Saturday, July 16, 2011

Our leaders and so-called 'experts' just don't get it!

I'm getting more and more frustrated by the apparent lack of the most basic mathematical and economic knowledge exhibited by our politicians, (alleged) economic 'experts' and journalists. None of them seem to have the faintest idea of the reality of the USA's economic situation (and that of the entire world, for that matter - follow those three links for some very graphic illustrations).

What's even worse is that so many are painting the problem as one of partisan political interests. For example, Megan McArdle, writing in the Atlantic (a journalist whose opinions I usually respect), misses the mark completely when she asks, 'What's The End Game For Republicans?'

Voters are telling pollsters they're going to blame the Republicans for the shutdown. And the spending cuts you're going to do won't even be that popular with the tea party, who aren't much more enthusiastic about Medicare/Medicaid cuts than the rest of the country.

To me that sounds like "huge Democratic victory in 2012". I know, I know--if it's so "great for Democrats", why aren't they urging this course? Well, one school of thought says that they are--and neatly maneuvering the blame onto the GOP, thanks to the tea party's very vocal intransigence. But if that's a little too Machiavellian for your taste, the simpler answer is that this can be lose-lose. If we shut down the government, key social programs get hurt, the economy contracts, and the Democrats have to cut spending in a recession in order to make the budget balance after this little contretemps raises our interest rates. But the fact that the Democrats are worse off doesn't mean that the Republicans are better off. The Democrats can lose while the Republicans lose even bigger.

That has implications, not just for the debt ceiling, but for a whole range of problems. Republicans have a decent shot of taking the White House and the Senate in 2012; by throwing that away with both hands they also throw away their best chance at repealing ObamaCare before it starts irrevocably altering health care markets. They also ensure that any deficit-reduction deal we do post election will be heavily weighted towards tax hikes; give Democrats a fresh crack at all the bits of the Obama agenda that they ignored in favor of passing health care; and probably let them preside over a mid-decade recovery that will leave the GOP in a very difficult electoral position in 2016.

The GOP will have taken a chance at meaningful entitlement reform and a mostly-spending budget deal, and thrown it away for literally no gain. Anything you can achieve by simply saying no, they can undo by simply persuading voters not to re-elect you. And the 1996 experience suggests that this will not be hard for them.

Does that mean that I'm shilling for the Democrats and saying you can never cut spending? Hardly. But you cannot cut spending by 40% in the middle of a recession. Throw out any metaphors you have in your head about families or CEOs. The political system doesn't work like that. Neither voters, nor other congressmen, are children or employees who can be dictated to.

. . .

There is no neat strategic maneuver which will allow you to bypass the American public and cut their government benefits by 40% overnight if they don't want you to. And if you think that the American public actually wants you to do it . . . well, then it's not Washington, DC that's out of touch with the rest of America.

There's more at the link.

What Ms. McArdle is saying - along with a great many other commentators, journalists and 'experts' - is that the two sides have to compromise. Democrats have to cut spending, while Republicans have to agree to tax increases. Unfortunately, they're all wrong, because compromise is no longer going to matter much. Mathematical reality is about to catch up with all of them - and all of us. As Karl Denninger points out (bold, underlined and italic print are his emphases):

This is not about the "ceiling." It is about fiscal sustainability.

Here is the text of the salient section from S&P as reported by Reuters:

"We may lower the long-term rating on the U.S. by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future."

There it is.

Folks, it is time to cut the crap. We must cut the growth of government debt to below the growth in GDP. Since at present the government is providing ~12% of GDP via borrowing,
this means we must cut federal spending by something closer to 15% of GDP, since GDP will contract when we do this (it's the math, and is inescapable) and debt must shrink faster than GDP does, or grow slower than it does.

Incidentally, that means we must cut federal spending approximately in half, double tax
receipts (not rates), or some combination of the two that adds to the same figures.

And we must do it now, because the laws of exponents, which we
cannot change, state that the longer we take to get to the above point the greater the cut in the federal budget will have to be.

In other words we will soon get to the point where it makes absolutely no difference what we do - default will become mathematically inevitable.

This sucks, and I understand it sucks. It doesn't matter if it sucks. It also doesn't matter if Congress likes this or not.

In blunt language it no longer matters whether there is political will to act as is required. Arithmetic does not care if you like the answer that it provides.

I have been warning of this outcome for four years, and saying that time, while available, is not unlimited.

We are now out of time.

Mr. Denninger speaks the precise, exact and literal truth. Mathematics does not lie. Arithmetic does not mislead. We've been feeding the debt monster for (literally) generations . . . and now he's grown too big for his enclosure, and busted out. We've got to kill him, or he'll kill us, economically speaking. There's no alternative.

It no longer matters whether Democrats and/or Republicans want to "compromise". Spending cuts alone will no longer solve the problem. Neither will tax increases alone, because no matter how you manipulate the figures, it's simply not feasible to raise the amount of tax necessary to deal with the problem. It doesn't matter whether either option is politically popular or not. Both are necessary. If we choose to ignore that truth, it will - very soon now - rise up and slap us in the face.

It's too late to put a bandage on our economic wound. It's gone septic, and the infection is killing us. Surgery is our only option.

We will have to cut spending, and we will have to raise revenues - if not by raising actual tax rates, then by some combination of closing tax loopholes, removing taxpayer subsidies, and reducing or eliminating tax allowances and deductions. Both options - cutting spending and raising revenues - are essential. They're two halves of the same coin. That coin has to be large enough to pay down the immense debts we've accumulated, and bring us back to financial stability. If politicians won't cut spending and/or increase revenues, they're merely condemning all of us to an even more parlous financial future when the mathematical chickens come home to their inevitable, inexorable roost.

Why can't people - particularly politicians -
acknowledge reality
when it's staring them in the face???

It's like Nero fiddling while Rome burns . . .

Politicians! Grrr!



trailbee said...

Got a letter in the mail today from the RNc asking for another donation, which they will match. The entire four pages from Reince Priebus, the Chairman, was loaded with stroking my ego and lip service.
No, they do not get it. Neither party is ready to do some serious surgery because both are afraid that they will lose in 2012.
At this point, the Prez can buy the WH next year and move it to Chicago with all the money he has!
So, why worry, GOP? Step in and do something meaningful, PLEASE!
Commit to those principles you're always throwing out there and bragging about. At least you will have done SOMETHING! We will, honestly, applaud you.

Quizikle said...

Re: "... after this little contretemps raises our interest rates."

Don't you see this game as a method to "force" interest rates up in a way where Coke or Pepsi can blame the other for something both Coke and Pepsi are responsible for and have no way to prevent?

Inflation's going up - hard and fast. It's just what triggers it and when. Look at an economic history of the '70s.