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President and Tea Party Win Big, the National Interest Be Damned

Prof. Peter Morici - 8/1/2011

In the debt ceiling melodrama, the President and Tea Party each had political objectives and national interests to serve. Politics won out.

At the outset, the President demanded something his predecessors have not enjoyed—a debt ceiling increase large enough to see him through two years and his reelection campaign, and a greater measure of tax fairness.

With a Republican majority in the House, the President could only hope to achieve one of his goals. The final deal could have attracted centrist majorities in the House and Senate to close tax loopholes enjoyed by big corporations and wealthy Americans, but alas, the President picked his hide.

He will get his furlough from debt ceiling politics until after the 2012 election, and tax justice can wait.

The Tea Party had a choice too—entitlement reforms at the price of closing tax loopholes and a fairer tax structure to generate more revenue. Instead, that caucus, on July 23, balked at a landmark deal crafted by Speaker Boehner and President Obama that would have addressed both entitlements and the tax fairness.

That mega-deal would have changed the course of budget politics for the better for a decade but instead Tea Party Congressmen bowed to their base instincts. Now, they can boast to constituents they won spending cuts without succumbing to Democrats’ pleas for higher taxes.

Nowhere, did I hear the politicians—of either stripe—address the genuine nature of the deficit problem. The American private sector may be the most efficient on the planet, but the U.S. federal government is woefully uncompetitive.

Compared to other large prosperous democracies, like Germany and Japan, Americans have reasonable expectations of their federal government—effective law enforcement, protection from abusive business practices, a well functioning infrastructure to support commerce, a reasonable measure of income security in these uncertain times, a minimum standard of health care for all citizens, and a dignified retirement.

The problem Americans face is that they pay so much more than citizens in other countries to get comparable benefits—hence, Washington has budget deficits that no amount of tax increases can erase.

Over the last four years, federal spending has swelled an additional $1.1 trillion, when inflation required only $200 billion, and the budget deficit jumped ten-fold to $1.6 trillion. Consequently, now the federal government simply costs more than the economy can bear.

To point: increasing everyone’s taxes 50 percent would still leave an annual deficit of nearly $1 trillion.

The deficit reduction compromise reached by the President and Congressional Republicans makes spending cuts of about $900 billion over ten years ($90 billion a year) across all areas of government except the two areas creating the biggest problems—Social Security and accelerating Medicare and Medicaid costs. The deal establishes yet another blue ribbon panel of senators and representatives to find another $1.5 trillion ($150 billion a year), mostly in those two problem areas.

If successful, the federal government would still be left with annual deficits much greater than $1 trillion a year—more than increased taxes can erase and certainly big enough to ensure a downgrade by credit rating agencies.

The panel will play some quick tricks with Social Security, like lowering the inflation formula, even though the current formula shorts grandma on annual adjustments to Social Security.

The panel will shift some health care costs onto the states, employers and the well-to-do elderly. That only will accelerate health care price increases by expanding the market drug companies—and other health care monopolists—can bludgeon.

Social Security will never be fixed until President Obama steps up to the podium, stops denying the retirement programs’ impact on future budgets, and tells Americans, “we are living longer so we will have to work longer, otherwise the system will go bust and not be there for our kids.”

Don’t hold your breath waiting for that act of courage.

Americans spend 19 percent of GDP on health care, while the Germans and Dutch, with private systems and similar outcomes to the United States, spend 12 percent. Americans can’t hope to compete and create jobs if businesses must pay so much more in premiums and taxes to finance employee health care benefits.

The difference between the U.S. and those European systems—Europeans better manage the drug patent system, don’t let drug company and insurance company executives skim enough health care dollars to live like pre-revolutionary French aristocrats, and don’t let hospitals overstaff with the marginal competent clerks, technicians and overspecialized professionals—you have to spend a few days in one of those places to fully comprehend.

This week the President and the Tea Party got their victories but Americans will remain besieged by slow growth, high unemployment, stagnant wages, and a government too expensive for its citizens to bear.

It reminds a lot of the old Soviet Union—which if you will remember, quit the business of governing when it ran out of money.

Scapegoats and Deficits


It is an article of faith among Democrats that the Administration of George Bush caused plagues, pestilence and the nation’s economic woes—and by derivation the political morass that bests Washington.

The New York Times asserts huge budget deficits have resulted from the Iraq and Afghanistan wars and Bush tax cuts—which by the way lowered tax burdens for all Americans not just millionaires and billionaires.

Consider, in 2007—the last fiscal year before the Great Recession and the Democrats took control of Congress—the deficit stood at $161 billion—about one-tenth its present size. Two wars were at full tilt, and the Bush tax cuts and prescription drug benefits, which congressional democrats are always inclined to cite, were in place—all for several years.

