Everyone knows what I'm referring to with the "Debt Deal", I hope. But before I get into this discussion, let me outline the factual provisions of it so that all readers are on the same page, rather than basing their reaction to my views on "facts" fabricated by pundits.
- The debt ceiling is raised $900B, which means the Federal government can add that much to the national debt before it needs to be raised again.
- Between $900B and $1T in cuts to Federal deficit (DON'T SAY "SPENDING") have been made, distributed the following way:
- $3XXB in military spending.
- $3XXB in discretionary spending (this entails everything that is not military or entitlements
like Social Security/Medicare), specific cuts going to education and trasportation.
- $3XXB in projected interest savings on debt. This is what makes "deficit" different from
"spending". By raising the ceiling less than requested, implementing other cuts, and
counting on less borrowing in coming months as the Iraq and Afganistan missions draw to a
close, the government projects it would have spent this money on interest on loans to pay
for what has been cut out. It isn't a "made-up" cut the way some far right pundits claim,
but the numbers ARE very approximate as exact projections both on operating costs of
government and the costs of borrowing are almost impossible to make.
- The government is projected to add $900B to the debt and hit the debt ceiling again in December of 2011. At that point, the debt ceiling will automatically go up another $1.4T, but an additional $1.5T in cuts will also kick in at that point, approximately $500B a piece coming from military and SS/Medicare. To avoid this pre-determined cut package, Congress can vote in an alternative legislation by the time we hit the ceiling again, but that legislation has to reduce the deficit by a matching $1.5T; they can accomplish this through cuts, tax hikes, or however else. The Commission to come up with this alternative package will consist of 12 members of Congress, 3 from each party from each House, and the prospect of "painful" cuts to the military and entitlements - considered sacred cows by Republicans and Democrats, respectively - is supposed to motivate them to compromise for a better deal.
- There are other provisions and complications, but for the purposes of this post, I'll stop there.
In this post:
- What does the debt ceiling deal REALLY do?
- Who is unhappy about it? Who should be?
- Political and economic projections as a result.
So, what has the debt ceiling deal really accomplished?
The short answer is - absolutely nothing. In the weeks leading up to the final compromise, Americans could not tune into any source of mass-media without being bombarded with doomsday projections about what will happen if the government were to go into default. These included the usual ignorant hysteria of "it'll effect military families, seniors on social security, and 'hardworking' Federal employees" that we hear each time a government shutdown looms, but also an added peppering of macro-economic predictions about a tumbling market, a dowgraded credit rating, and even a plummeting dollar. Before we examine these projections, here are the inconvenient facts:
1. Most economists agreed that the actual consequences were impossible to predict, and could only speculate on both the nature and extent of any possible result. Specific economists with a colossal vested interest in avoiding a default - such as Federeal Reserve Chairman Ben Bernake and Treasury Secretary Tim Geithner - went into vivid and horrifying details of the worst case scenarios, but not even these hysteria-baiting profiteers ever went beyond saying such scenarios were guaranteed or even likely. In fact, they avoided discussing probability like the plague, focusing qualitatively on all the ways the world "could" end. As a scientist, I'm not scared of anything until someone can tell me how likely it is to actually happen; and when someone with doomsday projections avoids that topic, they are most likely a con artist.
2. In non-speculative reality, a default is similar to a shutdown. The government still has revenue - money from taxes - but it cannot borrow any more until the debt ceiling is raised, making it short but not completely without funds. In this situation, executives such as the Treasury Secretary or the President have to make the call who to pay and who to issue IOUs to, with all the usual classes as options for the chopping block:
- Recipients of government-paid incomes (social security, active military and veterans,
Federal employees of all sorts).
- Government contractors of every kind (military, academia, healthcare providers who take
medicare, social service providers with Federal grants, etc.)
- Stimulus and subsidy recipients, such as agribusiness and lenders who give subsidized loans
for various purposes.
- States that receive grants and funding for expenditures that fall into any of the classes above.
- People the government owes money to - banks, foreign governments, bond-holders.
3. Whoever wasn't paid WOULD be paid once the government could borrow money again, their obligation wouldn't simply be forgotten, and the executives could make the call to pay people partially and pay the difference later.
