by Gary North: On
the Road to Government Default
media are all a-twitter. Speaker of the House John Boehner has given
up in the President's offer of a solution to the deficit crisis:
a $4 trillion deficit reduction package. Oh, the horror! Oh, the
pigheadedness of the Republicans!
Oh, the chicanery
of the media.
Maybe you have
noticed the game that the media manipulators play: they announce
a Big Government Deal in the headline, only to add later in the
story these words: "over the next decade." This is the baloney factor.
To take away
the hype, divide by ten. Then try to find a breakdown of the figures.
Without exception, most of the savings or benefits in the heralded
breakthrough are scheduled for the last three years. The package
cuts, this decade gives Congress plenty of time to write new laws
that spend far more than the proposed savings promised in the last
is how one media outlet presented the story. It describes the
hikes, by any name, are a nonstarter for a party that forged its
brand on the mantra of lower taxes and less government, and Boehner's
willingness to talk rates with President Barack Obama particularly
in the context of House Majority Leader Eric Cantor's (R-Va.) refusal
to do so raised eyebrows within his conference. The uproar
among Republicans, on and off Capitol Hill, forced Boehner to back
away from the "grand bargain," setting up a testy White House meeting
where little was accomplished Sunday night.
Ah, yes: the
"grand bargain." Let us examine this bargain. The $4 trillion reduction
deal meant on average $400 billion per fiscal year of reduced deficits.
But the country is running a $1.6 trillion deficit this year. This
is the new normal. Take away $400 billion, and the deficit is $1.1
trillion. Give the government the benefit of the doubt: $1 trillion
a year for the next decade. That is the package that Boehner abandoned.
He was supposedly forced to do this by Cantor.
walked away from a round of debt-limit talks led by Vice President
Joe Biden when Democrats asked Republicans to identify taxes they
would be willing to raise in exchange for spending cuts of as much
as $2.4 trillion over 10 years. Then Boehner and his top aides worked
with Obama and senior White House advisers to try to find a sweet
spot. Cantor and his top aides were then letting it be known on
Capitol Hill that he was not supporting the large-scale deal, terming
it a tax hike with the implication that Cantor was plainly
not with Boehner.
The story is
presented as one of political intrigue, of back-room deals, of closed
covenants secretly arrived at.
long shared a frosty rapport, which extends to their top aides.
And this episode serves to illustrate that Boehner has a No. 2 who
is unafraid to go his own way on an extremely tricky issue. It wasn't
the first split in recent weeks. Boehner told House Republicans
in a closed-door meeting last week that he was not going to provide
details of the negotiations to the full conference. Cantor, for
his part, wanted lawmakers to be kept apprised of the blow by blow
of the discussions.
the article is there one word about how the United States government
could fund the proposed deficit of a trillion-plus dollars per year.
"The biggest question in Washington and Wall Street
now is what happens next." (http://bit.ly/GrandBargain) The issue
is described as "tricky." It is not described as fundamental to
the survival of the government.
Note what the
biggest question of Washington supposedly isn't: How will the Treasury
get the money to keep the doors open over the next decade?
LUNCHES ARE SO EXPENSIVE
The media want
to play up the political aspect of the kabuki theater that is being
performed in Washington for the rest of the month. There is no open
discussion about which programs will be cut and by how much if there
is an impasse over the deficit debate.
There are so
many thousands of invisible Federal programs that should be cut
by 100% on a permanent basis. The voters should not worry about
these cuts for fiscal 2011. The government could easily shut down
these programs, and the voters would not feel the pain. A few voters
would: the ones on the receiving end of the subsidies. They would
feel the loss substantially. But the broad mass of voters would
sinkholes of spending Medicare, Medicaid, Social Security,
and the military are the big problems. They constitute almost
70% of the Federal
budget. If the deficit of $1.6 trillion were eliminated, which
is 40% of the budget, there would have to be cuts in one or more
of the big four. The politicians are not ready for that kind of
This is why
the debate over the deficit is a sham. It is political theater.
There is no majority in either political party to balance the enormous
budget of the U.S. government. To do so would require a drastic
shrinking of expenditures.
