Raising the Debt Ceiling: When Ideology Meets Reality

Jul 14, 2011   //   Politics

With dialog on Capital Hill being next to impossible, Senate Minority Leader McConnell has put forth a plan to allow the president to raise the debt ceiling to prevent the United States from defaulting on its obligations.  The politics are dangerous and the reasons for the ‘no compromise’ position on increasing taxes on upper level income are baseless.  Finally, shame on Fox News for so effectively poisoning the well with conspiracy theories and distortions during economically tough times that all but destroyed the opportunity for reasonable dialog and compromise.

Will Rogers once said: “Democrats never agree on anything, that’s why they’re Democrats.  If they agreed with each other, they would be Republicans”.  Well not any longer.  In the past Republicans could effectively play brinksmanship and bargain hard knowing that they had a solid party-line vote.  It was a party known for top-down management.  However, with the emergence of the Tea Party, in reality the right-of-center Republican wing, their party is now fractured between those who would not let a disaster occur, such as defaulting on our obligations, and those who now would.  And if a Republican politician is not felt to be conservative enough, that individual is at risk of being purified out of their party.  Watch out Orrin Hatch and others.

In looking at the graphs and charts below it is difficult to not conclude that the consistent and considerable debt run-up during periods of Republican tax policy has been intentional.  It has been, a process of forcing an ideological view of ‘smaller government’ by starving it, forcing it to abandon programs and turn matters over to private business.  The strategy has a name and it is called Starving the Beast (you can Google the term and I have written about it), and it is a dangerous game.  Even more so now that this recent severe economic downturn has opened the very real possibility that our country could lose its AAA credit rating due to the risk that the US might default on its obligations.

First, I want to address two issues that are being used to defend a no compromise position on raising taxes on the wealthiest of Americans.  In one of my more heavily distributed articles, I provided eight reasons, backed by data and outcomes, as to why the ‘Bush tax cuts’ to the wealthiest should expire (link).  In that article I ask for honesty from our elected officials in negotiations regarding debt and deficits and that decisions should be based on information, not partisan spin and distortion.  The first reason for ‘no compromise’ is that is a bad idea to raise taxes on those who create jobs, i.e., taxing the wealthy would be bad for job creation.  The other is that the debt ceiling is the president’s problem and he needs to solve it.  I have written extensively on these claims in the past and will address both here.  I will refer readers to past articles that provide a more detailed work-up, including references, to support the points made in this article.

Taxing the Wealthy Destroys Jobs Creation at Home is Myth

The claim that raising taxes on the wealthy is bad for the economy and job creation is myth and it needs to be taken off the table.  In examining 4 year periods of time where tax cut/deregulation policy has been in place, job creation, if anything, underperformed periods where progressive tax policy was in place.  The data is displayed in the following table is total non-farm payrolls (expressed as millions of jobs), the measure that one hears on news broadcasts when the employment situation is discussed.

Taxes were raised on the wealthiest of Americans during the 1990′s and our country experienced a strong economic run and strong job creation; small business boomed.  In the 2000′s we reduced taxes largely benefitting the wealthiest and experienced the weakest job creation since the presidency of Hoover.  And with tax cut policy in place, it took 22 months to achieve sustainable job growth following the March 2001 to November 2001 recession – a historically short-lived and shallow recession.  So where were the stimulative effects of this policy on job creation?

Additionally, these tax cut policies are still on the books and have even been augmented; so where are the jobs?  If there is concern about the jobs growth here at home, and based upon past performance data, is the answer to cut taxes further as is proposed in the Ryan plan?  As I pointed out in a recent article on the failure of supply-side policy from theory to outcomes (link), the tax cut benefit largely weighted to the wealthiest (those with high savings rates) did stimulate job creation; but it occurred abroad in high growth emerging markets, not here, for the simple reason that we can not control where the wealthy or corporations deploy their capital – and we borrowed to support that.  It is time to retire the argument that taxing the wealthy is bad for job creation here at home.  If that has been a key concern for the non-negotiation stance on increasing revenue, we should be able to put that one to rest and open dialog.

The Debt Ceiling is the President’s Problem and He Needs to Show Leadership on the Matter

It is hard to believe that this claim/statement is being made.  In every 4 year period that tax cut/deregulation has been in place since the mid-1970′s (there have been 5 of them and we are working on the 6th), our national debt increased at a rate faster than the growth of our economy – and that is unsustainable.  During every four year period where progressive tax policy was in place (there were 3 of them) our debt became smaller as a fraction of our economy.

The break in the debt curve following implementation of supply-side policy, as displayed using inflation-adjusted dollars in the graph below, is striking.

The above graphs also destroy the claim that the tax cuts would pay for themselves by stimulating the economy; there is little evidence supporting the claim that supply-side policy has had a stimulative effect on the economy (link).  And with that being so well established, the fight to continue the policy reveals its intent to force ideology.  There is little question that tax cuts largely favoring the wealthiest of Americans, without spending cuts to offset the drop in revenue, was a primary contributor our debt run-up over the past 30 years.  And the deficits have been compounded since 2008 from the recession where there is less tax revenue due to higher unemployment as well as the stimulus spending that both liberal and conservative economists alike agree helped put the brakes on an economy in free fall.

