US Politics Special: Fiddling While America Defaults?

To look at the state of US politics and the economy, a brief stop-over in Britain....

British Prime Minister David Cameron has worked hard over his career to ensure his public image portrays the compassionate face of conservatism. In that he has been largely successful, but his recent political reputation has rested on the perception that he is, above all considerations of image, "serious" about Britain's debt and deficit problems. The man likes to smile. Mention Britain's economic future, however, and he becomes grim, focused, and – for the most part – decisive. His policies designed to deal with the debt problem are contentious, and might even prove disastrous, but very few people doubt that the Prime Minister is totally committed to finding a way out of the public finances mess in which Britain finds itself.

For some reason, President Obama has decided not to assume a similar role. With four weeks to go before the US faces a possible default on its debt, there is still little sense of how he will lead the country out of the public finances mess the nation faces. It defies belief that the Administration does not have some kind of long-term strategy to ensure that America pays its bills come 2 August, but quite what that plan is nobody outside the Administration could claim to know for sure.

One disturbing possibility to begin considering is that Obama is privy to information that the crisis in America's finances is worse than thought --- his seeming reluctance to get fully involved in the debate is, in fact, a masterful attempt to avoid spooking the markets before a Band-aid can be slapped on the problem. That is pure speculation, but it says something about the ineffectiveness of the President that the only way to take some cold comfort from his performance is to imagine an even worse scenario.

It's not as if there are a lack of budget plans and deficit-reduction ideas out there, and, unless President Obama knows something the rest of the country doesn't, it is not a sudden transitory crisis. Back in January, 2010, when the debt-limit was last raised, Sen. Kent Conrad (D - North Dakota), Chairman of the Senate Budget Committee, led the calls for creating a bipartisan commission to find ways of reducing America's deficits. The Senate failed to get the 60-vote "super-majority" threshold required to establish the commission, and Conrad's suggestion was adopted by an Executive Order with only tepid support from the President. Conrad's statement then, that “Congress must send "a message to the American people and the markets all across the world that the United States is prepared to stand up and deal with this debt threat", makes for depressing reading now.

Credit must go to Conrad for repeating since then that America's debt problems is, quoting the warning of Admiral Mike Mullen, the Chairman of the Joint Chiefs of Staff, “our biggest national security threat". The Senator said in a floor appearance on 23 June, “Make no mistake, we do face a debt threat of ominous proportions.” It is this single-minded doggedness on the issue that, hopefully, as Conrad releases his long-awaited deficit-reduction plan on Wednesday, will garner support in the halls of Washington for some sort of long-term solution to America's debt crisis.

No one, least of all Sen. Conrad, believes that his plan will pass into legislation unaltered through Congress, but something has to give soon, on both sides, for a compromise to be reached. That may be too much to hope for, especially as Conrad's previous budget proposals have received little support from even his fellow Senate Democrats, but his party cannot simply afford to hope that Republicans will take the whole blame if no accord over the debt limit is reached. By dint of being the only constructive Democratic proposal still in play, the Conrad plan to cut $4 trillion from the deficit in ten years may become their default bargaining position in any final spending versus revenue discussions.

While we are on the general theme of the depressing lack of constructive action by politicians over the debt-limit, even in the Senate, the loudest note of despair on Tuesday came from Sen. Jeff Sessions (R-Alabama). Speaking on the floor of the "world's most deliberative body," Sessions, the ranking Republican member of the Senate Budget Committee, warned, "I'm beginning to wonder if the United States Senate is in fact beginning to lose its reason for being."

But whatever form the endgame talks take, they need to begin sooner rather than later. The Senate Minority Leader, Harry Reid (D-Nevada), was emphatic on Tuesday, "We no longer have months or even weeks to avert this catastrophe, we have days." But even if Reid grasps the urgency of the situation, noting that “the United States of America stands at the brink of defaulting on our financial obligations", his approach to the potential disaster was depressingly familiar. He called for a "Sense of the Senate" resolution on increasing taxes on millionaires; echoing the statements made by President Obama last week on ending tax breaks for corporate jet owners.