4. The government would NEVER refuse to pay the mandatory payments on the debts it owes, although in this situation it may go down to minimum payments where it has the leeway to do so, much like people can do with credit cards. I discuss why below.
Hopefully, these facts make it evident why the "poor government-dependent denied his paycheck" doomsday projection is absolute hogwash. Politicians always focus on the threat to "seniors on social security", "military personnel", and "hardworking federal employees" because these are classes voters will relate to. If Harry Reid or Peter King came on TV and said the threat of a default would mean multi-million dollar corporations that produce weapons and oil, grow corn-fed cows, or own government debt has to wait a few weeks to receive its millions in tax-funded payments, Americans would be happy about a shutdown or default rather than scared of it. What they neglect to mention when trying to elicit sympathy, however, is that most Federal spending in the US goes to large corporate interests, not sympathy-deserving military families, seniors, and Federally-employed service workers.
- Those of you in the military know that military personnel aren't paid worth squat. Our military expenditures are colossal, but what's expensive about the military is fuel, supplies, research and production on new weapons and systems, and care of the wounded - all things that are privately produced by a gravy-train of Federal contractors at prices that would make Bernie Madoff blush. To an extent, this includes military BENEFITS - money paid on behalf of the military to health care and housing providers, educational institutions, and so forth.
- Other than the direct benefit of social security, very few civillian expenses of the Federal government aren't paid to corporations either. Medicare is essentially a voucher to contract with a private health insurance provider that then pays for a private health care provider, at costs to be determined by both and the recipient being indifferent that they are tax-funded (and then we wonder why these costs keep growing). Student loan subsidies, as well as the recent onslaught of stimulus to homebuyers, start-up businesses, and so forth, are also nothing more than a handout to corporate banks. The borrower never sees that money; the government gives it to the lender on his behalf, creating the illusion that without said subsidy, the borrower wouldn't be able to afford it. It never occurs to the borrower that without the subsidy, the lender would face the choice of going bankrupt or selling his services at affordable prices because so few borrowers could work with him otherwise. In most cases, Federally-funded benefits distributed by State governments follow this same paradigm.
- Then there are direct payments to the rich and powerful, such as oil and farm subsidies, corporate welfare in the form of various massive tax deductions, and so forth.
Various profiteers on the list above have servant politicians in different parties and different levels of government, and the last choice any politician wants to make is whether to lose their campaign financing from whichever of these has funded them or electoral support from any class of government-dependent individuals. In a real shutdown situation, the government would not have to stop paying anyone that wouldn't starve if they weren't paid for a few weeks, but this is contrary to the self-interest of politicians and hence they try to avoid it by making sympathy-deserving classes look threatened.
However, despite no military family or senior on a fixed income honestly being threatened by a shutdown or default, such an event would have macro-economic consequences - although their magnitude is unclear as economists have pointed out. The various recipients on the list above also make up a significant chunk of both private employers and corporations in which private investors own stocks, so a sudden freeze on payments to them sends a ripple effect through the economy - contributing to less buying in the short term and possible unemployment in the long term, and an unstable and hence plunging stock market.
The threat of a Federal credit rating downgrade is related to this as well. As with an individual's credit score, the rating agencies measure the government's projected capacity to pay its debts, and governments with lower ratings have to borrow at higher interest rates because they are less trustworthy borrowers. Refusing to pay existing debts is an automatic downgrade, which is why the government would continue to make the payments on its debts. Beyond this, factors that effect this capacity are income, stability, and existing expenditures and debt, all factors the make the credit rating more dependent on the economic situation at large than on a default; the rating agencies said there was a chance they would downgrade the US whether or not we went into default. Our economic system is stimulus and subsidy dependent, as described above. It is absolutely at the government's discretion to change this condition, but short-term proposals were limited to spending cuts and tax-hikes. Cuts to stimulus and subsidy supply threaten to increase unemployment and close dependent businesses, reducing revenue. Tax hikes cause rich and powerful interests to tighten their wallets and reduce production or move it overseas, also driving unemployment up and net revenue down. You've probably heard a million different proposals for how to institute either cuts or hikes but prevent these fallouts, but these fall under different ideas about changing the system, none of which had any real chance of clearing the political stalemate. This stalemate itself was a secondary threat to the credit rating, as unstable and indecisive borrowers are viewed as riskier.
