Budget Deadlock in Washington
by Gary North: Not
Theirs To Occupy
The debt ceiling
battle led to a compromise. Congress and the President promised
to submit to mandatory budget cuts. A bipartisan super committee
was set up to put together a package of debt reduction cuts totaling
several trillion dollars over supposedly a decade. If the committee
deadlocks, the cuts will begin automatically on January 2, 2013.
These must be $1.2 trillion in cuts, or $120 billion a year.
by everyone, the committee is deadlocked. The Democrats want $3
trillion in debt reduction, mainly from tax increases. The Republicans
will not grant this.
sources told CNN that at the meeting Tuesday the plan was presented
to the 12-member committee by Sen. Max Baucus, D-Montana, the
Finance Committee chairman. A majority of the six Democrats on
the super committee supported the proposal but sources declined
to say which member or members disagreed.
would have made cuts to entitlement programs such as Medicare
and Medicaid, which the Democratic sources described as a major
concession from their party. In return Republicans were asked
to go along with between $1.2 and $1.3 trillion in new tax revenue.
unnamed Republican aide expressed anger that some Democrat had leaked
the details of the deal to the press. I mean what kind of stab in
the back is this? Telling the public what's in store for them! This
is clearly an outrage. It means, the aide said, that the Democrats
think the super committee will fail.
in his right mind expect it to succeed? The August deal to extend
the ceiling and thereby avoid shutting down some government agencies
temporarily was based on a sham solution.
The politicians want no responsibility for cuts. There was no record
of which Democrats opposed the leaked deal. Some did. Everything
is being kept hidden. There is an election year coming up.
This was the
first proposed plan. The committee has not gone public with anything
in two months. It has a deadline for announcing a plan: November
23. That is less than one month away. If Congress and the President
refuse to accept a plan, or if no plan is offered, then cuts will
begin a year later.
one deadlock is here. There is little likelihood that members of
the super committee will put their careers on the line and vote
publicly for cuts that specific special-interest groups can identify.
There would be retaliation in November 2012.
IMPORTANCE OF POLITICAL SYMBOLS
The debt ceiling
extension had a back-up plan: mandatory cuts, imposed by no one
in particular, beginning on January 2, 2013. That gives the politicians
a year to find a way to defer the cuts.
The cuts can
be blamed on no one in particular. But the cuts will start hurting
special interests. One of the main targets will be the military.
The Pentagon will howl.
I think the
reason why Obama is pulling out all U.S. troops from Iraq in December
is to take advantage of the deadlock. He is willing to accept these
cuts in the Pentagon's budget in 2013. They will not be blamed on
him in 2012. After all, this was part of a bipartisan compromise.
Those Republican voters who were committed to keeping troops in
Iraq "for as long as it takes" with "it" being undefined, open-ended,
and forever will not be able to pin the tail on the Democrat
donkey. The cuts in the Defense budget will come because Republicans
in Congress demanded this budget compromise. This is Obama's moment
of opportunity. One of his campaign promises was to pull the troops
out of Iraq. He is finally doing it. He gets a Republican cover.
He can say that these reductions are part of his good-faith attempt
to conform to the budget compromise made in August 2011.
in the super committee transfers to the President the right to pick
and choose the cuts he will make. Constitutionally speaking, the
House must introduce all spending bills. In fact, the President
has possessed this power for two generations. Obama has been granted
a license to cut as he sees fit. It is clear that his first cut
is the cost of keeping troops in Iraq.
The name of
the political game is to defer taking unpopular political actions.
The Congress is a master of this game. The public put pressure on
Congress last summer to do something symbolic to defer the debt
crisis "with honor." The looming debt ceiling limit was a convenient
hammer for the minority of Tea Party-leaning Republicans in the
House of Representatives to use to force the Republicans to agree
to something resembling a balanced budget.
the budget is not going to be balanced. The Congressional Budget
Office has projected $1 trillion annual deficits through 2020. But
the Tea Party Republicans demanded a fig leaf: $1.2 trillion in
cuts over a decade, beginning in 2013 at the latest.
are symbolic. But symbols are important in life. They are important
in politics. Someone has to propose cuts, and some special-interest
groups must suffer cuts. Special-interest groups resist all cuts.
will label their spending programs with whatever emergency is available.
