My crystal ball on how the sequester will play out

The Thinker by Rodin

Lots of pundits are puzzling through the politics of the federal sequester that began March 1, trying to figure out how long it will last and what the end game will be. If it were simply a matter of exercising common sense, it would have never occurred in the first place. Neither party claims it wanted the sequester, so a one line law passed by both the House and the Senate repealing the sequester would have done the trick. But of course what parties say they want and what they actually do are two different things. The reality is that neither party nor the White House saw advantage in capitulation and Republicans simply refuse to compromise.

The sequester could be moot by March 26, which is when the current continuing resolution funding the government runs out. If no new resolution is passed, sequester will be the least of the government’s problems. It will simply shut down, except for whatever is considered to be emergency services. So federal employees worried about whether they will be furloughed one day a week will have bigger problems to worry about: total unemployment, at least until something is passed into law. The experience in 1996 didn’t go well for Republicans, so it is probably something they will not want to repeat. Time will tell.

The earliest impact of the sequester is going to be on constituencies that Republicans care the most about: defense and the massive military industrial complex that depends on defense spending. Federal employees may have thirty days to avoid furloughs, but defense contractors won’t be so lucky. This means that Republicans will endure most of the initial heat for blocking a resolution to the sequester. And the impact will fall most heavily in red states. Here in Virginia, our governor Bob McDonnell is already squealing, due to the huge defense contractor community both in the Washington suburbs and in the Hampton Roads area. The bright red state of Texas is also likely to be one of the first to get squeezed as well, as they also have their thumbs deep into the federal defense pie. They also host huge bases where much of the surrounding community has their livelihood dependent upon spending at these bases, such as Fort Hood.

Doubtless the military industrial complex is already frantically dialing their senators and legislators asking them to strike a deal. The only question is how long Republicans will choose to hold out against this squealing. And that depends on Republicans not affiliated with the Tea Party and whether they will bolt. If they find common ground with House Democrats, they would have a majority to end the sequester. This has been the tactic that Speaker Boehner has repeatedly used so far when he cannot convince his own party to take necessary action. What is unclear is whether enough pressure can be exerted to affect this change.

It’s more likely all parties will find a reason to drag it out through March 26. The question then becomes not the sequester, but what can pass a divided congress in the way of a continuing resolution to fund the government. What would normally happen is a split the difference bill between the House and the Senate. The Senate would probably not pass a continuing resolution that funds the government at the sequester rate through the end of the fiscal year without it being softened through tax increases. The House will probably not approve any resolution that increases taxes.

My bet is that in the end it will be the defense cuts that force the bargain and affect political compromise. The rationale from Republicans will go something like this: “We can no longer afford to jeopardize our nation’s security by these unilateral cuts to defense.” The compromise: ditch the defense cuts, but keep the non-discretionary cuts in place, but spread this pain over all discretionary spending. The deal will be in essence to cut the sequester in half, at least through the end of the fiscal year, and leave it in fiscal year 2014 to be figured out through the appropriation process. This way everyone sort of wins. Defense takes a smaller hit, but it will still be considered “manageable” by Republicans. Non-defense discretionary spending will be trimmed as well, but to the 2%-3% level vs. the 5%-6% for the year that has to be spread out through the end of fiscal year 2013 now.

Anyhow, that’s my crystal ball. We’ll see how this all works out, but one thing is certain: it won’t be easy or pretty.

No sense of proportion

The Thinker by Rodin

After six weeks or so of stalling, it appears that the federal government will “shut down” at midnight on Friday. It’s déjà vu for some of us who make our living as public servants. Given that the fiscal clock runs out in twenty four hours, it’s unlikely that some acceptable continuing resolution or fiscal year 2011 appropriation bill will somehow emerge, pass both houses of Congress and get signed into law so quickly. Which leaves us pondering really the imponderable: how long will it last this time?

Some think that it will be over by Monday morning, as this has happened in the past. The theory goes something like this: Republicans need to shutdown the government to satisfy the Tea Party, but once the government is actually shutdown, the base is miraculously satisfied enough that the House, Senate and the White House can agree on a bill that will win enough grudging support to bring government back to life by Monday morning. Except for possibly canceling the Cherry Blossom parade, the impact would not be felt in any meaningful way until Monday anyhow. Those of us with longer memories remember the shutdowns of 1995 and 1996, and see House Republicans this time in an even ornerier mood than then, so for us it’s best to husband cash and to try not to panic.

One thing I am confident about: Republicans will come to rue their “my way or the highway” high stakes brinkmanship. It does make the Tea Party and conservative base happy, because Republicans are a party of that believes in sadism for anyone not like them. But the fact remains the House is not the entirety of Congress and the President is a Democrat. No one side gets everything. It has never been this way in the past. A shutdown of any length is not going to change this fact. Moreover, poll after poll shows the public having a bad case of buyers’ remorse from the 2010 election. The longer a shutdown goes on, the steeper the political price that Republicans will pay. Those less motivated by ideology can see that the political winds have already shifted.

