A Week of Down

It’s been an eventful week economically. The debt ceiling deal got passed and signed, but the stock market tanked and S&P downgraded U.S. government bonds anyway.

For the most part the media has covered this constellation of issues the way they cover anything: What-happened and what-it-means-for-citizens has gotten short shrift, in favor of assessing blame (always awarding it equally to both sides) and trying to predict how this tactical skirmish will affect future elections.

But we’re talking about trillions of dollars here, so it must have some effect on real people. Let’s start there.

What got cut first. “Only” $917 billion of spending cuts have been passed so far, including only $21-25 billion in the 2012 budget. (I’m seeing different numbers in different places; not sure why.) So worries about immediate contraction in the economy (at least from this deal) are overblown. The rest of the $900 billion is cut over the next decade.

Apparently, $350 billion comes from “security” — defense, homeland security, etc — and $567 billion (although this article in The Hill claims $756 billion) from domestic discretionary spending (i.e., not entitlements like Social Security and Medicare). That’s as specific as things have gotten so far. The Hill:

The law does not itemize the cuts, instead leaving those decisions to appropriators. But the size of reductions makes it inevitable they will impact a long list of discretionary programs, including those related to environmental protection, food safety, education and infrastructure.

<sarcasm> Food safety. Just the other day I was noticing that I hadn’t gotten food poisoning lately and thought, “That’s probably something we could cut back on.” <end sarcasm> The long-term unemployed are probably going to suffer too.

The next round of cuts. Boehner, Pelosi, Reid, and McConnell each get to name three people to a “Super Committee” to recommend another $1.5 trillion in deficit reduction by November. Their recommendations will get an up-or-down vote in both houses of Congress, with no amendments.

The problem with agreements like this is that no Congress can force a future Congress to do anything. So the agreement contains automatic cuts that will happen if the $1.5 trillion deficit reduction doesn’t pass. The automatic cuts are supposed to be ugly to both sides, so that they’ll be motivated to negotiate a deal to avoid them.

Republicans are so set against any tax increases on the wealthy that they wouldn’t agree to them even in this automatic deficit-reduction package that isn’t supposed to happen. Their motivation is supposed to come from defense spending cuts.

The painful-automatic-reduction feature of the agreement sets up another hostage crisis in November, with the idea that both sides will have hostages, so no one will get shot. Somehow I don’t find this comforting. Jonathan Chait has compared such agreements to ransoming your child from kidnappers for “$100,000 and your other child”.

The precedent we’ve set. Keep in mind that the debt ceiling has never been used this way before. Most other countries don’t even have a debt ceiling, because it’s redundant: If Congress passes a budget with a deficit, it shouldn’t have to separately authorize borrowing to cover it. (That’s like going to a restaurant with nothing but your Visa card, eating, and then debating whether you’re going to take on this additional debt by signing the receipt.)

In the past, debt-ceiling increases have been opportunities for the out-of-power party to posture about the irresponsibility of the in-power party. But never has there been a negotiation in which the president made concessions to get the ceiling raised. That’s because the debt ceiling is a doomsday device. Nobody seriously believed that the country would be better off if our government couldn’t meet its commitments.  So there was nothing to negotiate about.

But now hostage-taking has become a respectable tactic. Don’t take my word for it, listen to Senate Minority Leader Mitch McConnell.

I think some of our members may have thought the default issue was a hostage you might take a chance at shooting. Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming.

McConnell says this “set a template for the future. … we’ll be doing it all over.”

I keep flashing back to the novel The First Man in Rome. As the story begins, the Roman Republic has few rules but a lot of traditions. In a gradual back-and-forth escalation of advantage-seeking, Marius (the main character) and his enemies violate the traditions — sometimes with justification, sometimes not. By the end, Marius is mounting his enemies’ heads on spikes in the Forum.

So yeah, there is nothing illegal about holding the American economy hostage until you get what you want. It’s just a violation of tradition, something we’ve never done before. But if you go far enough down that road, you wind up with heads on spikes.

The downgrade. Raising the debt ceiling and cutting future deficits was supposed to keep our credit rating up. It didn’t. On Friday S&P downgraded the U.S. government’s bonds from AAA to AA+, which is still pretty good. (Japan is at AA-, and they manage to sell 30-year bonds at less than a 2% interest rate.) The other major ratings service, Moody’s, is maintaining the AAA rating, at least for now.

As with the debt-ceiling crisis, lots of blame is going back and forth. Democrats and Republicans are blaming each other, the administration is criticizing S&P, and so on.

Here’s the thing to understand: What bothers S&P isn’t the sheer size of the federal debt. (Again, Japan is much worse fiscal shape, and they’re far from bankrupt.) It’s the dysfunctionality of our political system. If you look at the trends and do the math, our current level of taxation doesn’t cover the expenses of a world empire with an aging population and an inefficient health care system. None of that is unsolvable, but S&P says:

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.

No one has a plan to disengage our military commitments, the Republicans have drawn a line in the sand against any increase in revenues, and our society is probably not willing to let large numbers of old people die in the streets. So how does that situation resolve? Inflation? Or maybe one of the future fiscal hostage crises goes bad and we actually default.

Given what we’ve just seen, it’s hard to make the case that loaning money to the U.S. government is risk-free.

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  • By The People Repelled « The Weekly Sift on August 8, 2011 at 12:04 pm

    […] A Week of Down. Bad as it looked, the debt-ceiling deal was supposed to keep the stock market from crashing and the ratings agencies from downgrading our bonds. Funny how that worked out. […]

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