Let's Not Make a Deal - Page Two
Acknowledge “The Truth”
Anyone who has ever taken a semester of macro economics knows that government spending is one of the key components of GDP, along with consumption, investment, and net exports. We can argue about whether government spending is too large or too small in relation to these other components of GDP, but we really can’t argue the fact that government spending helps to fuel the national economy. This issue was settled long ago.
It is true by definition, and no economist trained in this country would dispute it. It is an idea incorporated into all computer models of the economy. It is the reason why Ben Bernanke, the Chairman of the Federal Reserve, recently warned Congress that cutting government spending too rapidly would shrink the economy. Every economist believes this because there is indisputable evidence that it is, in fact, true in the real world.
Government spending, therefore, is not the unmitigated evil than the Tea Partiers believe. It is the second most important pillar of our economy, after consumption. Yet in the Tea Party belief system, reducing government spending is always good. They have seen The Truth. All the professional economists – men and women who have devoted their lives to trying to understand this vast, complicated system we call the economy – are mistaken.
Since they have been chosen to receive The Truth, the Tea Partiers – like the Bolsheviks before them – believe passionately that they must impose their ideas on the rest of us, those of us still mired in the complicated world of “facts” and “evidence.” Since they have arrived at The Truth through a kind of revelation process, Tea Partiers can’t be bothered to argue their beliefs with empirical evidence. Economic evidence is complicated and subject to many interpretations. Economists routinely disagree. So rather than concluding, as a skeptical person might, that tax cuts sometimes appear to help the economy and sometimes appear to harm the economy and cause bubbles – like the tax cuts George W. Bush implemented in 2001 – the Tea Partiers persist in believing that tax cuts always grow the economy, and they're all good, all the time. Tea Partiers don’t like to get bogged down in arcane arguments about evidence.
This makes the Tea Party belief system, like all belief systems that don’t like to bogged down in arcane arguments over evidence, profoundly dangerous. A tremendous amount of harm can be done by people who over-simplify a complex world and ignore the evidence. This kind of thinking leads to cruel decisions and blind persistence in the face of dumb mistakes.
The United States is not Russia in 1917. Our democratic institutions are strong. All of the Tea Party Republicans will have to stand for re-election in 2012, and they will have to answer for their extremist actions. They will not succeed in hijacking the American state for 74 years, or even for one year. Indeed, they are setting the stage for an overwhelming landslide for President Obama, and a situation in which they are marginalized and the Republican Party repudiated.
Compared to these crazy zealots, Obama will seem safe and compassionate to voters in 2012.
The Dismal Political Calculus
Tea Party Republicans represent about 50 seats in Congress, out of 433 currently filled. Some will not vote to raise the debt ceiling under any circumstances. Others will vote to raise it only if a constitutional amendment is passed mandating a balanced budget, a provision no professional economist supports, because it would prevent the Federal government from using fiscal stimulus ever again. This flies in the face of the accumulated economic theory of the last 80 years of macro-economics. Every Administration since FDR has stimulated the economy through deficit spending, including that conservative icon, Reagan, who ran up the largest peacetime deficit in U.S history by a country mile.
For what they believe are very good reasons, neither the Senate nor the Administration will accept a solution that involves a balanced budget amendment. It would be easier to get Republicans to accept new taxes.
Since at least 40 Republicans in the House will not vote to raise the debt ceiling without a balanced budget amendment, this means, through simple mathematics, that no plan acceptable to the Senate and the President can pass the House without Democratic votes. Since very few Democrats are prepared to support any Republican plan, this means no plan can pass the House unless people change their minds.
The Democrats currently control 193 votes in the House. Of these, about 8-10 are sympathetic to the simplistic economic ideas of the Tea Party. These will not vote to raise the debt ceiling under any conceivable circumstance. There are therefore at most 185 Democratic votes for a centrist plan.
In order to pass something out of the House that could be passed by the Senate and signed by the President, therefore, at least 32 Republicans will need to vote with the 185 Democrats to pass a centrist plan. This is the only solution to the impasse. This will happen – eventually – but no one should count on it happening before August 2nd, or at any other certain time.
The budget ceiling impasse may endure until mid-August or possibly all the way through September or beyond.
The Blowback
The consequences of the impasse will be worse and different than most people have so far imagined. Rather than defaulting on the debt, President Obama can choose to reduce social security payments, Medicare payments, Federal employee salaries, Federal pension payments, and payments to soldiers on active duty, among other payments. While it is possible that some of these particular groups will be spared drastic cuts, all of these groups will suffer to some degree. None will get their full payments in August, I suspect, and the average reduction in payments will have to be around 50%. Interest payments on the debt will be paid 100%.
All Americans will suffer from these drastic cuts. By subtracting $135 billion in Federal payments from a monthly economy of about $1.25 trillion, we will lose almost 11% of our economy in a single month. No recession on record has ever been this sudden or this severe. The downturn that caused the Great Recession in 2008, by comparison, was only about a four percent decline in its single worst quarter, or about 10% over nine months.
Worse, there are likely to be thousands of individuals, living close the edge on social security or unemployment compensation, who will literally die or be made homeless by these payment cuts. If food stamps are included in the cuts, some individuals could actually starve to death in the richest country in the world. The media will sensationalize these stories, and public opinion will harden against the Tea Party.
The Good News
The only good news about this catastrophe is that it will be short-lived. The primitive Tea Party economic ideas will be exposed for what they are, and the nation will change course. Eventually – perhaps in early August, or in September – there will be 32 Republicans in the House who will be willing to vote for the centrist plan, which will cut spending in many areas including entitlements and raise taxes on the wealthy and on corporations.
The impasse will finally be broken when Republicans in the Senate decide not to filibuster the centrist plan. They will, however, vote against it, further tainting their brand.
By the end of September Tea Partiers will become persona non grata in Washington, as both parties come to understand the disastrous consequences of their simplistic ideology. Unlike the Bolsheviks of 1917, the Tea Partiers have no chance of hijacking our state for an extended period. Their ideas are both unpopular and unprovable, and in American politics, public opinion matters more than anything else. After the catastrophe Americans will turn against the Tea Party with a vengeance. Once the noxious Tea Party ideas have been flushed from our political system, the American economy will start to grow again and we will slowly begin to recover from the Great Recession.
Be prepared for considerable chaos and pain between now and then.
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