Hmm, how can that be? If Mr. Bush’s policies caused the current big deficits, why did those require a change in party control, in congress and then the presidency, to happen? Simple observation indicates those policies were not the cause, and huge deficits, like a lot of ills, were caused by the economic collapse of 2008, which was motivated by bad economic policies that political parties had a hand in creating.

Mr. Bush, like Mr. Obama, inherited a country with deep economic troubles—granted Mr. Obama’s situation was much worse, because the nation’s structural problems have been cascading through cycles of expansion and recession for several decades.

Mr. Bush did pursue pro-growth policies and got unemployment down to about 5 percent before the Great Recession.

The terrible event was caused by “financial reforms” Treasury Secretary Larry Summers persuaded President Clinton to push through Congress. Those repealed Glass-Steagall and other constraints on abusive behavior by financial institutions that now plague Wall Street and America, and a gapping trade deficit that is nearly all accounted for by excessive reliance on imported oil and a massive trade deficit, mostly with China, and the rest of Asia. The latter deficit is a major component of the imbalance in demand for goods and services between the economies of Asia and the United States and Western Europe, and a significant reason Asia grows at near ten percent and the West at only about two.

Together, Wall Street abuses and the trade deficit resulted in shoddy mortgages, a housing bubble and huge foreign-sovereign capital inflows that financed the bubble with little attention to the soundness of loans banks were making.

Democrats in Congress have made it national policy to shift oil production from the United States, where environmental risks may be managed, to developing countries, where they may not as well be supervised. President Bill Clinton negotiated China’s entry into the WTO without creating suitable constraints on China’s exchange rate and other mercantilist policies that make free trade a unidirectional affair.

Mr. Bush and Republican Congresses turned a blind eye to growing abuses by bankers of their new freedom and China’s protectionism—those responses get an E from this professor.

Subsequent to the 2008 meltdown, though, stimulus spending and targeted tax cuts— passed at the behest of Presidents Bush and Obama, and Democratically controlled congresses—have failed to adequately lift the U.S. economy.

Additional expensive regulation of Wall Street has not slowed damaging financial practices but only inspired new tactics and for big banks to cut off lending to their regional brethren, which chokes lending to small and medium sized business. For example, the nation’s leading bank—J.P. Morgan—is working as hard as it can to develop offshore business and neglecting responsibilities to assist a domestic economy that heavily financed the Wall Street bailout.

Moreover, President Obama has made war on oil companies and manufacturing by indiscriminately tightening regulation, raising employee health costs and failing to aggressively address China’s abuse of the international currency system and mercantilism.

The economy has not recovered, many Americans are without jobs, and the President and his defenders spend their time blaming Republicans and engaged in new math. For example, how is it that a two income family earning $250,000 are millionaires as the President again asserted Monday evening? Also, why the obsession with repealing the Bush tax cuts to that group when the revenue yield would be about $80 billion or five percent of the $1.6 trillion deficit?

More progress would be accomplished if everyone stopped blaming one President or the other, scapegoating oil companies and the well-off, and recognized the need to trim spending. Since 2007, that’s up $1.1 trillion--$900 billion more than was needed for inflation—and tax increases won’t solve the deficit problem. Even if taxes were increased on everyone by 50 percent the deficit would still be outsized—likely about $1 trillion each year.

Simply, raising taxes won’t do it. The government is spending beyond what the economy can bear, and scapegoating won’t change that. Only real reductions in what we spend will solve the deficit—for example slicing in half the $900 in additional annual spending to save some $5 trillion over ten years, and asking everyone to pay more taxes by letting all the Bush tax cuts expire—will fix the deficit.

GDP Growth Goes Flat


The economy expanded a tepid 1.3 percent in second quarter as consumer spending went flat, and imports drained off much of that domestic demand. Higher oil prices, Wall Street contracting and local governments retrenching are killing growth. All on top of a huge trade deficit with China, which sends much of what is not spent on oil abroad to China--not enough of either comes back to buy exports and replace jobs lost to oil and Chinese electronics. Exports were up but without cracking the protected Chinese market--which is where the consumers are--U.S. chances to lower unemployment are nil.

Globalized economies must go with their strengths. For the United States those are resources, banking and medium and high-tech manufacturing and services.

Shutting down drilling makes the United States too dependent on foreign oil when it could be energy independent with oil selling for $100 a barrel.

Wall Street needs proper regulation but Sarbanes-Oxley and Dodd-Frank have not reined in trading nor redirected efforts toward honest lending. Too many business are dependent on volatile to crisis money markets for cash, because banks won't lend but instead trade.

Finally, China' exchange rate policy deprives U.S. of growth in mid-range and high end manufacturing.

If an economy doesn't go with its strengths, it can't create jobs in a globalized economy.

President Obama will blame his predecessors and House GOP and budget morass--and with the help of the New York Times may get away with it.