Looking at the factual provisions of the deal described above, this discussion has hopefully made it evident why it accomplished absolutely nothing. There was no "poor, threatened paycheck recipient" to save by a last-minute deal, so that point is moot. The provisions are very short-term and force us to return to the same stalemating instability in a mere 3-4 months, so while we may have avoided the credit rating downgrade, this is likely to be temporary. The provisions haven't changed the system by a drop; but they have made significant cuts to heavily stimulated industries such as military contractors, education, and transportation, and threaten more cuts to these and other similar industries or, less likely, tax hikes. The plunging stock market is a result of both these real and threatened further cuts - something the politicians claimed a last-minute deal would avoid, and the cuts continue to threaten our credit rating, but I remind you tax hikes would not threaten it less.
So, who is unhappy about this situation, and who should be?
The Center:
In several posts about 8 months ago, I pointed out the erosion of party lines following the 2010 elections and the virtual lack of difference in economic terms between mainstream Democrats and mainstream Republicans. The fact that the House vote on this debt deal split the Republicans about 60/40 and the Democrats 50/50 should be sufficient evidence that my prophecy is coming true, but even these splits overestimate the power of the center.
Essentially, both center Republicans and center Democrats represent Keynesian economics, the very subsidy and stimulus dependent system described above, and you may skip this paragraph if you are familiar with how it works. Keynesian economics is a mixed model, one that allows free-enterprise but insists the government steps in with relatively high taxes to invest with stimulus and subsidies in areas it determines need help or whose growth it determines benefits society as a whole. This is the system most of the Western world has employed since the period following WWI, and much of the global economic collapse is attributable to its inherent unsustainability. Without dipping too deep into economic theory, government makes a piss-poor umpire of where to invest money - it is prone to inefficiency and inaccurate information, and it is also prone to sabotage by special interests rather than investing in a way that honestly serves the public good. Hence, over time, Keynesian economics makes the economy less and less efficient, forcing the government to become more and more involved in what is still a free-enterprise system. We have simply reached a point where it cannot become qualitatively more involved, and has destroyed the efficiency of the existing system.
Center Republicans and Democrats really only differ in how they want to preserve the system described above, roughly falling into the categories of Republicans wanting to cut direct benefit investments and increase business investments, and Democrats wanting to raise taxes on the rich to preserve direct benefit investments. The fringes in both parties, on the other hand, want to abandon the system of Keynesian economics altogether, although they are as different in their ideas of what to put in its place as they are similar in their hostility toward it. Together, these fringes have managed to keep the center from reaching a deal that preserves it, forcing it at the last minute into a half-deal that, as I discussed above, only looks like it preserved it on the very surface. Hence, the center politicians in both parties who put together this deal and the disproportionate amount of rich Keynesian profiteers (banks, military contractors, health care providers) that side with the center are rightfully angry about the way it went down, because it virtually guarantees the system will be derailed. However, neither these politicians nor their special interests deserve a drop of sympathy. They have fed upon the inefficiency of this system to profit off irresponsible investments that take resources away from the lives of everyday Americans for decades, and it's about damn time the warranty wore out on their panic-machine that makes people feel we couldn't do better without them.
The Right Fringe:
I'm cautious about referring to this fringe as the Tea Party, because it is in fact an odd concoction of fiscal hawks such as libertarians and stalwart conservatives, but also a small contingent of neo-cons dead set on preserving excessive military funding as it is evident the center has largely abandoned this interest. In any case, that neo-con contingent notwithstanding, this fringe wants to see Keynesian economics abandoned in favor of a pure free-enterprise, or capitalist, system. Those of you who know me at all should know that economically, my own views are not only with this fringe but as extreme as this fringe can possibly get, although I bitterly oppose them on social issues with the exception of the libertarians.
