politics relies on deception. Without deception of the voters on
a comprehensive scale, there could be no politics above the local
level, where people know the deceivers personally and are therefore
less easy to fool.
Basic to deception
are symbols. Symbols serve politicians in much the same way as a
red cape serves a matador.
Congress goes through the equivalent of a Punch and Judy puppet
show. This is the debate over whether or not to raise the Federal
government’s debt ceiling.
debt-ceiling is always raised. There are no exceptions. As surely
as night follows day, so does the national debt-ceiling get raised.
Everyone in Congress knows this. Everyone in the media knows this.
Those few voters who pay any attention suspect this.
But there is
always that long-shot possibility: a stalemate in Congress that
lasts until the deadline runs out. Then there might be a showdown.
Washington knows that the ceiling will be raised. The proponents
of flat-lining the ceiling would wind up with their careers flat-lined
if they were ever successful. But if there is a fight, it will make
great copy for pundits. The evening new shows will feature the story:
“The nation faces a shut-down of the Federal government!”
The last time
there was one of these battles was in 1995. The Republicans had
taken control of the House in the election of 1994. The Contract
With America was the rallying document: one of the really great
campaign slogans in Republican Party history. It did not quite match
“Had Enough?” in 1946, but it was close.
So, the new
Republican majority was ready to flex its muscles. The young Turks
were ready to hold the line.
It took a year
for the showdown to come. The battle began to heat up in the summer
of 1995. The rhetoric intensified. The battle was over what is called
a continuing resolution. When Congress and the President cannot
agree on a budget, which is normal, Congress passes a series of
continuing resolutions to keep the government’s doors open. This
can take place monthly.
1, 1995, the new fiscal year began. There was no budget. Congress
passed a continuing resolution that lasted until November 13. On
November 14, the government technically had to stop spending on
nonessentials. That stand-off lasted five days. The House then passed
another CR, but the next vote was scheduled for early January. The
crisis was merely deferred.
1996, the final showdown could no longer be postponed. The House
refused to increase the debt ceiling or pass a new CR. The
government officially had to stop all spending over the debt ceiling.
Certain checks stopped being printed. Clinton’s popularity rose.
The stand-off lasted only a few days. Clinton did not capitulate.
The House Republicans did.
That was a
Presidential election year, just as 2012 will be. It was clear to
the Republicans that the voters favored Clinton. Voters wanted their
checks. The Republican majority in the House folded. There has not
been any trace of a fight over the debt ceiling ever since.
The size of
the Federal deficit is numerically horrendous. But nobody in power
are quiet, as they always are. They always believe that, at the
margin, there is another rabbit for the government to pull out of
its hat. Their criticisms are limited to the perennial statements
about the bad effects one of these days, by which they mean decades
from now. “Nothing to worry about now.”
are saying that they want $50 billion to $100 billion in spending
cuts. They don’t say out of which departments’ budgets, meaning
out of which voting blocs’ hides.
This is political
showmanship. The Federal government is spending $3.8 trillion this
year. It will borrow $1.5 trillion, in nice round numbers. In 2010,
the spending was $3.6 trillion. In 2009, it was $3.1 trillion. It
is clear where spending is headed.
Into this escalating
disaster ride the newly energized Republican Don Quixotes, calling
for at least $50 billion in spending cuts. In percentage terms,
that is a little over 1%. The rhetorical sound and thunder signifies
Will the Republicans
be willing to shut down the government over cuts in this range?
If so, they are counting on the willingness of voters to see the
government paralyzed for the sake of a symbol.
can defer any crisis until Labor Day. The accounting gimmicks available
to it are discussed in an article by a pair of Morgan Stanley economists.
Will this battle accomplish anything? No.
opposition to a debt ceiling hike lead to meaningful fiscal reform?
Of course, anything’s possible, but it seems unlikely that a major
shift in the direction of fiscal policy will occur any time soon.
A return to FY 2008 levels of appropriations for non-defense discretionary
spending probably amounts to no more than $50 billion of cuts relative
to the Continuing Resolution baseline. And, as Treasury Secretary
Geithner indicates in his recent letter to Congress formally requesting
a debt ceiling hike, even if these spending cuts were adopted, “the
need to increase the debt limit would be delayed by no more than
In other words,
needed from the standpoint of fiscal reform are long-term measures
to rein in the deficit. The Bowles-Simpson deficit commission offered
some bold initiatives that, from our standpoint, would move fiscal
policy in the right direction over the long run. However, although
the overall Commission voted 11 to 7 in favor of the final package
of recommendations, the vote among those members who are returning
to Congress was 6 to 4 against. While some components of the Commission’s
recommendations may come up for a vote in Congress, support appears
lukewarm at best. In other words, it’s very hard for elected representatives
to agree on the tough choices that are needed to achieve significant
fiscal reform. At the end of the day, we’re likely to experience
a tough political battle that will disrupt markets somewhat but
achieve little in terms of meaningful policy change.
a role to play in the show.
The House Republicans
must demonstrate their commitment to fiscal responsibility. This
is nonsense, of course. Minimal fiscal responsibility would require
the politicians to run a budget surplus and steadily reduce the
Federal debt to zero, as it was for the first and last time in fiscal
1836. Serious responsibility would require money invested in the
capital markets as a reserve. Zero Federal debt is a goal for fiscal
So, the House
Republicans will huff and puff and threaten to blow the fiscal house
will call for responsibility to the poor, the elderly, and the weak.
He will insist that the threatened 1% to 2% cuts threaten the moral
standing of the nation. This ruthless ploy of the rich shall not
will bump and grind its way across the stage, shedding bits of fiscal
clothing but never getting to the full monty.
It will all
have the significance of the McLaughlin Group.
Half a century
ago, I was on the student council of the smallest state university
in the United States: under 2,000 students. It was a state university
with no graduate school, other than in agricultural research. It
was located 60 miles east of Los Angeles in what was then a city
famous mainly for orange groves: Riverside, where there was no river.
had sports teams, which played small, expensive private colleges
in the region. The city paid no attention. The media paid no attention.
Most of the student body paid no attention.
There was a
battle over spending that year. The sports program was supported
at the margin by student fees. I remember the threat of the council’s
main athletic program supporter. The sports program would be forced
to stop paying for the lettermen’s jackets. The horror! With that,
the council buckled.
Here was something
visible: lettermen’s jackets. These were the great rewards for those
hard-hitting specimens of teamwork. They were the sinews of the
Why the threat
against jackets? Because they were visible. Because not funding
them would be . . . unfair!
alerted me to a tactic that probably goes back to Babel. A bureaucracy
threatens to cut back on something both popular and highly visible,
as if this were the only possible budget cut. If the legislature
does not fork over the money, the bureaucracy will kill the hostage:
the popular program.
The idea that
there is lard in the budget never becomes a factor politically.
Voters see only the threat of a great loss. “We dare not lose that!”
act on behalf of the bureaucrats, because large chunks of their
PAC money come from the promise of the continuing distribution of
then come before the voters. “We cannot shut down the government.
We dare not do without these vital programs.” They then point to
the equivalent of the lettermen’s jackets.
problem is that lard-seekers are well organized, while the voters
do not pay attention. The pay-off for lard-seekers is high. The
loss to the voters is widely distributed and therefore marginal.
To mix metaphors, lard-seekers know who butters their bread. Politics
becomes a series of greased skids.
spends more, he becomes used to the benefits gained. What had been
a luxury becomes a necessity. This is why people find it difficult
to cut their household budgets in a crisis. Spending remains after
income falls. People go into debt until they can adjust to the new
level of income. This has a name in economic circles: the Duesenberry
effect, named after James Duesenberry.
Think of Christmas
feasts and January diets. It is so easy to put on ten pounds. Nothing
to it! It is so hard to take them off.
always raises the debt ceiling. Since 1940, it has done this 80
times. But wait! It has been only 70 years since 1940. This gives
some indication of the certainty of the next hike in the debt ceiling.
be lots of political hot air expended on a discussion of the debt
ceiling. But the economists will not say much. A hike is marginal.
No, the debt will never be paid off. It need not be paid off. It
must just be kept within reasonable limits. What limits? The economics
guild never says. It says this: “There is no immediate threat to
the economy. Someday, of course. . . .”
not now. Politics is all about now, and how now relates to the next
For those of
us who have warned about the increase in the debt ceiling for the
last 50 years, all of this is familiar. Nothing ever changes in
this beloved play in political theater. It is America’s political
equivalent of “It’s a Wonderful Life.” We see it every year.
It ought to
be the equivalent of Night
of the Living Dead. When it comes to the debt ceiling, George
Romero is the qualified director, not Frank Capra.
is out of control. That is because the government is out of control.
That is because the electorate is out of control.
For as long
as there are buyers of government debt at low rates, there will
be no fiscal crisis. For as long as investors hand their money over
to banks and fund managers who load up on Treasury debt, the system
will roll along. For as long as bond holders say to themselves,
“I will sell before rates rise,” there will be no crisis.
The bond vigilantes
are asleep, all over the world. The European crisis cannot be solved,
but there are buyers of Greek bonds, Portuguese bonds, and Spanish
bonds. Each crisis is papered over with more European Union debt
and more European Central Bank fiat money. The same game is being
played out all over the West.
spending never falls. That is the law of the fisc.
I hope that
you will not be deceived by the battle over the symbol of the debt
ceiling. The debt symbol is a reliable symbol. It testifies, year
after year, to this truth: fiscal restraints are an illusion for
as long as the words “full faith and credit of the United States”
are taken seriously by investors.
strategy of kick the can relies on investors who continue to play
kick the can with respect to cashing out. If they refuse to cash
out, the game will go on.
some point, at the margin, wise investors will start selling. That
will be Ben Bernanke’s moment of truth.
My view is
that the FED will begin to buy in earnest when the somnambulant
bond vigilantes wake up and see that they are standing at the edge
of a cliff. QE 2 is just the beginning.
As for the
debt ceiling, think of it as an elevator. “Going up!” But this elevator
never goes down.
At some point,
bond investors are going to move toward the stairwell. You had better
get there in front of them.