On the claim that the debt ceiling is the president’s problem, it is important to remember the remarkable economic position we had in 2000 – a summary is provided at the beginning of a previously published article (link).  We experienced four consecutive years of debt paydown and were in a position to payoff all public debt within a decade had we so chosen to do so.  The backbone of what was achieved during this timeframe was OBRA93, or the debt reduction act of 1993, that included raising taxes on the wealthiest of Americans.  Between the years 2000 to 2005, our country went from record surpluses to record deficits, and the Republican party controlled both houses of congress in both instances.  The party didn’t change, the policy did and it produced the same result as it did between 1981-1992.  And let’s be honest, Eric Cantor, a chief opponent of raising the debt ceiling, voted multiple times during the GW Bush years to raise the debt ceiling when his party’s tax policies were driving up debt at a rate that outpaced the growth of our economy.

It was not run away spending by President G.W. Bush, as has been claimed, that contributed to the doubling of US debt during his presidency.  That has been analyzed and the largest singular contributor was the unfunded tax cuts, accounting for almost half of the debt run up.  Increases in domestic discretionary spending accounted for only 7 percent of the debt increase.  In fact, analysis showed that if it had not been for the legislation enacted in 2001 and 2003, our country would have had a surplus in 2005 rather than a record deficit.  Where blame falls here is that with the documented effect of this policy in increasing debt (as was shown between the years 1981-1992), supply-side policy should not have been implemented again without first specifying spending cuts to offset the loss in revenue.

So I don’t see the Republican party passing the buck on this one to the president who inherited an economy in free fall and a budget deficit of over a trillion dollars in 2009 from the prior administration.   They need to take responsibility and step up to the plate on this matter as it has been their policies that have been at the heart of our escalating debt over the past 30 years.

When Ideology Meets Reality

When Bob Schieffer (CBS News) has something to say, I listen.  Bob is old school, and that is in no sense derogatory.  He is a bonafide reporter who digs for specifics rather than spew punditry as so many who pose as reporters do these days.  Those following in his line are few in this age of 24/7 ‘Breaking News’ and sensationalism.  Bob has been around DC for many years and has a sense of history that serves him well.  And what he had to say a few days ago was prophetic – that the current political theatre we are watching in DC on the Debt Ceiling crisis is different this time around because our leaders do not have control of their followers thus placing us at risk that Uncle Sam, for the first time, may indeed become a deadbeat, unable to pay his bills.  And what followed was that Mitch McConnell put forth a plan to give the president the authority to increase the debt ceiling.  For a party that is used to top down management, it no longer has control of its followers and thus may not be able to pull back from the brink.  Ideology met reality when the business community stepped in and made it clear that we could not allow a default on our debt.

Following the mid-term elections there was speculation as to whether Speaker Boehner and Senate Minority Leader McConnell would be able to control the freshman Tea Party crowd.  When a party is in the minority, unified opposition is easy.  However, when the switch flips it is often a more difficult matter to actually get something done because of differing opinion.  As much as I disagree with the concept of compromise (both parties have to give up something – there is often a better solution if people dialog), compromise is how politics works, and it helps keep things in the middle.  But in playing the game of running up debt to force smaller government, and with leaders unable to count on their following, we now face the very real possibility that our AAA credit rating could be lowered.

I have made the case before about a balanced approach in solving the debt issue, one where cuts are made to reduce waste and improve efficiency, and where the wealthiest of Americans step up to the plate and pay a little extra into the system (link).  There should be no sacred cows here.  Do we need to take hard looks at the entitlement programs to assure their long-term viability?  Of course, but they should not be decimated or turned over to business to run.  The picture of America, should the deficit reduction be all cuts and no revenue increase, is not a pretty one as we would lose what has made us great in the past – the willingness to invest in our country.  It was taxation that built our interstate highway system, an enormous boost to commerce; that fueled the space program that spun off new technologies, new industries, and new jobs; and that supported education that creates a competitive workforce (link).  And I hear a president saying that he is willing to take heat from his own party to strike a deal that would markedly reduce our deficits by $4 trillion over the next 10 years.  So let’s do something big, let’s talk, let’s negotiate, let’s compromise; but in reality we no longer show the capacity to do so.

So thank you, Fox News, for so effectively poisoning the well with conspiracy theories and distortions during economically difficult times.  With polling showing that the majority of those in the Tea Party view Sean Hannity and Glenn Beck as valid news sources, they have had heard such things as our African-American president is a racist who has a deep seated hatred of white people (the intent of that one is quite transparent), and watched a manipulated tape that made it appear the president planned to raise taxes on all Americans (link).  And, the ‘liberal agenda’ is destroying the country you love the most.  The enemy has been defined, anger has been stoked, and dialog has stopped; and that is the beginning of dangerous territory (link).  There is a saying that the fish begins to stink from the head.  And with what we have seen regarding Rupert Murdock’s news tactics in England, should we really expect a different operating style here?  Can a wealthy individual who controls powerful media manipulate the public for political gain?  The answer to that question is as apparent as whether the Citizens United Supreme Court decision now permits the wealthy to buy elections.

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