Tuesday, August 2, 2011

Losers and Winners in the Debt Ceiling Deal


The market dropped over 2% today, as the debt ceiling deal became law. With federal spending--the last bit of economic stimulus standing--being knocked down, the economy can only follow. State and local government budgets, hit by revenue losses from the Great Recession, are already shrinking. Corporate investment is at stall speed. Consumers have again begun saving more. Even China's and other Asian economies are slowing down, offering less stimulus. Wishful thinkers will latch onto the falling dollar, which will help with exports. But America isn't an exporting nation in the tradition of Japan, Germany and China, and a weakening currency won't by itself make that much difference. The stock market is approaching cold water and icebergs lurk.

Liberal Democrats. The liberal wing of the Democratic Party has been squeezed almost entirely out of power, by a Democratic President. Oddly, the truth is liberals would be better off with a Republican President. When George W. Bush was in the White House, he made no headway with efforts to change Social Security. His big change to Medicare was the Medicare Part D prescription drug program, which significantly increased federal benefits and spending. Democrats tend to unite when faced with a Republican President, and can largely protect their constituencies and priorities. But they have no effective defense against a Democratic President who largely surrenders to Republican diktat.

Barack Obama. He triangulated the political spectrum, and got a deal. But, unlike the congenial Bill Clinton, Barack Obama can't pull this stunt and still schmooze his way back into the good graces of the left. Obama appears to have acted with the hard edge of Chicago power politics, leading some liberal Democrats to seem to refer to him as He Whose Name Shall Not Be Spoken. He had the support of about half the Democrats in the House. But half voted against him, and their votes reflect the views of many of the Democratic faithful. Obama's re-election bid is starting to look like George H.W. Bush's, another moderate president who lost the faith of his party's core and then lost his bid for re-election. Obama leaves many Democrats wondering if he has any goals or principles other than his own re-election. That feeling won't motivate them to line up at the polls.

John Boehner. Boehner's weaknesses as Speaker were never so clearly exposed as during the Sysiphean trek toward a debt ceiling deal. Policy positions are imposed on him by the small number of Tea Partiers in the House. He doesn't dictate, or even hardly influence, anyone or anything. If he continues on his current downward trajectory, there won't be a Boehner Office Building in Washington.

Republicans. The Republican Party is kind of like the mortgage industry, circa 2006. It only looks at upside potential, not downside risk. By pushing through spending cuts now, and more spending cuts in a few months, it has placed itself clearly downrange in the Washington blame game for the impending economic slowdown and has painted a bright red bullseye on itself. Obama and other Democrats can quite plausibly contend that the federal spending cuts that now will hinder economic recovery were forced on them by the Republicans. You can bet that the Republicans on the deficit reducing bipartisan committee prescribed by the debt ceiling legislature will avidly play the role of the Grim Reaper, and in so doing will provide grist for Democratic attack ads in the fall of 2012.

Tea Partiers. People usually learn little from victories. Tea Partiers were victorious this time, although they got much less than they wanted. Having won a victory, but not the war, they will only pursue the same agenda using the same tactics. They won't realize when they go a bridge too far. About half of all Tea Partiers receive benefits from Social Security and/or Medicare. These programs must be cut if Tea Partiers are to see the deficit reduction they claim to desire. Emboldened by victory, they will fail to notice that their point of aim strongly resembles their feet. They will lose benefits they may be relying on, and popularity.

Federal Reserve. Although the Fed has tried to play innocent bystander during the debt ceiling fight, it will come under enormous pressure to provide stimulus taken away by the debt deal. While the Fed won't say so publicly, it's probably already laying the keel for QEIII. Even though such a measure would probably be futile and maybe inflationary, expect it to be launched after a couple more months of bad economic statistics.


