Two Years of Gridlock

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Recently by Gary North: Judgment Days: November2and3

On November 2, Americans will go to the polls and decide which political party will control Congress. It is possible that neither party will. The House is expected to go Republican. The Senate is too close to call.

My favorite race is Dr. Art Robinson’s. Human Events, the conservative website, calls his race one of the top ten potential upsets in the House.
Ore.-4: Scientist and scholar Art Robinson is raising big money and attracting independent expenditure support in his raging battle with 24-year Democratic Rep. Peter DeFazio.

Robinson says he will vote with Ron Paul. That means he will vote “no.”

If elected, he will be the only scientist in Congress. He is the scientist who organized the petition signed by 31,000 scientists against the claim that global warming (if it actually exists) is caused by anything humans do.

He is convinced that the United States is going to be dwarfed economically by Asia, because of today’s Federal regulations on energy production.

He is also an opponent of government subsidies to science. He thinks the free market is the source of productive scientific research.

Robinson is also the creator of the Robinson Curriculum, a $200 K—12 home school curriculum that a family buys only once for all of their children.

He also runs a scientific research institute and a sheep ranch.

He has the overwhelming support of rural voters, but his opponent has always had the support of Lane County, a Democrat stronghold and the location of the University of Oregon.

Now, if there is a torrential rain in Lane County on November 2. . . .

Win or lose, he says that he will produce a training course on how to run a political campaign on the cheap. If you want to sign up to receive word on this course, and also if you want to donate to his campaign, go here.

OVER THE FALLS

What is interesting is the possibility that the 2011 House will have a new breed of Republicans like Robinson: serious budget-cutters.

That was what the Republican Party promised in 1994 in its “Contract With America.” But Clinton called their bluff on the budget. They capitulated. He never had any trouble with them again on the budget. But he avoided wild spending. He even ran a budget surplus (if we don’t count the Social Security deficit as a deficit). So, the voters got part of what the Republicans had promised, sort of. The House did kill Hillary’s health care reform.

Once again, there are some Republican House candidates — newcomers — who are promising to vote no on spending. A lot of incumbents have gotten religion . . . at least while Obama is still in office.

This time, the budget is visibly out of control. It’s not 1994 any more. The Republicans started the deficit disaster under Reagan. That ended the myth of balanced budgets under Republicans. Bush II dramatically increased spending, and the Democrats voted with him. He did not veto one bill in his first term. Then the Democrats extended Bush’s deficits under Obama, with the Republicans voting against this, knowing that they could not stop the bills, so Obama would be held responsible.

We are now headed over the falls. Everyone can hear the roar of the falls. No one knows how to get the national canoe over to the shore. We all want off, except for Paul Krugman and the Keynesian crazies who think we should paddle faster toward the falls.

On November 2, voters are going to determine which politicians will get a chance to paddle the canoe.

My assessment is that there will be two years of gridlock. That will keep the government from paddling even faster toward the falls. But even with gridlock, we will still be headed toward the falls.

The voters have sensed that the deficits are a threat. They opposed the Big Bank Bailout in 2008. They opposed Obamacare. But Congress ignored the voters. It voted for $1.5 trillion in bank bailouts and economic stimulus, and then voted for Obamacare. The Republicans got the bailouts rolling in late 2008, but then switched sides in 2009 for political positioning. But Bush’s prescription drug law is a bigger budget drain than Obamacare is going to be. The voters liked the prescription drug subsidy.

Voters got the nation into this canoe and allowed Congress to start paddling a long time ago. Voters could not hear the falls. Anyone who looked at the map of the river of red ink could see where we were headed, but both parties had an incentive to keep this map away from the voters.

The nation is divided. No one knows which budgets to cut. The special-interest groups are well organized. “Don’t cut here. Spend more.” The cost-cutters run for office on a platform: “We need to cut budgets, but I won’t say which.” So, nothing ever gets cut. The budget deficit gets larger.

Obama will not propose any more major spending programs if the House goes Republican. He has shot his wad. Change is over. Hope is over. He is worried about this slogan:

Change Back 2012

FISCAL HEALTH CARE

The steady build-up of Federal debt is a cancer. The politicians have kept telling voters, “Don’t worry about that lump. No need to go through surgical removal now. Wait. It will go away on its own. Or we’ll find a cheap, pain-free cure. New techniques to fight cancer are just around the corner. Trust us.”

If there are no new big spending programs, we are still threatened by fiscal cancer. The automatic spending increases are sufficient to keep the deficit at $1 trillion a year for the next decade. This assumes that there will not be another economic recession. But there will be. Maybe two.

So, the voters are not going to get what they want — or say they want — in the next two-year term of Congress. Congress will not revoke Obamacare. The House Republicans may propose a bill to revoke it. This would be good politics. But it will not pass the Senate. Even if it does, Obama will veto it.

This means that Federal spending will not be brought under control. The deficit will be funded by money that could otherwise have gone into the private sector. The bills keep coming due, and investors, including foreign central banks, keep offering to let the Treasury roll them over.

The economist asks: “At what price?” This question includes: “At what interest rate?” But it also includes this: “At what loss of productivity?”

