The Debt Limit

By Richard Baehr

I am pretty certain that in the current debate over the debt ceiling and the attempt to reduce the deficit, the President will come out on top. The reason for this is simple- he is the leader of his Party and his side in the debate. What Nancy Pelosi and Harry Reid think is irrelevant. Other than demagoguery about Eric Cantor, they have largely kept their mouths shut. Obama has the big megaphone, and gets all the networks to break away for his speeches and press conferences. So he can shade every substantive debate his way, and get a large audience for his attempt to frame his side as one that wants to compromise, behave responsibly, achieve balance between tax increases on those who can afford to pay more and cutting programs for the needy (in reality, mostly the middle class).

On the GOP side, you have a fight for the nomination going on, so the leaders of the Party are those in the Senate and House. Here real ideological battles are playing out publicly.

I just watched a bit of the Obama press conference, and as usual, he lied. Obama argued that America is not Greece or Portugal and our deficit problems only need a little tweaking. That is patently false. The Obama budget for the next ten years, relies on optimistic growth forecasts for the economy, optimistic forecasts for interest rates on federal debt (very low), and absurd estimates of the cost of the health care reform act -- now scored as a deficit reducer, when in reality, once many companies drop coverage , pay the small penalties, and allow their employees to enter the subsidized exchanges, the cost will skyrocket. The federal deficit of $14 trillion could easily double in the next ten years. Greece is taking some medicine. We have not. As usual, we will defer the problem.

We have a gridlock in Washington because one party, the Democrats, does not trust the results of the private economy, and wants to insure the results it desires. They need larger government to achieve more redistribution. For that they need more tax money. The GOP is more sensible about the size of government and the excess of regulation (and its job killing impact). They understand that almost all "cuts" in government spending are really not cuts at all, but merely cuts in the rate of growth of government. The debate over changing the inflation adjustment for Social Security by a few tenths of one percent per year going forward, brought out all the predictable "granny will freeze, starve and fall over a cliff" baloney.

The GOP has its own problems. Too many Republicans are happy to sign pledges, such as the Norquist pledge on taxes. I would have taken a deal on the deficit/debt limit, that would have realized $4 trillion in net deficit reduction, with a ratio of $3 dollars in spending for $1 in revenue increases, if the spending reductions would have included entitlements, and the revenue increases would have come from simplifying the tax code, and eliminating some of the crony capitalism achieved by lobbyists. The Democrats would have lost the political advantage they now may get from these never ending negotiations, which the media is happy to portray as GOP obstructionism, and the deficit reduction would have been much larger than the debt limit increase, now unlikely to happen.

Quite simply, I do not buy that all stimulus spending is useless (though much of the Obama 2009 package was), but that all tax cuts work magic for the economy. The Bush tax rebate in 2008 did nothing. Nor did the tax cuts in the 2009 stimulus (a third of the package). I see little evidence that the payroll tax cut from the December 2010 deal has had any stimulative effect on the economy. In other words, it is a stretch to argue that taxes cannot go up one dollar in a recession because it damages the economy, but spending can go down by trillions, because that is not damaging.

I much prefer individuals and corporations to make decisions on how to spend and invest, not government. Government has no concern for its bottom line, and spending always rises. Corporations and individuals make real cuts when they need to.

I understand the frustration in the GOP about not wanting to raise taxes, since they believe that will only cut the amount of spending reductions in any package. But it is impossible to argue that the current tax code is sane. It is designed for complexity by lobbyists, lawyers, and government officials, all of whom profit from being able to buy or sell fixes and favors.

The truth of the matter is that the GOP does not have the ability to achieve deficit reduction on its own. The GOP only controls the House, and can only say no to a Democratic plan. So you can block a Democratic plan, and get blamed, or you get the best compromise you can.

Of course, the idea that Democrats were willing to do a 3 for 1 debt deal may be pure fiction, and represent nothing more than spinning for a friendly compliant media eager to bash the GOP. Or maybe the plan was discussed, but the hard left within the Democratic Party killed the idea.

Short notes:

- Obama's former budget director, Peter Orszag lays out the real budget math. It is ugly.

- To get re-elected, Obama will need to turn out the groups that backed him overwhelmingly last time. Ruy Texeira, a liberal but solid student of American politics, argues that the weak economy will make that less likely. Even if Obama gets some short term benefit from the debt ceiling debate, the slow GDP growth, and high unemployment may be his demise. Obama is not a serious President, and his term has been a mix of ideology and politics, not problem solving.

- Al Gore was right about one thing (and only one thing): we needed an "ironclad lockbox" for the Social Security trust fund, not IOUs, or there would no trust fund. Now the Obama team admits this. No one who pays into Social Security is building any equity for their retirement. You only have the promise that future taxpayers will fund your retirement. Your Social Security taxes today pay for some other person's retirement. Rick Richman lays out the admission.

- The Medicare prescription drug plan, passed in the Bush administration, is alone among government funded health programs , coming in well under budget. Why?

- One of the scariest aspects of the Obama administration is the people it listens to. On foreign policy, Samantha Power, Tom Friedman, and Fareed Zakaria are some of the influential. In domestic policy, Paul Krugman and the SEIU are the kings.

- During the very brief period between Obama's inauguration and the passage of the stimulus bill, Krugman argued tirelessly for taking a large share of the stimulus money and sending it to the states, so they could avoid cutting spending. It was , he argued, very effective targeted spending. Now he writes that the stimulus failed , in part , because too much went for programs that provided no real stimulus, or permanent job creation, like aid to states and cities . Mickey Kaus wants to know which Krugman is right or whether Krugman is just forgetful.