Monday, July 25, 2011

The Triumph of Politics

America is the only country in the world that has the luxury of creating an economic crisis when there isn't one. Ours is the only democracy with a debt ceiling, with the exception of Denmark, which raises its ceiling well in advance of when it would be reached. Economists say that our "debt crisis" is an unforced error, because people are more than willing to lend us money, at pretty good rates. This is the benefit of having a really good credit score.

And yet there are some who wish to call the credit card company to voluntarily reduce our credit limit after they just max-ed it out. This tells us that politics triumphs economics in this country. That we ended up with so much debt is a result of politics, anyway. For all the talk of budgetary restraint coming from Congress, the fact is it was Congress that authorized all the spending that has brought us to where we are. Yes, every single dime. The only way to explain a Congress which wants to spend, and indeed already has, and also wants now to cap spending, is to understand the pathologies of the budgetary process. Members of Congress have an incentive to bring the pork home, and they have done this for two centuries. They must also defer all redistributive policies to the federal government, because citizens of states are mobile and can escape the reach of state redistributive policies. The collective outcome of this is a federal government that is milked for everything it can give to the states, and on top of that, left to do the dirty redistributive (and regulatory) work that no state can do. The grand paradox is that a Constitution written to exploit jealousy and suspicion in the pursuit of liberty also ended up consolidating a bureaucracy that not even Hamilton could have imagined.

And still we continue apace. Rather than fight politics by taking it away, the libertarian ideology of Grover Norquist is an effort to fight politics with ideology. In the hope that ambition can counteract ambition, this has always been the American way. The Tea Party is deliberately trying to inflict a wound on our financial credibility, by signally to the market that we may choose to default in a roundabout way of forcing us to spend less. And yet for all the talk of "getting our house in order," presumably the whole point of doing so was to restore our financial credibility, which would be better off without a forced financial crisis in the first place.

If we are talking in circles, it is because politics is circular. It is rooted in human nature, messy, dedicated to the short term, and oblivious to the historical accumulation of short-term utility-maximization. But fissiparous politics has also been the guarantee of liberty in America. And the greatest freedom is surely the freedom to make our own mistakes.

Wednesday, July 13, 2011

Republicans will Pay for the Tea Party's Ideological Purity

Tea Party Republicans are about to be forced fed a slice of humble pie. In the first test of their political acumen since sweeping into Congress last year, they showed an ignorance of the first rule of democratic politics: never say never, because a politician's got to be a politician.

Especially on an issue, the federal debt ceiling, with stakes as high as financial Armageddon itself! All the best intentions in the world served up on the high horse of ideological purity is about to bring the entire Republican party to its knees before Obama on this issue.

Ronald Reagan presided over 16 debt ceiling raises, Bush saw it raised 7 times. Did Tea Party Republicans really think that they could out-Republican Reagan and Bush? There's the crux of any bargaining game -- know thine chips. There is simply no way Wall Street and the Chambers of Commerce around the nation were going to sit around and let the Tea Party faction within the Republican fold play with this financial matter of life and death. Maybe it was the residue of last year's electoral hubris, or maybe they believed the myth that fiscal conservatism is the one thing that unites Republicans, or maybe they forgot that the president wields a veto, but Tea Partiers and their leaders in Congress should never have done a repeat of George H. W. Bush's "Read my lips, no new taxes." Doing this backed them into a corner, flanked by no debt ceiling increases on the one side, and no tax increases on the other. Leaving no standing room left for compromises, the Tea Party caucus is about to realize that two negatives do not together make a "yes" from the White House. In fact, the only one who gets to say "no" with no less than constitutional gravity is the President.

Obama knew this issue was his to win all along, and he has played the Republicans like a fiddle, presenting himself as a grand negotiator and eminent pragmatist; the go-getter who slyly had it implied that cheques for social security may not be sent out in August, and the media played along and covered the circus. But Obama knew that he never ever had to compromise, which is why he raised the goal of achieving a 4 trillion dollar plan to ensure both that he looked presidentially ambitious, and that he would get exactly what he wants when the deal inevitably fails. Republican leaders trotted along into the White House negotiation table, willingly playing his game in part because they had to look like they were trying, but for the most part, clueless about the plastic value of their bargaining chips.

It is one thing to take an extreme position, but it is another to take an extreme position on a matter that could precipitate financial Armageddon. I have to believe that anyone who is willing to take that risk has a part of herself who would like to see financial collapse on Wall Street, the decimation of corporate capitalism, and a return to Jacksonian laissez faire. The president is rather smugly playing this game because he knows that he doesn't have to lift a hand knowing that in the end, Wall Street will rein the Tea Party in. And so mainstream Republicans have allowed themselves to lose control of the message -- which worked so very well in their favor when they were still focused on jobs -- by talking themselves into corner on an issue they wrongly thought was more on their side than on the president's. Wall Street is not conservative or Republican, Tea Partiers! It's even more powerful than the liberals, and that's why the Dow's not even flinching.