In Eisenhower's era, Congress passed spending bills in the name
of national defense. The best example is the interstate highway
system. In 1956, Eisenhower signed into law the National Interstate
and Defense Highways Act. In 2001, terrorism was the catch- all.
The homeland security law had been sitting in Clinton's files for
years in 2001. He just did not introduce it. The time was not ripe.
Today, it's job creation.
As the U.S.
economy heads into a recession in 2012, an election year, the government
is running a deficit of over $1 trillion. This is four years after
the recession of 2008 and the bailouts in September and August of
that year. Unemployment is still over 9%. Businesses refuse to borrow.
New businesses, which provide most increases in employment, are
locked out of the bank loan market.
are most concerned over the rotten job market. The deficit is a
nagging concern, but unemployment is on the front burner. The politicians
So, as the
economy slows, and unemployment rises, Congress will be able to
come before the public and call for emergency increases in spending.
It is unlikely that unemployment insurance will be cut off. Other
programs will receive funding. But new large-scale programs are
less likely in an election year. Republicans will block them.
It is doubtful
that Obama will get another stimulus package passed in the House.
He keeps proposing big spending plans in the name of job creation.
Why? Because he knows the House will reject these bills. He can
go to the voters in the name of the Democrats in 2012 and claim
that the Republicans are to blame for the lousy job market.
For the first
two years, he blamed Bush. This year, that strategy has failed to
gain traction. It is now his labor market. So, he is setting up
Republicans in the House for the great tail-pinning in 2012. He
will cease blaming Bush and instead blame Republicans for their
refusal to pass his stimulus bills.
He may not
get away with this. His rhetoric is no longer drawing crowds. The
word magic has worn off. But it is clear what his strategy is: propose,
propose, propose; blame, blame, blame. He has the mainstream media
on his side. He also has academia.
strategy assumes that Keynesianism is true, that the best way to
create jobs is for the government to borrow or tax or inflate in
order to get the economy rolling again. It assumes that money extracted
from the private sector by force today (today's taxes) or promise
of future force (tomorrow's taxes) will be used to create jobs,
while money left in the private sector will not.
economy of the world is built on this assumption: in the USA, in
Europe, and in mercantilist Asia. At the center of the modern economy,
according to Keynes and his disciples, are the state and the central
to the Keynesian worldview is Austrian School economic theory, which
argues that there is no center. There is decentralized capital in
the broadest sense: money, tools, skills, and vision. The absence
of any center is the basis of creativity and growth, including job
growth. Other schools of free market economics accept this same
outlook to one extent or another, but all of them insist on the
need for a central bank.
Obama is relying on the Keynesian analysis to justify additional
stimulus spending laws. But he faces a major obstacle. His $787
billion "shovel-ready" law of February 2009 has not led to a strong
job market. This job market has been the most resistant since the
Great Depression. The unemployment rate stubbornly refuses to come
down. This is creating problems for Keynesian economists. They are
calling for even greater stimulus spending. But this is no longer
politically marketable. The voters have had enough. They know the
spending will not lead to unemployment at 5%.
This is not
the first time that economic reality has put a crimp in Keynesian
theory. The Keynesian outlook was called into question in the 1970s
by stagflation. By the end of the decade, the monetarists had gained
considerable influence in Washington and in academia. Academia worships
power, and monetarism seemed to be the wave of the future. It looked
as though Keynesianism was in retreat. The 1980s and 1990s brought
a boom and a rising stock market. Keynesianism seemed vulnerable.
that began in late 2007 has brought Keynesians back into unchallenged
power. The monetarists are nowhere to be seen or heard. They did
not challenge the Paulson-Bernanke coup in 2008. They either said
nothing or hailed the October big bank bailout as necessary. They
did not challenge Obama's stimulus, either. Yes, a few did, but
they were minor figures for the most part: a few hundred out of
tens of thousands of economists on various payrolls.