Reid's and Obama's class-warfare rhetoric is depressing because it is about as useful, in deficit reduction terms, as lancing a boil while the rest of the the patient suffers from terminal cancer. Back in May, Sen. Max Baucus (D-Montana), Chairman of the Senate Finance Committee, held a hearing on the tax breaks enjoyed by oil and gas companies in the US. Sen. Baucus “questioned executives from the five largest companies on whether the $2.1 billion spent annually on tax breaks is the best use of taxpayer dollars, particularly given the top companies are on pace to make $140 billion in profits this year.”

The $2.1 billion is, roughly, 0.2% of America's deficit this year, but to hear Reid and Obama, ending these tax breaks would make a significant impact on reducing the debt. We are all prone to chuckle at the Tea Party for holding the erroneous view that cutting foreign aid would somehow help balance America's books, yet progressives are as keen to delude themselves that soaking the rich is enough to solve the problem.

Take another example: Four weeks ago Senator Joe Lieberman (Ind-Connecticut) and Senator Coburn (R-Oklahoma) released their plan for saving Medicare. Part of their proposal would require higher-income Americans --- $300,000 annual income for couples --- to pay a greater share of their Part B and Part D premiums. Between them those two changes would save $10-20 billion, spread over ten years.

Compare that saving to a report of the numbers used by Lawrence Lindsay, former head of President Bush's Economic Policy Council, as he described the possible future of America's deficit:

The average rate of interest the Fed has had to pay to borrow for the last two decades has been 5.7 percent. However, President Obama is projecting the cost of money at only 2.5 percent.

A return to the normal Fed rate would, by 2020, add $4.9 trillion to the cumulative deficit, says Lindsey, more than twice the $2 trillion in savings being discussed in Joe Biden's debt-ceiling deal.

Second, Obama is estimating growth in 2012, 2013 and 2014 at 4, 4.5 and 4.1 percent. But the normal rate for a mature economy recovering from recession is 2.5 percent.

Hence, if we return to a normal rate of growth, rather than rise to Obama's projected rate, says Lindsey, that would add $700 billion to the deficit over the next three years and $4 trillion by 2020.

Taken together, a U.S. return to a normal rate of growth of 2.5 percent, higher than today, and a normal rate of interest for the Fed could add as much as $9 trillion to the deficits between now and 2020.

Or consider the Bipartisan Policy Center's appraisal of the consequences of not raising the debt limit by August 2. They  “project that the government will be unable to pay 44 percent of its bills during the remainder of August. That amounts to a $134 billion one-month spending reduction. As our study illustrates, a 44 percent spending cut will require deep incisions to many important and popular programs. Treasury would have to choose from a universe of bad options, each one more unthinkable than the next.” Ending tax breaks for oil and gas companies would give the US a 12-hour respite in making those "unthinkable" cuts.

Singling out President Obama and Senator Reid for criticism may well be unfair. David Brooks made a powerful argument in The New York Times, "Over the past week, Democrats have stopped making concessions. They are coming to the conclusion that if the Republicans are fanatics then they better be fanatics, too." Brooks' central contention is that the Republican Party has recently “been infected by a faction that is more of a psychological protest than a practical, governing alternative,” and that the “members of this movement do not accept the logic of compromise, no matter how sweet the terms. If you ask them to raise taxes by an inch in order to cut government by a foot, they will say no. If you ask them to raise taxes by an inch to cut government by a yard, they will still say no.”

But the political reality for President Obama and Senator Reid – and Nancy Pelosi – is that the most achievable bipartisan consensus for a long-term debt solution, at least before the 2012 elections, comes in the form of a united Democratic Party drawing enough moderate Republican support to get something passed by both houses of Congress. But that remote positive possibility remains only a pipe dream while the most important members of the Democratic Party are not seen to take the political risk themselves.