Saturday, December 22, 2012

It's the Debt Ceiling, Stupid

Well, the same concept, just not nearly
as rational this time
Are you tired of hearing about the Fiscal Cliff?  Good.  You should be.  The fiscal cliff is a sideshow, a self - imposed artificial crisis created by too many politicians trying to make deficit spending into some kind of existential threat in order to accomplish the goals of their individual economic and social agendas.  Let's be clear here - the debt does not represent any sort of near term threat.  It is largely money owed by Americans to other Americans, and because of the very low Treasury yields of the last few years the cost to service the debt is actually falling, even as the debt is high by historical standards.  A nation with its own currency, whose debts are denominated in that currency, simply cannot be "broke".  It is not possible for the very government that prints the currency in the first place to "run out of money".

The interesting thing about the fiscal cliff is that it is strictly a problem in Keynesian economics.  If you refused to believe that stimulus spending could help the economy grow, there is no basis for you to then claim that austerity will cause the economy to contract.  To believe either one is to believe both, and it is by that hypocrisy (along with the one where the debt is the biggest crisis we have ever faced but raising taxes isn't an allowable solution) that we can clearly recognize the malicious intentions behind the fear mongering of the fiscal cliff.

There is no cliff - at some point Congress will agree to reset tax and spending policy and they will do so retroactively.  There will be some short-term shrieks of panic and false outrage as markets overreact to the change to "the baseline", but at the end of the day it is just an opportunity for grandstanding and the making of grand pronouncements and dire threats, which is what our political leadership today substitutes for actual governance.  So, nothing to worry about, right?

Whoa.  That, it turns out, is hardly the case.  The fiscal cliff is an artificial problem, but we have a different, self-inflicted problem that is very, frighteningly real.  It's called the Debt Ceiling.  Think about this.  Congress is responsible for "the purse", that is, all spending and revenue collection.  The fact that congress has historically found it difficult to carry out this role responsibly has led to a number of problems, one of which is deficit spending.  So, in an attempt to impose the very discipline the legislators were unable to demonstrate willingly, they passed a law putting a hard cap on the amount of debt the United States could legally carry.  For years, this was seen as an opportunity for the minority party to rail against "spending" before the limit was raised.  It really served no purpose but to create the conditions for a few scolding speeches.  It wasn't like anybody would seriously force the United States government to default on its debt, right?

Then came Rush Limbaugh, Fox News, the tea party and the intellectual decline of the Republican Party.  And suddenly, the very same political caucus that brought us the Bush tax cuts, two unfunded wars and Medicare Part B was holding the entire American economy hostage in order to drive very deep spending cuts, claiming a new found fear of large deficits.  At a time of political and economic weakness, the President capitulated, but severe economic damage was done nonetheless.

This time will be different.  The President realizes that by agreeing to negotiate with a gun to the head of the American economy he created a monster, one that will perpetually reappear on a regular basis unless the entire hostage-taking construct is eliminated.  He cannot allow a weaponized debt ceiling to remain intact, no matter what the consequences.  The Republicans in the House are dangerously ignorant of real-world economics, and the hatred their constituency feels for Obama will drive them to new levels of intransigence.  It is on this matter of raising the debt ceiling that they believe they have leverage over the President, and both sides see this as the defining fight of a generation.  Neither can afford to lose.

Interestingly, the President has a number of technocratic solutions he could fall back on if the standoff became uncomfortable - from invoking the 14th amendment to authorizing the Treasury to mint several trillion dollars in platinum coins (this is by far my favored solution).  But even before that, the federal government can keep paying it's debts as they come due and continue sending out social security checks, while paying defense contractors, government employees and other vendors with IOUs.  This would certainly create a widespread demand that a solution be found, with everyone from CEOs to FBI agents to Park Rangers demanding immediate action.

It's hard to see how it's all going to play out, but it's going to be very loud, very messy and quite probably destructive to lives and families.  It's completely pointless, as there is no reason to even consider deficit reduction at this time, and the political and ideological reasons for pretending otherwise are vile.  But it's the real action in town.  Forget the fiscal cliff - that's just the opening band, some locals with day jobs.  The main act will take the stage sometime around March 1st.  And that's when the real bleeding starts.


  1. It's hard to see how it's all going to play out, but it's going to be very loud, very messy and quite probably destructive to lives and families.

    And all the serious people...the Fred Hiatts, the Fareed Zakarias...are sure that the answer is sticking it to the olds and the poors.

  2. But the good news, Thunder, is that's just not what this fight is about. This is about the debt ceiling itself - it's almost recursive when you think about it. Obama has to make sure that weapon is eliminated NOW - so it stops being about arguing about spending cuts and becomes about the ceiling law itself. So while the olds and the poors are on the table for the fiscal cliff, they're entirely safe in the debt ceiling fight...

  3. If the "my offer is nothing" bit is true then maybe terrible things won't happen.