Staring at the Debt Ceiling

So, have you been staring at the debt ceiling? I have. Really fascinating stuff. Yeah, I know.  

But it's also worrisome stuff. I've got a 401k and a job in a pretty fragile industry, so predictions for an economic quake if the ceiling isn't raised by August 2 make me woozy. And, on top of that, I have a dentist appointment that day.

I've absorbed lots of different takes on this. Allow me to purge my thoughts.

I do not have much confidence that something good will come of all this. One reason is that this whole debate is pretty much about how to achieve responsible deficit reduction. And we have two political parties with absolutely no credibility whatsoever on achieving responsible deficit reduction.

When President Obama and the Democrats took over the show in 2009, they passed a huge economic stimulus. That's understandable, considering the economy was teetering on the brink of the D-word. What's not understandable is how the new, popular and emboldened president allowed Circus Congress to take the lead in shaping that stimulus. And apparently, the only shape Reid and Pelosi knew how to craft was an 800-billion-sided monstrosity. So, when the clown car departed and the confetti settled, some of the surplus did its job, at least in keeping things from getting a whole lot worse. But some of it was wasted by congressional foolishness and hubris. Unfortunately, we really, really needed all of it to work. It was a big blunder.

And when Democrats could have really made a dent in future deficits by letting the Bush-era tax cuts expire, they lost nerve. Obama compromised, which was very good politics at the time. But that's the trouble, kicking the can down the road is often very good politics.

Obama also expanded the war in Afghanistan and added Libya, without any authorization. Not cheap.

When Republicans and President Bush dictated the agenda starting in 2001, they passed a large, temporary tax cut to give a sizable budget surplus back to taxpayers. They made it a 10 year cut, figuring that even when the surplus was gone, economic growth would continue to feed revenues. That's understandable. What's not understandable is, now that it's crystal clear that those assumptions were wrong, it's become an unshakable article of faith for Republicans that those tax cuts must be made permanent. And that no tax change resulting in more revenue can ever, ever be made.

And while Republicans ran the show, not only did they not cut spending, spending blossomed. Wars, one clearly warranted, one much less so, a Medicare drug benefit, etc. Deficits clearly did not matter, despite lots of rhetoric to the contrary.

So, ladies and gentlemen, these are your deficit fighters. I'll let the applause die down.

I will give Obama credit in this current struggle. He appears to be the only one at the table who understands and is willing to acknowledge what happened in November 2010.

Obama gets that Republicans made big gains because many Americans are fed up with massive spending and are worried about the growing size and scope of government. That's probably why he's been willing put a pretty impressive marker on the negotiating table, $4 trillion in cuts and $800 million in tax hikes/code cleanups over 10 years. His tax reform bid would actually pre-empt the expiration of the Bush tax cuts now set for the end of 2012.

He's got to face voters next year, so he has to show them he gets it. That's sort of what politicians are supposed to do.

Still, many Democrats want to bask in some sort of fantasy that 2010 never happened. They're horrified that Obama would touch Medicare and Social Security, even thought it's clear you can't do serious deficit reduction without touching entitlements. They're appalled that he would try to deal with crazy Republicans, who, news flash, control half of Congress.

Bleeding Heartland, for instance, is not pleased:

Obama is not only eager to help Republicans trim spending, he's begging them to join him on cutting entitlements. Maybe he thinks he will go down in history as the brave president who fought his own party to "do the right thing." More likely he'll go down in history as the Democrat who started dismantling Medicare and Social Security, or the president who settled for historically high unemployment as the new normal.

If he loses the 2012 election, he'll have only himself to blame.

Republicans clearly know they won something big in 2010, but what they don't seem to understand is that they now control the U.S. House of Representatives, an important part of our government. They act as though they're still a scrappy minority, making unreasonably rigid demands, gleefully tossing bombs and debating light bulbs. They did not just win some sort of student council vote to run the Tea Party, they were elected to take a key role in governing the whole country. And, news flash, Democrats still control the White House and Senate, so getting everything your way is a non-starter.

Republicans are rejecting Obama's bid because it includes tax hikes/changes that raise revenue. They've signed pledges, for Pete's sake. Never mind that you can't do serious deficit reduction without more revenue. The party that led the charge for two off-budget wars is now also shocked by the need to slice defense spending.

Presidential wannabees like Michele Bachmann, T-Paw, etc., are in Iowa clamoring for Republicans to let the ceiling deadline pass and the chips fall where they may. These are "leaders" who will argue that gay marriage and health care exchanges are going to bring down the republic, but turning off 44 percent of the government, and flirting with default, is no big deal. It''s just a pleasant cleansing purge. Only Mitt Romney has had the good sense to keep his trap shut while Rome starts smoldering.

Luckily, not every Republican thinks this way. Exhibit A, David Frum:

The government buys everything from equipment for cancer research to metal for warships to toothpicks for federal cafeterias. Suppose the government had to cut 44% from its budget on 2 weeks notice? How sharp a shock would that be to the world economy?

Here's a comparative. In the worst quarter of 2009, American consumers cut their spending by … not 44%, not even 4.4%, but 1.2%. That 1.2% drop in consumer spending helped tumble the US economy into the worst collapse since the 1930s.

The US consumer sector is even larger than the federal government sector. But it's not unimaginably larger. US consumers spend about $10 trillion a year. The federal government spends about $3.4 trillion.

If a cut of 1.2% from $10 trillion was an economic shock, a cut of 44% from $3.4 trillion will be a much, much, much bigger shock.

Maybe this debt ceiling tussle isn't the perfect venue for a major effort to tackle the deficit. But big issues, big wars etc. are often settled by unplanned, inopportune or accidental circumstances. I think this is an opportunity to do something necessary with the right mix of shared blame and big consequences to push things along. It's time for this to happen.

But, as I said in the beginning, I don't think it will happen. Our politics and institutions are way too screwed up. All we can hope for is they'll come to their senses and do something before the deadline.

Obama says it's time to eat our peas. But I'm more concerned that a big sh** sandwich will be on our August menu.