Bond market. In the welfare states that 21st Century capitalist nations have become, the biggest welfare recipients of all are holders of debt, especially government and bank debt. They just won another round in Europe, followed promptly by today's debt ceiling deal. But the smart money knows this game can't go on forever. Europe's solution to its debt problem is to increase its debt. That looks like a win-win, but long term is a lose-lose-lose-lose all around. America's debt ceiling deal is really a kick of the can down the road, with the usual Washington solution of creating a bipartisan committee to deal with the big deficits. Whoop de do. Just as the mortgage industry couldn't shift its losses away indefinitely, holders of government and bank debt won't have taxpayers and citizens as patsies forever. Losses in one form or another are inevitable if things remain on today's trajectories.

Liberal Democratic Leaders. In the yin and yang of politics, the seeds of success are sown during stinging defeats. Witness how the Republicans have rebounded from their horrendous losses in 2008. Liberal Democratic leaders need to understand that: (a) they are no longer Middle American (most are, or reflect the attitudes of, upper middle class elites), and (b) they need to find a way to get through to Middle America. Middle America means people who live on $40,000 to $60,000 a year. Most of these people are moderate, and cautious about government. They don't like overbearing government, and that cuts in both directions. An overbearing Republican governor in Wisconsin, bent on not only balancing the state budget but destroying his Democratic opposition, has offended many of the voters who elected him nine months ago. He's delivered badly needed ammunition to labor unions and other Democratic faithful, and revived their flagging spirits. Democrats in Wisconsin had the opportunity to stage weeks of raucous demonstrations in full view of today's 24/7 news media coverage, getting the better of the political debate there. Ten Wisconsin legislators have or will face recall elections--six Republicans and four Democrats. A Democrat has won one. Nine others will be held a week from today. The outcome will be informative.

Liberal Democratic leaders now have an opportunity to rethink their message. With Republicans offering nothing except "no" to government action, the field is left wide open for Democratic initiatives. Democrats have to stop playing defense. The best medicine for a sick economy and large government deficits is a pro-growth program. Tax cuts aren't necessary for growth. The late 1940s, the 1950s and the 1960s, a time when America had a gigantic debt overhang from World War II, enjoyed storied prosperity, even though marginal income tax rates reached as high as 90%. Innovation was rampant--today we may think that improvements to smart phones are a big deal, but remember that the computer as a device was created in the 1940s and 1950s. During the same period, brisk per capita income growth made the American Dream come true from sea to shining sea.

America's transportation systems must be repaired, improved and extended. A transcontinental nation like America needs top tier transportation much more than compact nations like those of Europe. But, today, ours don't even compare. America needs renewable economic resources--i.e., those primary economic activities that perpetuate themselves (unlike homebuilding, which is a secondary economic activity dependent on the health of primary economic activities). Manufacturing is the classic example, and Germany's focus on high quality machine tool work exemplifies the concept of renewable economic resources. America may not have the best lathes, but it has the best geeks. High tech tinkering and inventing should be encouraged and funded. Special scholarship money should be made available to engineering majors and other aficionados of pocket protectors. America's second largest export is entertainment, and protecting copyrights worldwide should be a priority. Maybe the rest of the world's tastes are no better than ours, but if they'll pay for our reruns, why not make a virtue of necessity in a time of economic stress? America's agricultural sector shouldn't be subsidized in wasteful ways, but improvements to our transportation systems and trade negotiations aimed at opening up more foreign markets would assist our highly productive farms. Very few Americans today are farmers, but prosperous farmers buy new trucks and tractors, and lots of computers. Other Americans benefit as a result.

A strong economic growth program may require some shifting of spending away from defense and other large programs, at least for a while, and a renewed battle for tax revenue enhancement. But, it takes money to make money. Let us remember that the Interstate Highway system was initiated during the 1950s, a time of major governmental retrenchment. But it greatly sped up transit times for just about everybody and everything, and was one of the wisest uses of public resources in the 20th Century.

Advocating a strong economic growth program doesn't mean foregoing traditional Democratic priorities of protecting the unfortunate and the underprivileged. What it does is add hope to the Democratic message. Today's Republicans would refuse Oliver Twist another bowl of porridge. That leaves them vulnerable to the political cycle as it comes around.

No comments: