Monday, July 11, 2011

Debt Ceiling Chicken

Count me stupid, but it seems to me a no-brainer that whatever deal comes out of the debt-ceiling talks it can't include a tax increase.

Why? Because it's pretty obvious to me that, after the gigantic spending increases and tax increases of the Obama administration, the only thing left is spending cuts. The run up of the national debt in the last couple of years is putting the nation in sovereign debt default territory, and that is something that will press especially hard on Democratic spending constituencies (from spending cuts) and government employee pension funds (from dollar devaluation and debt restructuring). To protect their supporters the Democrats must come up with a deal.

Radio-host Rush Limbaugh understands this instinctively when he says that there is no pressure on Republicans to come up with a deal. It is President Obama that has a problem. The economy is floundering on his watch. The national debt is climbing into the stratosphere on his watch. And the health of all those Democratic spending programs depends on the health of the tax-paying economy.

Don't forget that a majority of Americans are against any lifting of the debt ceiling. Gallup's May 13 poll found Americans 47% to 19% against any increase in the debt. (Yes, I know. They would certainly prefer an increase in the the debt to giving up their government benefits).

I suppose that the president and the Democrats believe that they can win the PR battle over a debt default just like President Clinton won the battle over the government shutdown in 1995. To which I say: Maybe. There's a big difference between now and then, and the #1 difference is that Bill Clinton was a political genius and President Obama is not.

But the political gamesmanship, of course, is merely a sideshow. The bigger reality is that the Keynesian prescription for getting out of a recession has failed. It has failed because it misunderstands the problem. A recession is not a temporary period of indigestion that can be cured by a couple of pills of stimulus. A recession is the result of the failure of investments made in the previous boom. In the immediate case, a huge boom in housing has collapsed. For growth to resume we must repair the credit system (i.e., the underwater borrowers) by liquidation of the malinvestments of the previous boom so that all loans are once again above water and paying interest.

Right now the economy is still in the process of liquidation. There are still millions of people with underwater and/or non performing loans. The capitalist system depends on a functioning credit system, and that means that more or less every loan is collateralized by assets that are worth more than the principal loan amount, and that the debtor is currently paying interest on the loan and is expected to continue to do so.

President Obama's big mistake was to take his eye off the ball. He should have focused like a laser on getting the bad loans off the books and/or properly valued so that bank balance sheets and individual consumer balance sheets were restored to health. But he didn't, and now he is reaping the whirlwind.

And it will get worse before it gets better.

1 comment:

  1. Um, I think any tax increases under Obama are a figment of your imagination. Name them, please.

    In addition, is it fair to speak of the spending increases of the last two yeears only? What about the increases of the last 12 years? You can't just make stuff up and expect anyone to listen to your perspective.