Streetwise Professor

July 9, 2011

Years of the Locust

Filed under: Economics,Politics — The Professor @ 7:52 am

The looming debt limit deadline has spurred widespread speculation of some sort of grand bargain on taxes and spending.  I consider it likely that some deal will be announced and that the limit will be raised.  I consider it a near certainty that the bargain will be a farce.

Any such trade will involve the Republicans agreeing to tax increases, and Obama and the Senate Democrats making promises to reduce future spending, including perhaps entitlement spending.  The problem with any such deal is asynchronous performance.  Tax increases must be implemented by legislation, and remain in place until Congress explicitly votes to eliminate them (unless there is a provision for expiration written into the law).  In contrast, budgets are passed year to year–well, they are supposed to be, anyways–and it is virtually impossible to precommit future Congresses to adhere to promises to cut future spending.  Watch for any deal to have eye-popping spending cut numbers–all in out years.  Pie crust promises–easily made, even more easily broken.   As previous deals have shown, the tax increase parts get implemented, and the promised spending cuts fade into oblivion.

Even promises of changes to entitlement programs are usually evanescent.  The metronomic “doc fix” in Medicare is a classic example.

The only reason any of this matters is in their effects on  the 2012 election.  2011 and 2012 will be years that the locusts hath eaten–as were 2009 and 2010.  Years when we should have grasped the nettle of our debt and spending problems–but did not and will not.  The time we have to do so is shrinking, but a serious start in 2013 would give us a serious chance.  But if Obama is reelected, that will not happen.  2013-2016 would become locust years as well, because Obama is Obama, and because the last two years of a second term invariably dissolve into conflict, exhaustion and incoherence in which nothing of substance is accomplished.

A bargain would therefore likely be a bad thing.  It would not actually address the problem, but would perhaps create the perception that it has.  This would empower the incumbents who would bask in the false glow of pretend accomplishment.  And since the status quo embodied in the incumbents is fundamentally unsustainable, this would be a disaster of the first magnitude.

A fundamental change in the direction of government in the US is needed not just because spending is unsustainable.  The burden of debt is becoming unsustainable not only because spending is increasing, but because growth is anemic: debt burdens ease over time if growth outstrips the cost of servicing the debt.  But US economic performance in The Locust Years has been poor.  Yesterday’s dreary employment report makes it abundantly clear just how poor that performance has been.  In terms of employment, this “recovery”–such as it is–is the worst since the Great Depression.

And likely for the same reasons.  Hyperactive federal governments that heap massive regulatory burdens on the backs of businesses and households, and which generate vertigo-inducing uncertainty to boot.  Today, the looming specter of Obamacare and Frank-n-Dodd are huge drags.  But these are only the most visible things.  From the EPA to the NLRB to whatever government agency you can name, regulators are raising both costs and uncertainty.  Which is almost certainly why “Recovery Summers” are chimerical: why years that should have witnessed a sharp rebound in economic activity have instead been consumed by pests swarming out of the District of Columbia.

No, what happens between now and August 2 is important only in how it affects what happens in November, 2012.  Sadly, an Obama defeat then is not sufficient to ensure that the country can turn things around, but it is necessary.  Any dealing around the debt ceiling should be done with one objective in mind: ensuring that our future harvests do not fall to the sun-blotting clouds of spenders and regulators.

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  1. Amen.

    Comment by Howard Roark — July 9, 2011 @ 8:33 am

  2. qe3 will solve all our problems. if not then qe4 🙂

    Comment by Surya — July 9, 2011 @ 11:11 am

  3. I can’t think of anything better than—Amen

    Comment by pahoben — July 9, 2011 @ 6:49 pm

  4. More economic failure = a TSA man with rubber gloves on every corner. But don’t listen to that nutjob Ron Paul who wants to stop such searches, he’s a Commie Russia lover.

    Comment by Mr. X — July 9, 2011 @ 8:19 pm

  5. Because austerity economies like Britain, Ireland, Latvia, etc., are booming!

    Comment by Sublime Oblivion — July 11, 2011 @ 9:25 am

  6. Great article, it really points out the problem with the Keynesian cries for more and more spending – the debt burdens on both the U.S. government and on U.S. consumers are far too great to manage without fundamental changes to spending patterns. Households in America have reduced discretionary spending by 7% and paid off record amounts of debt – all while facing massive employment, retirement, and home value uncertainty.
    Americans expect their “leaders” to do the same thing – cut costs, cut spending, pay off debt: The old (read: pre-globalization) model of growing your way out of debt has proven to be impossible for average Americans who have seen their wealth and income stagnate for 30 years. It’s time for the U.S. government to accept the same reality – we won’t outgrow China, Brazil, Indonesia, India. And with capital flowing around the world in an unconstrained manner, governments can’t unilaterally change their currency valuations to create growth through low-cost export strategies.
    It’s ‘grown-up’ time in America; and it’s striking to this cynic that the Average American, who is obese, ill-informed, sedentary, and watching 30 hours of stupid T.V. shows a week has figured out the new reality and adapted to it before the “experts” advising Treasury, Commerce, the White House, and Congress.
    The fast-growth, Modigiliani & Millier ambivalence to debt service, Efficient Frontier, “rising tides raise all ships”, world is over. Completely. So it’s past time to adapt to it, to de-lever, to get conservative (in the true economic sense, not the Sarah Palin sense), and to buckle up our chinstraps because we are in a whole new world and the BRICs are ready to rumble.

    Comment by NPVofZero — July 12, 2011 @ 9:20 am

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