There are rumors
about this or that Grand Bargain, or Mini-Bargain, but the bargains
all involve enormous deficits for the next decade and presumably
far beyond 2020. The government's budget-related agencies simply
refuse to publish the numbers beyond 2020. The politicians have
no intention of dealing with the #1 issue of the deficit: the size
of the proposed deficits in relation to the available private capital
required to finance them, year after year.
We hear about
size of the deficit in relation to gross domestic product. But
the GDP includes government spending at all levels. What if the
Federal deficit were discussed in relationship to the net domestic
product: the private sector? The private sector is Atlas. He holds
up the public sector.
can shrug. Investors can refuse to buy Treasury debt at any time.
Because the economy is still stagnant and getting more stagnant,
investors buy Treasury debt because they believe it is the lowest-risk
investment available. It is the most liquid asset. They think they
can sell their T-bills, notes, and bonds at any time at close to
face value. The average maturity of the Federal debt is in the range
of 50 months. Investors prefer safety to profitability. This is
why Treasury interest rates are so low. Investors are afraid, and
for good reason.
lent to the U.S. government is a dollar not invested in a potentially
productive venture. The government is a sponge for private capital.
The Treasury Department is the source of that giant sucking sound.
The media do
not explain the deficit in terms of the fundamental economic truth
about the Federal deficit. It sucks.
is weak because it is not being capitalized. Small businesses are
the source of job creation, and owners of small businesses remain
pessimistic about business conditions. They are not borrowing money
We are in a
Keynesian-induced productivity trap. The government is absorbing
capital on an unprecedented scale for peacetime. There is no light
at the end of this tunnel. The government is becoming the borrower
of last resort. Businessmen see the future. The future is marked
by slow increases in the productivity of capital, high unemployment,
and lethargic demand. The so-called wealth effect of rising home
prices is now operating in reverse.
housing market has lost at least seven trillion dollars since 2006.
a private firm that specializes in monitoring residential real estate
prices, puts the loss at $9 trillion.
This much is
sure: most people feel poorer whose homes were their major capital
asset. People who were in debt for their homes were leveraged. They
have seen their equity fall like a stone. This has harmed 80% of
the 20% of the nation who are the main investors. The super-rich
are not feeling much pain, since they were not in debt. The average
investor does feel the pain. The middle class has been decimated.
Its hoped-for capital reserves are gone.
As growth slows
and unemployment rises, two years after the recovery officially
began, there are signs that 2012 will be worse. Business opinion
is the supposed source of salvation deliverance from
debt. The optimists recite the mantra, "deficits don't matter,"
because they have faith in the ability of economic growth to enable
the government to meet its interest payments. Even if it can't,
the Federal Reserve will be the lender of last resort. So we are
assured by the experts.
is being sorely tested in full public view for the first time since
1944. The economists who shrugged off a deficit of 2% of GDP are
finding it hard to shrug off a deficit of 10% of GDP. But they are
doing it. They have risen to the challenge. There is no hue and
cry from economists to balance the budget. Only the Austrian School
has opposed Federal deficits as a matter of economic analysis. All
other schools of opinion call for deficits in recessions. But today's
economy is said not to be a recession. This makes it more difficult
for economists to stay quiet in the face of today's 10% of GDP deficit
not impossible, of course, just more difficult.
of a series of trillion-dollar Federal deficits for the next decade
is obvious: reduced economic growth. So, the system's savior is
growing weak. Atlas looks like he will shrug at today's interest
rates whenever the demand for capital rises. He will demand higher
rates of interest to persuade him not to shrug.
for lower risk. They buy Treasury debt. But this guarantees reduced
economic growth. This threatens to produce a permanent deficit.
If things ever do get better for the prospects of businesses, the
result will be higher rates for the government. The only thing keeping
Treasury rates low is the rotten economy.
more loans, the Treasury will have to raise rates. The return of
optimism will assure this result. There will be competition for
funds. But this will create a nightmare for Washington. The increase
of the debt, when facing 5% or higher rates, will lead to a worse
deficit. The interest component of the debt will rise. This is the
Keynesian productivity trap.
total payments by the government in 2011 are about $400 billion.
