Friday, November 9, 2012

To the Fiscal Brink: Will the GOP and the 1% now destroy the US economy?

by Nomad

B
rinkmanship is defined by Wikipedia as ”the practice of pushing dangerous events to the verge of disaster in order to achieve the most advantageous outcome.” 

When it comes to the US economy- which has been hobbling along like a forsaken three-legged dog- both parties have been testing the wills of their opposition and how it will end is, at the moment, anybody’s guess. What started out as intransigence on the part of the Republicans soon became open obstruction not only to the president’s proposals but to any good-faith negotiation at all. But sometime last year, things took a strange turn. 
To understand how this escalation happened, we need to return to Wikipedia:
In order for brinkmanship to be effective, the threats used are continuously escalated. However, a threat is not worth anything unless it is credible; at some point, the aggressive party may have to back up its claim to prove its commitment to action.
For the last year- but mostly all through Obama’s first term- the Republican refused to budge when it came to the budget. Austerity ( at least, selectively defined), they claimed, was the only way out of this national debt problem. With the impending automatic and across the board budget cuts called sequestration, that threat is very creditable indeed. 

How the nation could have found itself in such a mess is perhaps an example of the breakdown in the political system. With the defeat of their candidate in the election, the Republicans now find themselves in a bind, an inexcusable situation, largely of their own making. 

Sequestration: Anatomy of a Political Disaster
Lured into the “I double-dare you” game, they agreed to the sequestration plan and hoped that Obama and the Democrats would capitulate in disgrace. (After all, hadn’t Fox News and Limbaugh kept telling them how weak President Obama was? Hadn’t he verified that by offering to cut some cherished social programs?) 

To understand how this slow motion train wreck happened, it’s important to backtrack a little. 

First came the debt ceiling crisis in the summer of 2011, in which Congress fought tooth and nail about raising the limits on how much the government could spend in the future. It was their trial run at brinkmanship and it nearly lead to the US into sovereign default. An embarrassment for a superpower, to be sure. 

The conservatives with the support of the Tea Party had blamed the president for out of control spending, ignoring the fact that Bush’s policy of writing blank check had much to do with the problem in the first place. 
In a speech to the nation in July 2011, President Obama was clear about his opinion of the Republican policy.
“This is no way to run the greatest country on Earth. … We can’t allow the American people to become collateral damage to Washington’s political warfare..

For the last decade, we’ve spent more money than we take in. In the year 2000, the government had a budget surplus. But instead of using it to pay off our debt, the money was spent on trillions of dollars in new tax cuts, while two wars and an expensive prescription drug program were simply added to our nation’s credit card.
It was the reputation of Congress that took the hit from the crisis. Additionally for the first time in American history, the credit-rating agency Standard & Poor's downgraded the credit rating of US government bonds. 

Speaker of the Republican-dominated House of Representatives, John Boehner in a rebuttal to the president’s address to the nation, said:
The American people will not accept an increase in the debt limit without significant spending cuts and reforms. And over the last six months, we’ve done our best to convince the president to partner with us to do something dramatic to change the fiscal trajectory of our country…something that will boost confidence in our economy, renew a measure of faith in our government, and help small businesses get back on track.
In early August of 2011, that crisis was resolved- or so it was thought- by the Budget Control Act of 2011 which created the bipartisan 12-member Joint Select Committee on Deficit Reduction (or “super committee”) to handle budget negotiations. 

As a means to motivate- or, as some might say, in an effort to raise the ante, this act contained a special provision: should the super committee fail, automatic cuts, known as Sequestration would go into effect. This included countless essential social programs but also defense spending and Bush tax cuts. 

Sequestration generates automatic cuts for each of nine years, FY 13-21, totaling $1.2 trillion. Without Congressional action to prevent sequestration, the first round of cuts will take place Jan. 2, 2013. The 2013 cuts apply to “discretionary” spending and are divided between reductions to defense ($500 billion) and non-defense ($700 billion). 

Those kinds of cuts are, in effect, superpower destroyers. It should have been a strong incentive but that effort too collapsed. The super committee was about as super as Jimmy Olsen. With the collapse of the budget negotiations, nobody seems to have contemplate what might happen next in this case.
* * * *
In the blind march toward the cliff, one unfortunate factor that few seemed to consider was the upcoming elections.

Obama was in real danger of losing his base support in an election year by giving away the farm. Hadn’t he given away too much already, his core supporters were asking? Was demanding that the super wealthy pay their share really too much to ask? 

Richard Trumka, president of the AFL-CIO put that view in these terms:
"What is the grand bargain? It boils down to lower tax rates for rich people — paid for by benefit cuts for Social Security, Medicare and Medicaid. These are precisely the issues that are being debated so vigorously in the campaign, and voters do not want anything to do with such a deal."
If Obama had wanted to win the election in 2012, there was no way he could have accepted such an offer.