Worse still, by sticking to their guns on no tax increases, the Republican party, which is bigger and normally wiser than the Tea Party orthodoxy, has missed the opportunity to call the president's bluff, and take the deal of a life time involving three dollars of spending cuts for every dollar of revenue increase. Republicans should take the deal if it is still on the table, or else they are going to look very impotent indeed when they're forced, under Mitch McConnell's plan, to raise the debt ceiling by convoluted way of saying no to it. Either way, this was a high-stakes game of politics played wrongly on the Republican side. That the debt ceiling would be raised was, and remains, a foregone conclusion, and that the Tea Party thought they could use it against Obama guaranteed that they will be used.

Monday, July 11, 2011

If the Public Debt Robs our Children, We Robbed the WWII Generation

It is often said that the public debt is a burden we leave to our children and grandchildren. Even Barack Obama said the same when he was a Senator. Invoking children is a great way to make a moral argument without sounding moralistic, but it is a spurious way to make an economic argument in committing the fallacy that all borrowing is deferred charge.

The American people should know that it is not as if the 14 trillion dollar public debt is owed to foreigners. Actually, Paul Krugman (not surprisingly, a Keynesian) thinks that the figure that matters is the debt (or federal securities) held by foreigners and institutions outside of the US, which is about 9.6 trillion. The remaining 5 trillion or so, called intra-governmental debt, is the debt the federal government owes to itself, such as in the form of debt owed to trust funds like Social Security. The cries against burdening our children and grandchildren are illegitimate here. Borrowing by the federal government is itself a market transaction and an investment decision in which the lender forgoes the present use of her money, and purchases a security in return for interest. This interest is socially costless because it is simply a redistribution from all tax-payers to bond-holders. This is a transfer payment, not robbery.

What is missed in the intergenerational-robbery fallacy is that deficits actually help present working cohorts to invest in the increased supply of assets, generated by the debt. Far from being a burden to their children, the present working cohort are, if they are not also building tangible assets made possible by the money raised, at the very least saving for their retirement and doing their part to ensure that future generations are not called on to fund their retirement (either personally, or by public programs). We don't even have to get into Keynesian arguments about how debt possibly increases aggregate demand and jobs to show that government borrowing in such instances does the exact opposite of burdening future generations. This is what makes government borrowing a potent instrument of fiscal (read "stimulus") policy, and it is the real reason why deficit hawks are against it.

Debt sounds like a bad word only because we are falsely analogizing from the personal, or the household, to the public sphere. But what is prudent for the individual or the household is not necessarily prudent for the market. (That's why the economy needs us all to go out and buy even if we don't feel we should.) Yet the false analogizing isn't too surprising if we recall that one strand of ideology in this country has always started off from the perspective if the individual, and the other, the collectivity. We can argue till the cows come home on the latter, but the idea that the public debt is always and entirely a burden to future generations is simply and certifiably fallacious. We are the children and grandchildren of people living during WWII, during which time the public debt as a percentage of GDP was even higher than what it is now, but I don't think anyone will argue that we're now paying off their debt.

OK wait, maybe some will.

Monday, July 4, 2011

Rethinking July 4th

Today is Independence Day, we correctly note. But most Americans do not merely think of July 4 as a day for celebrating Independence. We are told, especially by the Tea Partying crowd, that we are celebrating the birth of a nation. Not quite.

Independence, the liberation of the 13 original colonies form British rule, did not create a nation any more than a teenager leaving home becomes an adult. Far from it, even the Declaration of Independence (which incidentally, was not signed on July 4, but in August), did not even refer to the "United States" as a proper noun, but instead,  registered the "unanimous Declaration of the thirteen united States of America." And that was all we were in 1776 - a collection of states with no common mission, linked fate, or general government. This was the understanding of the the Franco-American treaties of 1778, which referred to the "United States of North America."

America was not America until it was, well, constituted. The United States of America was born after the 9th State ratified the US Constitution, and Congress certified the same on September 13, 1788. So we should by all means celebrate the 4th, but confusing Independence with the birth of a nation has serious constitutional-interpretive implications. If the two are the same, then the Declaration's commitment to negative liberty -- freedom from government -- gets conflated with the Constitution's commitment to positive liberty -- its charge to the federal government to "secure the Blessings of Liberty." The fact of the matter is that government was a thing to be feared in 1776. Government, or so the revolutionaries argued, was tyrannical, distant, and brutish. But it was precisely a turnaround in sentiment in the years leading up to 1789 -- the decade of confederal republican anarchy -- that the States came around to the conclusion that government was not so much to be feared than it was needed. This fundamental reversal of opinion is conveniently elided in Tea-Party characterizations of the American founding.

It is no wonder that politicians can get American history so wrong if we ourselves -- 84 percent, according to the National Constitution Center's poll in 1997 -- actually believe that the phrase "all men are created equal" are in the Constitution. Actually, quite the opposite. Those inspirational words in the Declaration of Independence have absolutely zero constitutional weight, and they cannot be adduced as legal arguments in any Court in the nation.

Nations are not built by collective fear. Jealousy is a fine republican sentiment, especially if it is directed against monarchy, but it is surely less of a virtue when directed against a government constituted by We the People unless jealousy against oneself is not a self-defeating thing. What remains a virtuous sentiment, in monarchies or in republics, however, is fellow-feeling, a collective identification with the "general Welfare." America can move in the direction of "a more perfect Union" only if citizens can come to accept that the Declaration of Independence was the prelude to the major act, and not the culminating act in itself.