This is in the range of 10% of the budget, This comparatively low
percentage creates no sense of fear in Washington or on Wall Street.
But if this percentage doubles in response to higher interest rates,
the extra payments will have to come from somewhere. Where?
pressure to cut spending is minimal. The media are opposed to a
deficit freeze. So is the economics profession. So are the politicians.
Most college-educated voters have adopted some version of Keynesianism.
The politicians cannot ignore the tea party, but they need not take
unpopular stands. A fringe group of voters is up in arms over spending,
but that is because the promoters of a freeze on the debt ceiling
have not identified where the spending cuts must come from.
I learned basic
politics from Bill Richardson, the state senator in California who
created the lobby, Gun Owners of America. I worked with him from
time to time in the late 1960s. He is the author of the classic
book on politics, What
Makes You Think We Read the Bills?
lobbying efforts inside the state were legendary among political
operatives. They were based on this principle: the most important
goal of politicians is to avoid electoral pain. If you can inflict
pain, you can get them to change their votes.
adopted this tactic in his direct-mail campaigns. He was the state
senator who ran them on a regular basis. (He had been in advertising
before he went into politics.) In the district of a gun control
advocate there may have been a strong majority favoring gun control.
It would have been wasteful to target him on gun control. So, Richardson
would identify an issue on which the voters were opposed to something
the guy voted for. The local voters just did not know that he had
voted for it. So, Richardson would do a direct mailing into the
guy's district exposing his vote on whatever it was. The guy would
know who did the mailing. He would come to Richardson and beg him
to back off. Richardson, who cared little about how the guy voted
on the vulnerable issue, would agree, in exchange for a vote against
gun control, or whatever issue Richardson was promoting. On some
issues where the vote was going to be close, it paid Richardson
to adopt this tactic.
There is no
well-organized voting bloc that is adamantly in favor of spending
cuts. There is a bloc that is opposed to raising the debt ceiling.
There is no voting bloc that is in favor of massive spending cuts
to balance the budget.
This is why
the debate in Washington over the debt ceiling is really about forcing
one party or the other to face the music on either spending or borrowing.
The Republicans seek to pin the tail of big spending on the Democrats.
The Democrats are trying to pin the tail on the elephant for spending
cuts on the middle class. Both parties are big spenders, which is
why we are facing a long-term crisis of debt. But the public feels
no pain on debt yet. Voters feel the pain of unemployment, job insecurity,
rising food prices, falling home prices, and curtailed dreams for
their children. They do not relate big spending and big deficits
to these issues. They fear cuts in old age spending, which they
are counting on for their old age.
This is why
the debate over the budget is without substance. Nobody is identifying
those voters who will be asked to bear the pain of cuts.
pain that threatens a politician is the Medicare-Social Security
pain. This is felt by the middle class. Medicaid will at some point
go onto the table, because Medicaid is paid mainly to the poor.
Obamacare added a few million middle class voters to the ranks,
but in general, the program is for the poor. The Middle class would
be willing to make these cuts if the pain of the deficits ever hits
them. But it won't. Anyway, the voters' knowledge of economic cause
and effect is so minimal that the rise in spending in the programs
they love will not be perceived as the cause of rising interest
rates, rising unemployment, and all the other negative outcomes
of the deficits.
is no pain, there will be no political change. Where the cause of
any pain is not understood as the inevitable outcome of existing
programs, there will be no political change.
debate over the debt ceiling is political theater. There is no commitment
to cut spending, because cutting spending creates negative voter
responses by specific groups who vote as a bloc. Politicians will
not risk this. They prefer to vote for another increase in the debt
ceiling, because the pain is diversified over millions of unorganized
voters. These voters do not perceive the increased deficit as an
immediate problem causing intense pain. They prefer to have Congress
kick the can. That is what Congress will do.
There may be
a few weeks in which the government is forced to balance income
with outflow by cutting spending on marginal programs. When I say
"marginal," I mean programs whose cancellation does not produce
voter bloc pain. This is Washington's definition of "fat."
are the equivalent of a diet soda on the tray of the 300-pound person
who has filled the tray with potatoes, biscuits, fried chicken,
and a piece of pecan pie.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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