Similarly, the Republicans under the pressure of the Tea Party, as well the 1% and corporate donors, were equally defiant. There was no going back at that point. Besides the GOP felt they had one last card to play. Mitt Romney and Paul Ryan.


Ryan’s Mistake
With the dismal state of the economy- largely as a result of the failure to come to any agreements- the Republicans were counting on Obama losing his bid for re-election. (How else can you explain their overwhelming support for the bill? While the Democrats were evenly divided (95 to 95), nearly three times the number of Republican politicians (174 to 66) voted “aye” instead of “no.” The Democrat-dominated Senate vote went even further and gave its unanimous support. 

Without this strong impetus, it was reasoned, there was very little reason for either side to sit down at the bargaining table if waiting until after the election could bring dramatic changes to the situation. And that was where the high stakes came in. Neither side expected to lose the election.

Ironically, the vice-presidential candidate and chairman of the House Budget Committee, Congressman Paul Ryan- unaware of his calamitous miscalculation- was as late as September, defending his past support of the Sequestration plan:
Appearing on CBS' Face the Nation, Ryan said, "I voted for a mechanism that says a sequester will occur if we don't cut $1.2 trillion spending in government."
Ryan.. also said that, "we passed in the House a bill to prevent those devastating defense cuts by cutting spending elsewhere," Ryan added. "The Senate's done nothing. President Obama's done nothing."
In a marvel of irresponsibility and misrepresentation, Ryan told reporters: 
Ryan also said: "The goal was never that these defense cuts actually occur, the goal is that we get to work and cut spending so that we prevent those defense cuts. We've done that. The president hasn't."
In fact, the $500 billion defense cuts were part of the bill which Ryan called a triumph of bipartisanship. Bottomline is the sequestration included painful defense cuts and Ryan  enthusiastically approved of the plan. Retracting it now is pointless.  
In a statement on the floor of the House, following the Budget Control Act approval: Paul Ryan told his fellow politicians:
It's a good step in the right direction, and it is a huge cultural change to this institution. Both parties got us in this mess. Both parties are going to have to work together to get us out of this mess, and the real problem, I would add, Mr. Speaker, is the fact that we spend way more money than we take in. We have to address that.
To my friends on the left, I think they would like to take comfort in the fact the way these spending cuts are designed and the way the sequester is designed.
To my friends on the right, we are cutting spending.
If we are to believe Ryan when he says that he voted for the bill to prevent defense spending cuts, then the natural question seems to be whether Ryan actually read the bill in the first place. Defense spending cuts were spelled out in black and white. It was an agreed bargaining chip, along with cuts in social program cuts. 
Much more likely, he is simply lying his way out of his incompetence.
Meanwhile, the marginally-more intelligent Romney was on another stage saying something quite different than his own running mate.
Asked about the sequester and the defense cuts on NBC's Meet the Press, Romney said: "I think it's a big mistake. I thought it was a mistake on the part of the White House to propose it. I think it was a mistake for Republicans to go along with it."
With typical vagueness and always in hindsight, Romney seems to have a tiny inkling that somewhere somebody had made a mistake. If he had tried to look for the source of the debacle, he needed to look no further than his own running-mate.
*    *    *    *
Where did the idea for this time limit come from in the first place? Although in the debate Obama denied that the White House was responsible for the Sequestration idea, according to Washington Post reporter Bob Woodward’s new book The Price of Politics, that’s not quite the case. The Democratic view was simple: without a strong motivation, the negotiations would go nowhere at all. 
"There would be no chance the Republicans would want to pull the trigger and allow the sequester to force massive cuts to Defense."
If the Democrats were adamant about not cutting social programs then the Republicans were equally protective of Defense cuts. The Republicans felt exactly the same way:Woodward writes:
"Boehner told the House Republican leadership and other key members not to worry about the sequester … ‘Guys, this would be devastating to Defense,’ he said. ‘This would be devastating, from their perspective, on their domestic priorities. This is never going to happen.’"
Clearly each side was waiting for the other to blink. Nobody did and everybody thought it would never ever go this far. It will never happen. The one thing they hadn’t counted on was that 2012 was an election year and that neither side could give in. 
Meanwhile time was running out. The cliff was fast approaching.

It was a gamble with the economy well-being of the nation and the Republicans, much to their surprise, lost the election. And not in a small way. And now the reality of the situation has suddenly dawned on them. 

The Republicans, under the inept leadership of Speaker of the House John Boehner, have effectively painted themselves into a corner. They were clearly outmaneuvered by the president in several ways. 

