plain your tax­es are too high, be sure you include in your com­plaint what pro­gram you would also have cut.

My best to Cal­i­for­nia. I hope they fig­ure some­thing out.

*Yes, Ron Paul would prob­a­bly cut every­thing, but one man is not enough (and peo­ple would want him lynched after their favorite pro­gram got cut).

A Sea of Red Ink

As, I hope, most Amer­i­cans are, I am con­cerned about the fed­er­al debt. Already high at the end of the Bush years, the fed­er­al deficit is now even high­er, and the fore­cast for future years is even worse.

Clear­ly this is unsustainable.

I vot­ed for Oba­ma and I sup­port his agen­da. But at some point the deficit/​debt must be addressed. I believe Oba­ma to be an intel­li­gent man and an astute politi­cian. He sure­ly under­stands the poten­tial prob­lems of con­tin­u­ing to pile up debt. I have to believe that he has a plan.

And the plan is this.* Effec­tive­ly deal­ing with the fed­er­al deficit will not be polit­i­cal­ly pop­u­lar. Pro­grams will have to be cut and tax­es raised. It will take a lot of Oba­ma’s polit­i­cal cap­i­tal to do this. So much so, that it would be dif­fi­cult for him to get his oth­er agen­da items through after deal­ing with the deficit.

Of course, get­ting his oth­er agen­da items through might not leave him with enough cap­i­tal to deal with the deficit. So what to do? By leav­ing the deficit for lat­er, it con­tin­ues to grow to obscene amounts. A year (or two?) from now, con­gress will have no choice but to get seri­ous about the deficit. Democ­rats will have to accept some pro­gram cuts and Repub­li­cans will have to accept some tax­es. They will be push­ing each oth­er aside to cut and raise more than the other.

A guy can dream, right?

*No, I have no inside info. This is com­plete­ly spec­u­la­tive on my part.