Many myths peddled about this fringe by the center-left that hates it with a passion are actually true about the center-right rather than the fringe. This fringe does not want to see entitlements reformed, cut, or saved, it wants to see them ABANDONED, but in political practicality it wants to see them phased out so as not to leave recipients who currently depend on them out in the cold. Similarly, this fringe is bitterly opposed to all subsidies and stimulus, including corporate subsidies and tax loopholes, and it wants to account for the resulting loss of investment by minimizing the functions of government so that more efficient private investment can step in. Government spending accounts for a large fraction of the economy because private industries who receive federal subsidies are impossible to compete with by those who do not, allowing them to be inefficient and a drain on the economy as a whole. Reducing stimulus payments to them within a Keynesian system in which many depend on them may be damaging, but eliminating said payments altogether would force them to be more efficient or go bankrupt to make room for more efficient providers through competition. The tax cuts this fringe endorses would be funded by said reduction in government functions, and it wants a reformed tax system that eliminates loop-holes and corporate welfare (both are types of stimulus), but that is also flatter because actual 40% taxes without loopholes would bankrupt anyone they are levied against in a heartbeat. This fringe does have some corporate sponsors, but these are largely industries that the center has abandoned or threatened to abandon as stimulus recipients in the Keynesian system, and who now need a free market system or they will be swept aside by the new subsidized classes within a decade. Interestingly, some of these are classic Keynesian profiteers such as the makers of traditional combustion engines, who are now threatened by the government's obsession with investments in "clean" and "renewable" energy.
This fringe is largely unhappy about the debt deal because it feels said deal does not go far enough. While I admire their passion, I say these people need to rediscover scientific practicality. They had the votes to stalemate the system with the left fringe on the other side, but they certainly didn't have the majority to get things to go their way. The Keynesian system has been damaged irreparably and its derailing has been almost guaranteed by this silly deal - the same thing all the pre-suppositional center-supporters are weeping over like it's a bad thing. What more could we opponents of Keynesianism possibly want? Yes, I know the answer, the right fringe wants to build its own system rather than have to compromise with the left fringe after the old one has fallen apart; but we could not have destroyed it without the left fringe, so regardless of how we feel about said fringe, we have to take that fact into consideration.
The Left Fringe:
Sometimes inaccurately called "Progressives" as Progressivism refers specifically to the Keynesian government investment in private industry that allegedly performs a public service, this political affiliation is largely hostile to private enterprise. It sees the failure of the Keynesian system as attributable to the excessive self-interest of the entrepreneurs affiliated with both the center-right and the center-left, and believes the government could efficiently perform the functions it currently has if it monopolized not only their funding, but their delivery. I am cautious about calling this fringe "socialists" because they don't believe in a fully government-run economic system. Rather, they place their faith in a Western European model where "essential services" such as banking, health care, and education, are both funded and operated by government with a "public good" motive, funded by high taxes on other industries which remain private.
As with the far-right, many myths peddled about this fringe are fabrications of the center right and actually true about the center-left but not the fringe. They are not on the campaign payroll of any corporation involved in public service provision as their ideology clearly suggests eliminating said corporations altogether; a public option to compete with private health care in terms of both insurers and providers that would undoubtedly drive private providers out of business being one example. Banks fear this fringe like the plague as its proposal is to cease them and their functions in favor of a government-operated central bank. This fringe is no friend to any energy company as it would not stop at investing in clean or renewable energy, but have the government take over its production and distribution. All of these expanded functions would be funded by higher taxes on other industries, and this fringe generally supports a globalistic approach to foreign policy which makes the US march in line with the orders of the UN and other supernational institutions, based on which it calls for massive reductions to military funding, making it no friend of the military-industrial complex.