This brings us up to the present. 

The Cliff and Beyond
Sadly, the results of plunging over the fiscal cliff are not easy to foresee but most economists are hinting at a economic disaster if the cuts go through. 

The first stabbing pain of sequestration will begin on the first days of 2013- before Congress even returns from the holidays. On December 31 of this year, the tax provisions will automatically expire resulting in $400 billion increase in taxes. Additional potential tax Increases include
These tax increases will negatively affect all parts of the society. Of course, the rich have their own personal safety nets in the form of wealth, while the middle class and the poor are watching their own being slashed. 
To give one small example, the families of 80,000 fewer children would receive child care subsidies, making it harder for parents to find work. As far as health issues, 659,476 fewer people would be tested for HIV, 48,845 fewer women would be screened for cancer; and 211,958 fewer children be vaccinated.

That’s just the beginning. In fact, that’s just the feeling of your stomach rising at the start of the roller-coaster plunge. As Tom Harkin, Democratic Senator from Iowa notes, sequestration wouldn’t apply only to defense: 
It would also have destructive impacts on the whole array of Federal activities that promote and protect the middle class in this country – everything from education to job training, medical research, child care, worker safety, food safety, national parks, border security and safe air travel. These essential government services directly touch every family in America, and they will be subject to deep, arbitrary cuts under sequestration.
While the Republicans may fret over defense cuts, Harkin points out that that’s the tip of the iceberg. 
They say nothing of the tens of thousands of teachers, police officers, and other public servants in communities all across America who would also lose their jobs. A laid-off teacher is just as unemployed as a laid-off defense contractor.
There’s also the wider systematic effects that these cuts could bring.
Back in July, the International Monetary Fund gave this blunt prediction:

"In simple terms: if U.S. policymakers do nothing, a number of temporary tax cuts will expire and significant across-the-board spending reductions will kick in on January 1, 2013. The combined effect of these measures could result in a huge fiscal contraction, which would derail the economic recovery."
A G7 European Policy Message backed up that assessment:
"If policymakers fail to reach consensus .., the United States' economy could face major uncertainties that would hurt economic growth in 2013 and would have significant spillovers to the rest of the world."
The “Whoops, Sorry” Endgame
For the Republican party there isn’t any positive outcome. The remaining choices now are few, and all of them would be humiliating. 

They could try to force Congress to pass legislation that would undo the legal requirement of automatic cuts. That’s quite an admission. Even if they could get that done in the short time left before the end of the year, and even if Speaker of the Senate Harry Reid would agree to that deal (very unlikely), the Republican party would be required to humiliate itself by asking for the president to sign the bill before January 2, 2013.  All of that is very unlikely.  

Both sides are certainly cutting it close.  There is less time that the calendar suggests. The much-discredited 112th Congress will take a week off for Thanksgiving, another three days off for Hanukkah, and finally adjourn for the Christmas holidays on December 14. Even if all participants were fully committed, that doesn’t leave very much time to work out anything.

Their only hope in that case is that President Obama cares more about the country than the Republicans do. Continuing the theme of miscalculation, they are convinced that he will buckle first. For his his part, the President has stuck to his guns. According to Brian Beutler, TPM's senior congressional reporter.
He has stipulated in the past that he will veto legislation to undo or rollback sequestration unless it is replaced with a balanced plan to reduce deficits in a more targeted way. That caveat suggests sequestration will take effect unless Republicans agree to raise taxes on higher-income earners ..
One obvious solution for the Republicans would be to  begin immediately to negotiate with the Democrats, aiming at cutting the best deal they can. In that case, however, they would have to abandon the Tea Party, renege on their idiotic Norquist pledge and throw the 1% under the bus. With so many bad decisions on his record, Boehner's political career would be finished. 
As a working hypothesis it also seems pretty unlikely. What would be left of the Republican party under those circumstances? The Romney campaign disenfranchised every other demographic. All around, If they chose not to negotiate before January, it is a lose- lose situation for the party.

There is one other thing they could do: Outright sabotage of the economy. They can choose to drive the entire country over the cliff and blame the whole thing on the president.  Call it a suicidal act of revenge for losing the election. Would it surprise you?
They cannot win but the whole nation could lose. Therefore, what it boils down to, then, is not brinkmanship at all. The Republicans are simply holding the nation, and its economic future as hostage. This would be the nail in the coffin for the Republican party  (and how many nails does a coffin need anyway?)
Sadly, this is probably the most likely scenario given the present quality of leadership in the Republican party.

If that should happen, the American economy, which has been climbing out of the hole, slowly and painfully, could be headed suddenly into a darkness that would make the recession of 2008 look like a sunny lakeside frolic. 
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