Treasury interest rates are low. This lets the government roll over its debt at low rates. This is what has led Japan to extend its deficits for two decades. The investors pay for these deficits. They re-finance the rolled-over debt, year after year, decade after decade. But the result has been a lower rate of economic growth for two decades. That has been the concealed price of Japan’s fiscal deficits.

What is the problem with Japan? This: it is deeply Keynesian. The best and brightest young men who wanted to be economists came to the United States to study economics. They went home committed Keynesians. They have only two answers for slow economic growth: (1) large government deficits; (2) central bank inflation to buy government bonds. The Bank of Japan has been conservative, refusing to increase the money supply, but private investors bought. So, the government has run up deficits.

Why didn’t interest rates go up? For the same reason they have not gone up over the last 12 months in the United States. Commercial banks refuse to lend. They build excess reserves.

The result is low economic growth. The Japanese economy is not in a permanent depression, by any means, but it is not a high-growth economy.

It is now aging. This spells trouble in the future. Old people don’t save as much. They liquidate. They need income. They cannot get it by owning Japanese government debt. Rates are too low. So, they must sell assets.

The Japanese government pays its debts. It is legendary about this. This is a matter of national pride. So, the debt burden is assumed to be safe. Over the next few years, this is a safe assumption. But there will be a crisis at some point. The debt will be too large to roll over at low rates. At that time, Treasury interest rates will rise, and the Japanese economy will go into permanent recession.

This problem is not unique to Japan. Europe faces the same problem: an aging population. Europe postpones the day of reckoning by allowing high immigration from Muslim countries. Japan does not allow much immigration.

So, the deferral of the day of reckoning tempts politicians to stick with the same old Keynesian policies of continual deficits. The final bill keeps expanding. There seems to be no cost to this. The cost is deferred.

Let me use an analogy from the mortgage mess. As rates fall, home owners are tempted to re-finance their homes. There are fees for this. But if they keep tacking these fees onto their total mortgage, they can continue to re-finance. It looks as though they can do this at no painful short-term cost. But there is a cost: the increased amount of money owed on the mortgage.

This threatens the home owner, but he pays no attention. He thinks he is able to gain this funding indefinitely. But, as he ages, there is a problem. He finds that he must leave the work force. He has no equity. He wants to cut his expenses. How? By selling his home.

To whom?

The national debt is a mortgage issued against expected future revenues. If Treasury interest rates rise as a result of anything — fear of price inflation, fear of government insolvency, fear of a tax revolt — the size of this burden will rise. The interest payments will add to the total debt to be rolled over.

At some point, there will be a default. This is going to occur all over the Western world, which includes Japan. Call it “going over the falls.” Call it “metastasized cancer.” Call it “the Great Default.” Whatever you call it, it means the same thing:
Federal checks will bounce, or
The central bank will print, or
The geezers will get stiffed.

The political ramifications of this will be comprehensive. There will be an inter-generational war over the flow of funds. I think the workers will win this war.

WORKERS UNITE!

I think the workers have begun to unite. I think this is what the Tea Party is mostly about. These people have seen the handwriting on the wall. They are determined to stop any new Federal spending programs. Any politician who does not understand that the politics of spending has changed will get the message next week.

I think the Tea Party represents a larger minority of voters who sense that something is wrong, but they are not sure what. They have believed the government all their lives. They believed that the government can overcome a recession, though they are not sure exactly how. They have allowed the Congress to write checks against their future income. These people are common workers.

The people whose futures are really at risk are the top 20% of income earners. They pay most of the Federal taxes. They invest in Treasury debt. Their assets are the most easily confiscated. But they trust the system. They went to college. They studied Keynesian economics. They took American history classes that taught that Roosevelt saved capitalism from itself. They believe it.

They also believe that the government-managed economic system still works well for them. They are mainstream Republicans and Democrats. They still keep the faith. They regard Tea Party types as wild-eyed amateurs who may capsize the canoe.

The Tea Party types will be the new kids on the block in the House. The mainstream types will outvote them. But there is great risk for mainstream politicians. These newly mobilized voters may represent a political turning point. It may be that voters have finally decided that it is time to put on the brakes.

This will do no good. The Federal deficits are built into the system. They are in the fiscal pipeline. To reverse this by cutting programs would be to alienate well-funded and well-organized political elites. It will not be done.

But voters can pressure new Congressman not to vote for new boondoggles. It will be more difficult to absorb them into the Good Old Boy network. The Internet lets voters monitor their elected representatives. It is harder to hide.

The workers have the votes. If the Tea Party types appeal to the self-interest of voters in holding back spending, they will be able to outvote the mainstream politicians when the latter propose new spending programs.

CONCLUSION

We are still headed for the falls. The programs already on the books will bankrupt the Federal government. But there is now a movement that is saying “no more.” We will see if the new Congressmen can hold the line and be re-elected in 2012.

At some point, there will be a tax revolt. This could be the preliminary signs of it. We will not know until late November 2012.

The canoe will go over the falls. Your question is: Will you bail out and swim for shore early enough?

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

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