If Democrats have trouble governing because they devolve into too many factions, Republicans have trouble governing because they are too united and have no sense of proportion. Taking no prisoners may make them feel good for a while, but it wins them no new political support. As evident in Wisconsin and elsewhere, mainstream America is aghast by the current Republican overreach. They elected Republicans on the hope that they would help grow the economy and jobs. Jobs seem to be the last thing on their agenda. Instead they are hopelessly entangled in causes that the public does not care about. Defunding Planned Parenthood and bringing the government to a halt is more important than creating jobs?

What this shutdown will show, if it lasts for more than a week, is exactly what Republicans fear most: the value of government. It is one thing to furlough a relatively highly paid civil servant like me. It’s another thing to put America’s soldiers on half pay, most of who are already living from paycheck to paycheck. These people comprise a significant portion of their base; they are the last people they should be pissing off. But that’s just the start of it. Tell Mr. & Mrs. Taxpayer that their income tax refund, which they really need, will join a growing backlog of claims. Senior citizens vote disproportionately for Republicans, but if they need to file for Social Security, or try to claim a disability benefit, they will be out of luck. Then there are all our national parks that will be shuttered. It’s going to be like the Iran Hostage crisis. The media will cover it 24/7. “It’s Day 11 of the government shutdown and Mr. and Mrs. Jones from Camden, New Jersey are here at the gates of Yellowstone Park, furious that they cannot visit the park they had long planned to see.” Camera crews will be queued in front of the Smithsonian, the Washington Monument and Yellowstone Park as the 80,000 visitors a day trying to use our national parks cannot. It’s going to be terrible PR.

Who will they hold to blame? A party that already went more than half way to accommodate Republican demands? Or a party that won’t budge one inch from a hard-line position on both deep spending cuts in discretionary spending and who insist on tilting at windmills by cutting programs like Head Start, programs Americans overwhelmingly approve of? It’s not hard to see who will get the blame, and from the headwinds in Wisconsin and elsewhere the public will echo the same theme: Republicans have no sense of proportion and are being completely unreasonable. The only question will be how much damage Republicans will choose to inflict on their brand before they move toward actual compromise. If the Tea Party has its way, their miscalculations will quickly put Democrats back in charge of Congress and the White House in 2012 as well as render their whole movement as obsolete as Glenn Beck’s soon to be canceled TV show.

Meanwhile, the longer the shutdown lasts, the more it hurts independent businesses, the states and the private sector, those Republicans claim to care about. The federal contractors they champion who live off the federal dole will start to lay off workers and find their profits sinking. The hotels, restaurants and other service providers who cater to those who enjoy our national parks will find themselves in increasingly greater financial distress. The states, which depend on federal revenue sharing to shore up their Medicaid expenses, will have to pay for these services out of pocket when they are already financially stretched. Tourists planning that trip to France will not be happy when they find that all but emergency passports are nonessential services but their pre-purchased airline tickets are nonrefundable. A sustained shutdown is a great way to slow down our economic recovery just when it is gaining traction. In addition to about 800,000 federal employees with no incomes, many more will also feel the pain. The unemployment rate is likely to jump if it goes on for several weeks. Economic pain will spread more every week it endures as all those who support these services lose business and employment.

A  shutdown of any sustained length will simply boomerang against Republicans. The longer it goes on the more damage it will do to their brand. Ironically, a shutdown is a trap of their own making, which is wholly preventable. A smarter political party would be making measured moves toward implementing their agenda by finding issues that resonate with Main Street America so they can build their majorities. They would not be jumping into perilous waters, such as proposing massive changes to Medicare and Medicaid which have no chance of becoming law but simply show them as being obstinate.

If we must have a shutdown for Republicans to learn this lesson once again, well, I guess bring it on. John Boehner must be suffering from long term memory loss to allow this to happen to his party, given that he witnessed what happened the last time.

To quote Forrest Gump: Stupid is as stupid does. Blind and reckless ideology will be the Republican Party’s undoing one more time. The good news for Republicans: voters have no sense of collective memory, so they will probably put them back into power again before too long. Then the same pointless cycle can play out until our great republic finally devolves into chaos and dust.

Bet on more debt

The Thinker by Rodin

Revolution is breaking out not only in Egypt but also on Capitol Hill. While protestors demanding freedom are taking over Tahrir Square in Cairo, Republican senators and legislators complaining that oppressive “socialism” is diminishing our freedom.

On Capitol Hill, we have the expected noise principally from Republicans about how dreadfully awful our $1.5 trillion dollar deficit this year will be (I agree) and how it must be stopped now! The chess pieces are moving. Earlier in the week, Senate Republicans forced a vote on the repeal of the Affordable Care Act, which predictably lost. Certain federal district courts apparently don’t like the ACA either. One Florida judge declared the whole act unconstitutional.

Glimmers of Republican sanity are emerging. House Republicans, or at least its leadership, seem to be backing away from an earlier threat not to extend the federal debt ceiling later this year, realizing that the resulting economic meltdown may not be good for their reelection prospects. Meanwhile, President Obama is playing a clever game of defense, setting boundaries on what is acceptable and not acceptable to cut and vowing to veto bills with earmarks. Overall, the momentum certainly seems to be on the side of those trying to cut deficits and reduce the size of the federal government. This time will the cut federal spending and deficits crowd actually succeed?