As should be evident, at least in theory, this fringe is for reforming the system by eliminating the profiteers and making government investment more efficient and accountable. Again, those of you who know me at all realize I think this idea is a naive fairy-tale. Even without the profiteers' self-interest in the mix, the inherent inefficiency of top-down economic decisions would remain a colossal problem, causing runaway taxation to keep funding the growing costs of public services and eventual bankruptcy as revenue producers leave for lower-tax locations. THIS effect is what is bankrupting the countries in Europe that many in this fringe present as economic masterpieces - France, Greece, Italy, Ireland, Sweden. The elimination of profiteers is also a fairy tale in itself, seeing as every government service would still require the contracting of private services - pharmacy and medical equipment for health care, for example - unless the system were completely government-run, in which the inefficiency would bring bankruptcy almost instantly. Finally, trust in globalism is less of a fairy tale and more of a sick joke. International institutions are not trustworthy as 2/3 of the countries represented in them are run by violent criminals who have never won a fraud-free election and do not even begin to represent the interests of their people. While I in no way endorse the reprehensible imperialism on neo-cons, the US equally cannot place its balls in a jar and hand them over to the representatives of the Ghadhafis, Assads, and Putins of the world, because these people are in turn not answerable to anyone. However, the bubbling sentiment of agreement with this fringe on the left is evidence that the faith in Keynesianism of all the do-gooders who believe in world peace and collective prosperity has expired, and they now see the Keynesian profiteers of the center as part of the rich self-interest they abhor.
This fringe is furious about the way the deal went down because they once saw Obama as one of their own and many of them continue to believe the bulk of the Democratic Party agrees with them. Their naive wishful thinking gave them the impression that the country was moving toward the collective fairy-tale they envision, and this event has painfully derailed that fantasy. Nevertheless, the left fringe is as much a victor in this as the right fringe, having brought about the nearly inevitable demise of a system they no longer believe in. Like the right fringe, they should face the reality that once the center is too small to matter, they will have to compromise with their opponents in the other fringe. In this case, the enemy of my enemy is my unlikely, awkward, temporary ally, but that alliance must continue to hold until the monster in the middle is finished.
Political and Economic Projections Based On This Situation
I cannot make any sort of prediction about the outcome of the next debt ceiling debate in a few months, but I can almost guarantee it will be the final resting place of the Keynesian system, and this is what makes me happy about the debt deal because I absolutely despise this system and am thoroughly scientifically convinced its effects are 100% harm and 0 good. Should Congress be unable to reach a deal, or reach a halfass deal the way they did this time - very real possibilities because the fringes will continue to stalemate, and will behave even more radically as this debate will lead into the primary elections in which they face the center - the guaranteed cuts to military and entitlements that kick in as a result will kill the system instantly and painfully. These cuts will break stimulus enough for the industries to cease functioning, resulting in a chaotic and unpleasant - but short - transition to a different system, the details of which will depend on further economic developments. Should Congress reach any sort of deal, the cuts or even tax hikes this culminates in will make the system less - not more - stable, bringing back the debate within the next 2 years in a Congress that will in all likelihood have more representation for the fringes and make another similar deal simply impossible.
As for political predictions, I'm quite convinced voters will punish the center like a redheaded stepchild in 2012. The angry fringes represent angry partisan bases on both sides, and these bases are angriest at the center politicians in their own parties who voted in favor of this deal. The far left is furious with Obama and Reid; the far right with McConnell and Boehner. Come primary season, centrist incumbents will begin to drop like flies in both parties, making the Tea Party's victories in 2010 look tame in comparison. Mitch McConnell, specifically, has likely signed his own political death sentence by brokering this deal, seeing as he is up for re-election and from Kentucky, the same state that elected Rand Paul to Senate in 2010, and whose Republican Party gave Paul a landslide victory over his opponent endorsed by none other than McConnell himself. If that's not a prophecy, I don't know what is. In the general election in 2012, partisanship is likely to prevail and the balance of power is not likely to shift by much in either direction, but the primary standoffs are likely to make both fringes swell in numbers, and fringe candidates from one party are likely to destroy centrist candidates from the other where they meet, because base endorsement from centrists is likely to go to third parties and independents, tipping the balance in terms of votes, volunteers, campaign funds, and so forth. I was beginning to buy into the idea that Republicans are too divided and their candidates too fringy to take down Obama in 2012, but in light of this event Obama may just be destroyed by this last effect I described. The far left now adamantly hates him, and all that is required for his demise is a semi-serious third party or independent run on the left that takes away 4-5% of his base votes and a lot of volunteers. If you think this is a far-fetched possibility, just look at 1992, and 2000.
