Sunday, January 16, 2011

Federal debt limit -- what are those dumm people thinking?

A Reuters/Ipsos poll marched through the headlines last week with a surprising result:  a 71% super-majority of Americans polled opposed increasing the US federal debt limit when it comes up in the spring.  What??  This is the federal teat we are talking about here, people.  If the debt limit is not raised, the teat dries up, got that?  It didn't matter whether people heard the following warning as part of the question:
As you may know, not raising the debt limit would damage the US’ sovereign debt rating, which is like our credit rating: it would seriously damage our credibility abroad, would make it much more difficult for us to borrow in the future, and would likely push up interest rates.
All that did was move 2% from unsure to in favor.  Seventy-one percent opposed raising the debt limit whether they heard that warning or not.

The reaction from the political right generally took the form of "aha, see, told ya !!"  From the left, it was more like "people are so stooopid."  See for example this page from Democratic Underground, an online news forum where activists aligned with the Democratic party go to vent.  "They have no clue... A sad commentary on our poor educational priorities ... Most people do not understand finance..."  The general assumption among those venting activists seemed to be that people are victims of Republican sound bite politics.  If they only understood, people would support the debt limit increase.

It's true that a different, perhaps more relevant warning could have been included in the question:  "Without an increase to the debt limit, the federal government would need to immediately cut spending by 40%, since the government is now borrowing 40 cents of every dollar spent."  Perhaps if that fact were front of mind, people would think differently.  Or maybe not.  Maybe people really aren't stupid, and understand this issue, and really don't want the government taking on more debt in their names.  As a random illustration, consider the following snapshot of the Yahoo News "most popular" section late on Saturday, January 15:

That is fairly typical.  The world could be crumbling around us, and most of the most popular items would concern Blackbeard's sword or tragedy related to an elephant.  But note the item on federal debt.  Maybe ordinary people really are concerned and informed on this issue.

(It's not true that Social Security payments would suddenly stop without a debt limit increase, since the payroll tax continues to roll in, and before the payroll tax reduction recently gifted to the people by our leaders, Social Security was nearly running at break-even.  It's also worth noting that the warning that Ipsos actually read to half the sample is not even necessarily true.  If the government continued to make interest payments on existing debt out of tax revenue, and continued to redeem maturing bonds, no harm would come to our debt rating or credibility.  On the contrary, both would strongly improve.  Lack of political discipline, and the rapid rise in our debt beyond what we ever could or would pay back, are the bigger threats to our debt rating and credibility.  A sudden drop in supply of new US federal debt on the market would actually raise the price and lower the yields, which is to say lower interest rates.)

Never fear, the debt limit will be raised.  In Washington, which in its own strange way is neither left nor right, but off on its own tangent, the will of the people will not be respected on this issue.  It never is on any issue.  The debt limit raise will be scheduled as a coming episode of the great game the parties are playing, called "2012."

President Obama cares about only one thing:  his own re-election.  He assumes that his chances come down to only one thing:  the economy, stupid.  If the economy is humming in the summer of 2012, and unemployment is falling, surely the voters will forget about this debt limit stuff and put him back in office.  Obama's big gamble is that massive Keynsian-style stimulus running all through 2011, in the form of massive federal deficit spending and massive monetization of that debt by the Federal Reserve, will do the trick.  A lot could go wrong.  In particular, rising prices of food and fuel, combined with the deep unpopularity of the Fed and its quantitative easing programs, could force the Fed to stop or even reverse course.  And Fed Chairman Bernanke is on the record predicting that unemployment will not fall for several years.  Not to mention whatever market crises or black swans that might pop up.  If anything goes wrong, Obama is doomed.

The Republicans, on the other hand, think they own this issue, because their talking points match the public mood as illustrated by the Ipsos poll.  Yet the Republicans could be marching into their own buzz saw.  Two problems:

1) A substantial cut to federal spending would shave points off of GDP and send the country back into recession.  If the GOP does manage to force federal spending cuts in fiscal year 2012 (which starts in October 2011), the election will come down to a blame game regarding the results.  To their credit, the GOP is well positioned for the blame game.  Obama is currently "moving to the center" and plans to "work with both parties" which means working with the Republicans, which means adopting a lot of their agenda.  Obama is famous for ignoring his erstwhile base and catering to the opposition.  If a double-dip recession starts in 2012 due to budget cuts, how can he blame his Republican partners?  When in October 2012 the GOP says Obama is an incompetent big government liberal who stands for nothing, who will disagree?

2)  The favorite big spending category to cut according to the Ipsos poll (and every other decent poll on the subject) is defense.  Among the half of the Ipsos sample who were informed that defense, Social Security, and Medicare are the big three, 54% said to cut defense vs. 23% cutting Medicare and 20% cutting Social Security.  (Among respondents given no additional budget information, the numbers were 47%, 22%, and 19% respectively.)  The GOP establishment, meanwhile, regards the defense budget, the surveillance state, homeland security, and our endless foreign wars as untouchable.  To make good on their spending cut pledges, while preserving endless war and protecting the special interests that control their agenda, they will need to gut nearly all federal programs that benefit ordinary people.

Obama and the Democratic Party establishment are locked into their positions, and nothing can change.  Probably they will lose their game of "2012."  Nothing to be done about that.  So maybe the left should break with the Democrats (face it, they broke with you already), and stop condescending to the people, and join with independents and the honest faction of the tea party to change the rules of the game right now.  Don't raise the debt limit.  Let TSHTF now, and lets have a real discussion of priorities.

I realize that state and local government employees are now the true base of the Democratic party, and a lot of them are counting on the Federal government to bail out the states and cities and save their jobs and pensions.  For those folks, any talk of balancing the federal budget is talking to the hand.  I know.  Recall that the Democrats lost the 2010 elections on the state level even more badly than on the federal level.  The voters are not stupid.  A majority wants state and local government hollowed out, not bailed out.  The Democrats better get that message if they want to hold office in the future.

Obama is the new Hoover, in the wrong historical place at the wrong historical time.  If you like him, let him off the hook that way.  (I don't and I wouldn't, but whatever.)  The country is on a very risky policy path -- hoping that huge fiscal stimulus from federal deficits will goose the economy back to rapid growth, and increase tax revenues, so we can reduce deficits with a minimum of unpopular spending cuts.  If that strategy fails, big pain.  As the Ipsos poll clearly shows, the American people no longer support the current policy path, and you have to admit, it looks a lot like a shagged out debt junkie trying one last big hit of dope before collapsing in the street.  The Republicans are in the position to be the new FDR, using the coming crisis to work radical change on the country.  Stop a minute and picture what that might mean.  Will there even be elections in 2016?

Maybe it's better to quit the drug of debt, and get into rehab now, and let the 2012 elections be a referendum on national priorities given a clear view of where we stand.

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