There is not
much price inflation today. This undercuts the monetarists. Their
schtick rests on either double-digit price inflation (late 1970s)
or double-digit price deflation (1930-33). There is surely stagnation
today. Monetarism seemed to explain the 1970s: two recessions and
rising consumer prices. It does not explain today's economy. This
puts monetarist defenders of limited government at a disadvantage
in the competitive marketplace of ideas.
for over three decades has been the only prominent alternative to
Keynesianism. The supply-siders have never had a college-level textbook.
The public choice theorists have no unique monetary theory. The
rational expectations economists' position is "accept the present
and make no changes." Only the Austrian School has provided both
a theoretical explanation for the bubbles and the busts. Only they
called the recession in advance. Only they argue that decentralization
is the only theoretically plausible solution to the problem of systemic
unemployment: the decentralization of ownership, political power,
and money creation.
of decentralization dooms the Austrian School in academia. Liberal
arts academia worships power. Academics did not actively criticize
all aspects of the Soviet Union, Red China, and their satellite
nations. The intelligentsia did criticize a few peripheral aspects
of Communism, such as its limits on the freedom of speech. The intelligentsia
did not criticize central economic planning in terms of its inevitable
waste of resources and its decades-long failure to increase the
standard of living. Academic economists publicly denied that the
Soviet Union suffered from widespread poverty. They trusted the
published statistics issued by the Soviet Union. The handful of
economists who said that the statistics were fabricated were ignored.
How many economists in 1970 had ever heard of Naum Jasny (d. 1967),
who showed for years that the statistics were fake? Hardly any,
and those who had heard of him usually rejected his warnings. I
cited his findings repeatedly in the chapter on Soviet economic
planning in my 1968 book on Marx, but who noticed? No one. (http://bit.ly/gnmror)
Most important, in the eyes of academia, was this fact: the Soviets
had nuclear weapons. They also had domestic power. Academia did
not turn on the USSR until after the Communist Party committed suicide
on December 31, 1991.
School argues that centralized political power makes nations poorer.
Some call for a lightly armed night watchman state. Others call
for disarming the night watchman. All call for a vast decrease in
political power, taxation, and regulation. They call for a comprehensive
surrendering of power by Washington. Academia will not tolerate
this. It is subsidized by the state. Its bread and butter is supplied
by the state. Eliminate all academic subsidies from the state, including
the state's enforcement of accreditation, and college professors
would wind up at the unemployment office the privately funded
This is why
there will be no solution to the fiscal crisis in Washington. There
is no body of academically acceptable economic opinion that can
be invoked by any political faction to justify the only viable solution:
the decentralization of political power and the cutting of Federal
spending back to what the Constitution authorizes.
of the super committee to come up with any plausible plan to balance
the budget is an indicator of the present state of the economy.
The automatic budget cuts that will begin in January 2013, if they
even take place, are merely symbolic. They will not do much to balance
the budget. But they at least will be symbols of the need to do
of the debt ceiling? Will Republicans be able to hold the line and
force a balanced budget? Ron
Paul has offered the only plausible scenario for doing this. No
other Washington politician in modern times has.
No one takes
it seriously in Washington. They do not think he will be elected.
They know he will leave Congress in 2013. They think they can safely
ignore the plan.
When the symbolic
budget cuts begin in 2013 assuming they are not deferred by a
new law the voters will have a play-pretend solution to keep
them asleep at the wheel. The trillion-dollar-plus deficits will
continue. The Federal debt will grow.
victory of the August debt ceiling compromise was in fact a symbolic
defeat. It meant that the Congress is not serious about the cuts.
There were some promised cuts, but they will be dwarfed by the deficits.
fiscal numbers are not irrelevant. They do have meaning. They do
point to the bankruptcy of the U.S. government. They cannot be evaded.
They can be sustained only for as long as investors, especially
the central bank of China, continue to fund what is obviously a
suicidal fiscal policy that cannot possibly be sustained for another
hide their eyes. Most voters hide their eyes. All but two members
of Congress hide their eyes. There is universal blindness. The masses
really do think that the day of reckoning will never come.
They are wrong.
It will come. Deferral is a tactic, not a strategy. Blindness is
a tactic, not a strategy.
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
Best of Gary North