My vote: bet on more debt. It seems likely that non-defense discretionary spending will be frozen for a few years. Of course, there will be lots of threats and wailing about how bad things are and how the dynamics must change now. However, that’s all they are: threats and wailing. To effect real change, new external drivers are needed. Specifically, our creditors need to stop lending us money (or slow the amount of money they are lending us) or bond rating firms (some of whom were bailed out by federal tax money just a couple of years ago) need to downgrade the U.S. Treasury’s AAA bond rating.

There is little evidence now that either of these things will happen. Why? There are many reasons but principally there is an enormous surplus of capital in the world, including trillions held by U.S. companies. Many of those holding the capital are already heavily invested in U.S. treasuries and do not want to see their investment’s value diminished. A lot of their extra money can certainly be invested in other stocks and bonds, but even blue chip companies are not as safe a refuge for money as U.S. treasury bills. Seeking safety, it seems unlikely that capital will flee U.S. securities.

The improving economy will eventually increase tax revenues. It will be hard to see over the next few years, particularly since Congress and the president have already agreed to borrow money to fund a cut in social security withholdings. Nevertheless, eventually the economy will pick up a head of steam, bringing in more in the way of revenues and thus lessening the deficit. As the deficit shrinks, however marginally, the animus to cut federal spending eases as well. Getting out of wars in Iraq and Afghanistan will help eventually as well.

Another reason to bet on debt is to consider what really matters. For Republicans, the deficit is a talking point toward their real utopian goal of cutting the size of the federal government. To seriously do this they need sixty plus votes in the Senate, a majority of the House and a Republican president. Two out of three are possible in 2012, but three out of three are very unlikely. As for right now, we will all have to muddle through somehow. What this will amount to in the end is probably a freeze on non-defense discretionary spending. President Obama noted in his State of the Union speech that this is only fifteen percent of federal spending, so a freeze does not solve any underlying problems. Medicare costs in particular will keep rising.

Republicans talk about cutting Medicare and Medicaid, but it is mostly talk. What they really want to do is cut non-defense discretionary spending. They want symbolic victories, like getting rid of the Department of Education and the Corporation for Public Broadcasting because these agencies offend them. Even if they succeed, which is unlikely, they don’t address the real problem. Discretionary spending outside of Defense has not been the principle cause of deficits since the Great Depression.

The real problems driving up the debt, aside from the bad economy and tax cuts are: Medicare, Medicaid and defense spending. Of the three, only one is a realistic target for major cuts. Can you pick the right target? If you said Medicaid, come up and claim your prize. Why Medicaid? Because when push comes to shove, the disenfranchised are always the first to go. You can see it in being played out right now in state and local governments. Here in Virginia, for example, services for the mentally ill were one of the first cut. A few people speak for the mentally ill, but not many and they are not well organized. Nor do they contribute to politicians’ war chests. Even with Medicaid, it is not going to go away, but if forced to choose between the three, it will be the first to be sizably cut. That is because those who buy influence ultimately win. The poor, being poor, cannot buy influence, and survive only on largess. So Medicaid stands a decent chance of being a loser, while farm subsidies will doubtless continue. (After all, they go principally to red states, and principally to large agricultural companies.)

The Defense Department may get symbolic cuts, but that’s all they will be. Secretary of Defense Robert Gates is proposing “cuts”, but this does not mean he expects DoD’s budget to go down. No, he is proposing slowing its rate of growth. While there are some Tea Partiers who would favor real and painful cuts to the Department of Defense, there are too many teats feeding off the military industrial complex. Cuts will be mostly symbolic and weapons systems built in large numbers of congressional districts, as usual, will be mostly immune to cuts.

Social Security is largely untouchable. Social Security will neither be abolished nor will it be replaced with some sort of voucher system. Any honest Republican knows this. At worst, the retirement age will be increased but that will prove unpopular with voters, who can hardly keep a job now. Moreover, social security is not insolvent. It will always have a steady revenue stream through withholdings. The only concern is that over the next twenty years it will be slowly drawing from its trust of already accumulated savings, i.e. Treasury bills, unless the law changes.

Medicare spending is the most chronic and largest problem. Cutting it and raising taxes are the only two things that will seriously reduce the deficit. Unfortunately, it remains popular with the public and retirees depend on it. Republicans live in a fantasy world that it can be converted into a voucher system. To fix Medicare will require making painful choices among many vested interests including doctors, drug companies, retirees, hospitals, ancillary insurance providers and clinics. For it to become solvent will require that hardest of work: everyone must share in the misery. Of course, everyone will want someone else to endure the misery, not them.

The last reason to bet on debt is that tax increases have become anathema. When push comes to shove, Republicans will put deficit spending ahead of tax increases. This is as sure as the sun will rise. The only way to seriously raise tax rates is to have a Democratic congress, sixty plus Democratic votes in the Senate and a Democratic president. That too is very unlikely.

So for the short term, unless our creditors and rating firms force our hand, expect barbarians at the gate, but wielding only noise as weapons. More debt will win because it is the least painful choice. Future generations, after all, aren’t yet of voting age.