No Budget Deal Possible Until The Adults Come To Play

 Guest post  by Peter Morici

Any parent knows, adolescents are inclined to deny facts when told something they want is not possible. Poor Speaker Boehner is frustrated by Capitol Children’s Players.

House Minority Leader Pelosi simply won’t accept that the Bush wars, tax cuts and prescription drug benefit for seniors didn’t cause the deficit. To point: in 2007, with all the aforementioned in play, the deficit was a manageable $161 billion, but since then government spending is up $1.1 trillion, when only $200 billion was needed to accommodate inflation, and federal spending has increased from 19.6 percent of GDP to nearly 26 percent.

The culprits are: additional regulatory costs; more and more expensive Medicare and Medicaid benefits and high prices created by “health care reforms” championed by Leader Pelosi and President Obama; and a population that lives longer while these politicians refuse to entertain further raising the retirement age.

Further, Leader Pelosi and the President cannot accept that more taxes are not the answer. Even if every tax and fee the government collected were raised by fifty percent-something that is not possible because some activities would leave the country and some services would have many fewer customers-the deficit would still exceed $600 billion.

The millionaires tax the Minority Leader and President love to flog would raise only about $80 billion or about 5 percent of the 2011 $1.6 trillion budget gap. Simply, the family budget cannot afford the new cars Leader Pelosi and President Obama bought on credit.

Over on the Republican side, the Tea Party, lead by House Majority Leader Kantor, refuses to understand that the 2010 election victory gave Republicans control of one-half of one of the two political branches of government. Control of one-quarter of the policymaking apparatus may give Republicans a veto over any change or even raising the deficit ceiling, but it does not put them in a position to impose systemic change to national policy.

Generally, political parties must win two national elections in a row to gain enough control to unilaterally impose change. That’s what the Democrats accomplished in 2006 and 2008, and that is how they got their new health care law. Without defeating President Obama in 2012, Republicans will not have the political power they rhetorically claim now, hence they must compromise on new taxes or the government partially shuts down.

Note, I said shuts down-as the Minnesota did recently for a few weeks-and not default.

Boyish Treasury Secretary Geithner is running around telling everyone the United States will be out of money and default on August 2 when it will still have lots of cash and only default if he and the President so decide.

The federal government still will collect taxes and other fees exceeding $180 billion per month; and interest payments on the national debt eat up less than $30 billion. If the Treasury prioritizes expenditures-as did the state of Minnesota during its partial shutdown-it could pay interest on bonds, roll over bonds coming due, and pay Social Security recipients and many other obligations.

Standard and Poor’s could downgrade the United States-but the fact is it is threatening to do that next year no matter what deal is reached now to raise the debt ceiling. Even though the ability to print dollars means the United States will never truly be compelled to default, it applies the same analysis to big countries printing international reserve currencies as it does small ones without reserve currencies.

For example, recently bond rating agencies ludicrously downgraded Japan because of its large debt, when the Japanese owe the money to themselves. The Japanese save too much, the government sells them bonds and spends the money for them. They don’t have the big external debt like the United States, the Bank of Japan controls a reserve currency, and Japan is a net creditor country.

The markets simply did not validate the downgrade. The Japanese are not paying higher interest rates for debt, as prophesized will now happen to the United States.

Simply, there are no good substitutes available to global capital markets in sufficient quantities for the dollar and dollar denominated sovereign debt. After the melodrama of Friday through Sunday, Asian markets were supposed to crash Monday morning but didn’t.

The boys at S&P also told us mortgage backed securities were solid investments. They do economics like my sophomores, and I don’t listen to undergraduates when predicting the future of the U.S. economy or sovereign debt either.

I have much sympathy for Speaker Boehner. He may be the only adult in the room. Surely he has the patience of Judge Hardy listening to Barack, Eric and Nancy-oops I mean Andy Hardy and friends.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.

 Uncle Sam Broke

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2 Responses to No Budget Deal Possible Until The Adults Come To Play

  1. Erik Grad says:

    This editorial misses the point – the problem isn’t a partial shutdown of government, it’s the downgrading of our credit rating. Not every rating source will be waiting until next year like the carefully chosen choice of Standard & Poor’s mentioned above.

    If you don’t think credit rating matters, do a Google search of the following words together “Greece” “credit rating” and “default”. The rest of Europe is scrambling to bail them out.

    Why Boehner, Reid, Obama can’t get together and pass an increase of the debt limit as a standalone measure is beyond my understanding. Its been done dozens of times before without all of this drama and risk to US interests.

    Also, the notion that our national debt (and the projected trajectory of it) is due to Obamacare or Medicare is ridiculous…neither of them may be an asset to our national interests, but they are not the source of our current buildup of national debt. Medicare could present problems in the future, but currently holds a surplus, and could actually still pay out benefits beyond our default deadline.

    • speakingofprecision says:

      Thanks for sharing your point of view Eric. To some people it is all about the potential shut down. While to others it is about the credit risk. We posted this because it shows that the inevitability necessity of a default per se is not necessarily so. With proper management of cash flow, the federal govt can continue to pay its interest as it comes due and continue selected vital services. But perhaps all the white house staff will go on furlough- what are the chances of that?

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