A Raw Deal

Welcome to the age of austerity.

In the first half of 2011, the economy grew by a measly 1.3%. That number should be alarming. It’s the slowest growth rate since the Great Recession, and in any other time, would be a dire omen and people would be predicting recession.

And, of course, it’s at this time that we’ve decided to pursue austerity. Over the past few months, a routine exercise to raise the debt ceiling turned itself into a moratorium on government spending and debt while the Republican party hijacked the process to force ideologically-driven and massive cuts to the federal budget.

Now, why are we basically the only country with a debt ceiling? Because of the unique nature of our democratic structure. Most democracies are parliamentary in nature: the parliament decides how much to tax and spend and borrow, and has the authority to do all three. Ours, however, is a divided system: Congress determines the level of taxation, appropriates spending, and authorizes borrowing, while Treasury is tasked with fulfilling the congress’s mandates. When Treasury doesn’t have the requisite money to pay for what congress mandates, it has to issue a bond. Before this century, Congress had to authorize any bond that Treasury wanted to issue. As time wore on, that became burdensome for congress, so a deal was reached: Congress would authorize Treasury to issue any bonds it needed—but that authorization would come with a cap, and if that cap was reached, congress would have to authorize a higher total. That’s the so-called debt ceiling.

So, we have a debt ceiling, and, since its inception, it has routinely been raised. And, it’s always raised because to fail to do so would have dire consequences to the economy: possible default is the biggest extreme predicted, but even at the most conservative, draconian cuts and a possible constitutional crisis (Treasury would have to decide what bills to pay, and it does not have that authority). There’s usually some token disapproval from the opposition party, but it always gets raised.

This time, however, things wouldn’t be so certain. The newly resurgent Republican party would target this as a strategically opportune time to hold the country and economy hostage to push an agenda of massive cuts to the federal budget. It was under the guise of debt reduction, but the fact that they would not accept adding revenue as part of the solution means that the cuts, not the deficit, was the issue. The Republicans have learned that principled obstructionism works, and this episode turned out remarkably well for them. After months of wrangling (and getting nothing else done), they got a pretty good deal for themselves.

During a time we should be thinking about investing more money to build roads and railroads, repair ports and help put people back to work, we’re about to cut one trillion dollars from the federal budget over the next ten years. It includes heavy cuts to “security,” which includes defense along with homeland security, etc., but, it also guts investments in energy, transportation, education and childcare. And more trillions of dollars in cuts to come, whether agreed to by some super-committee (good luck) or kicked in by a trigger. Maybe some tax increases, but I can’t imagine that would happen (can you?).

At a time when interest rates on treasury bonds are at all-time lows. The market believes treasury bonds are the safest investment, yet Republicans think it’s the most important crisis facing our nation. Labor is now also extremely cheap, so with our economy in shambles, what a perfect time to take on a little more debt to invest in those infrastructure projects we need to do. Yes, by all accounts, our country needs to spend $2 trillion just to fix the infrastructure we already have.

It’s insane that we’re going down this path. In part, it was to appease a nutter faction of the Republican party—a faction that won’t support the deal anyway, because they seriously believe that refusing to raise the debt ceiling is a good idea.

Yes, our entire economic discourse—not just the economy, not just the policy, but the goddamn discourse—has been hijacked by people who clearly have no idea how economies work. There was no argument between spending more and cutting. It was between cutting and selling the farm.

In addition, we get to say good-bye to the one-year payroll tax cut and unemployment benefits extension—two policies that have probably been keeping the economy from utter collapse, as they are two of the most effective means of stimulus available.

It’s an utter raw deal. I have to admit liking Rep. Cleaver’s description of it as a “sugar-coated Satan sandwich.” At a time when we should be concentrating on growing the economy, we’ve given in to shrinking it. And let there be no confusion: the Republican party is solely to blame. What could the Democrats have done? Refused to compromise and allowed the Republicans to destroy the world economy? Of course not. Sure, a father shouldn’t give in when his kid has a tantrum. That sends a bad message. But, if the kid is having a tantrum and is also holding a nuclear device? The first thing you do is get the device away from the kid.

It looks like the House is going to vote this evening and the Senate just after on leading the U.S. down the long road to austerity and, probably, a double-dip recession. Couldn’t have happened to a better country.

Contact Poplicola at poplicola@veritiesandvagaries.com