Sunday, July 31, 2011

The Very Nub Of It

As always, we can take two different photographs of the same political crisis. The first photo is of the immediate circumstance; the second is the big picture over time and consequences.

The debt default crisis has obvious immediate consequences, that is, at some point in the next few weeks (not necessarily the Tuesday deadline stated by the president and his secretary of the treasury), a technical condition of default on the debt of the government of the United States will exist. Contrary to the Cassandra-like warnings of the Obama administration, this will not mean that our government will not pay its obligations, particularly to bond holders of U.S. government securities. Nor will it mean that Social Security checks will not go out to elderly recipients. Nor will the security of the nation be placed in jeopardy. To raise the debt limit previously set by law will enable the administration to try to pursue its long-term policies of increasing federal spending. To refuse to raise the debt limit makes that pursuit impossible. That is the nub of the whole crisis.

The liberal government establishment, and even some in the conservative government establishment, see the raising of the debt limit, and its consequent increase in federal spending as not only inevitable, but the right thing to do. It has been done routinely for decades.

Living in the most prosperous nation on earth for many decades now, these establishment figures see the role of government as a supplier of aid, welfare and entitlements. They believe this. No one should doubt that, in most cases, they are well-meaning and sincere.

The movement which opposes this view is not, by any means, monolithic. Much media attention is given to the recent “Tea Party” as the sole engine behind this view, and the Obama administration has predictaby attempted to demonize this movement in the hope of diminishing its influence. In fact, the Tea Party phenomenon arose almost solely as an economic protest, and while it is conservative, it is not just Republicans, but also includes many independents and fiscally-minded grass roots Democrats who had become alarmed by establishment government economic policy, including growing deficits, unfunded liabilities, as well as the weakening justifications for whom and where public money was being spent. The Tea Party has been demonized by the left as a radical right wing movement which holds unpopular social views, but that is wholly a political contrivance and a slander. (There may be a relatively few who call themselves Tea Partiers who hold unacceptable or radical social views, but it has nothing to do with the economic movement.)

The grass roots uprising against government as usual, however, is not at all limited to those in the Tea Party. There is a much broader composition of this movement which includes traditional conservatives, independents, libertarians and Democrats. That is why the national elections of 2010 produced such a clear and powerful result, and why the consequences of that election have led to the debt limit crisis of 2011.

Perhaps much more important a factor hanging over this crisis is not the technical detail of default, but the clear warnings from those non-governmental agencies which rate the quality of all bonds and securities, e.g. Standard & Poor’s and Moody’s. They have stated and warned that if the debt and deficit circumstances of the federal government are not repaired in short order, they will lower the credit rating of the Untied States government from its current AAA rating. Why will they do this? Because our government budget deficits are too great, and because our government spending is too much. What are the consequences of a lower rating in real terms? It means that investors who are required to buy only AAA-rated financial instruments will not be able to purchase and invest in U.S. government bonds. This would cause a massive dislocation of national and international financial markets, and possibly result in a worldwide economic calamity as investors desperately seek out acceptable investments which may or may not be available. Lowering our rating also would mean that government borrowing would become more expensive. It is the individual taxpayers who would have to pay for that increased cost. In short, we should be much more concerned about losing our invaluable AAA bond rating than with perpetuating the increased debt which has put our rating at risk.

The ugly little secret of the U.S. debt limit crisis is that if President Obama and Senator Harry Reid were to succeed to raise the debt limit without ironclad cuts in spending, Standard & Poor’s and Moody’s would be MUCH MORE LIKELY to lower their credit ratings of U.S. bonds. I am not guessing about this. The agencies have specifically and unambiguously stated that if U.S. deficits are not immediately a drastically reduced, they will lower their ratings. The Obama-Reid outcome of the current crisis virtually guarantees that the U.S. will lose its AAA rating. Even the Boehner plan, now passed by the U.S. house of representatives, falls short of the financial agencies expectations. But at least it is a step in the right direction. It is, in fact, a long-needed brake of federal spending (something, it is important to note, was done by both Republicans and Democrats over decades).

Yes, there is a lot at stake in the debt limit crisis, and in the larger crisis of U.S. domestic economic policy. But it is only when we look at the big picture that we can see what that stake really is. The little picture presented to us by President Obama and his political allies is a sham, a lie, a misrepresentation of our economic circumstances, our choices and our future. The big picture is that we Americans are living at the financial edge of unsustainable economic policies and programs, and that the time is running out during which we might repair these circumstances.

Speaker Boehner and Majority Leader Cantor are establishment conservative figures. Unlike Congressman Paul Ryan and several of the new Republican governors (and New York Democratic Governor Andrew Cuomo), Mr. Boehner and Mr. Cantor perhaps came later to the understanding that the Congress had to respond radically and decisively to economic conditions and to their freshman members, i.e., cap and trade and the balanced budget amendment. Their instincts perhaps were to negotiate and compromise. But two circumstances have transformed them as political leaders. First, President Obama and Majority Leader Reid, desperately holding on to a drowning economic philosophy, have not been willing to truly negotiate. They call for compromise, but what they really mean is surrender. Second, the freshman GOP members of the U.S. house, backed by millions of grass roots voters, have stood their ground. The majority of voters in 2010 were promised transformation, and this House of Representatives is delivering as best it can the fulfillment of those promises.

This is the nub of where we are, and hopefully, where we are going. It is very clear that the whole liberal philosophy of government is collapsing around us. But, as is true in this case, it will take another election to complete the economic and political transformation.

Meanwhile, Speaker Boehner’s job is not just to avoid being blamed for not raising the debt limit. His historic opportunity is to bring the era of increasing public debt to a close.

With ironclad cuts in equivalent spending, the debt limit might be raised. But the real danger, as I have pointed out, is not default, but the credit rating. All solutions lead from that stubborn and unpleasant reality.

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