The Decession: The GOP’s Destruction of Government by Deficit

May I Speak with You Professor? A year ago I signed up for a free trial subscription to the RGE Monitor, Noriel Roubini’s mega-site for all things economics. Of course, I could never afford to convert to a paying subscription, but I still receive regular and highly informative emails with links to articles at the site, although sometimes I’m not permitted to access the full article due to my lowly status as a “trialist.”

Today, I was gifted with a link to a short and interesting article, Does this US recession presage a depression? It’s by Jonathan Parker, an individual whose biography makes the word “eminent” look downright anemic. In his short and breezily written article he makes some very good points as to why our present recession (or what I humbly but proudly coined “the decession”*) will not collapse into a depression to rival the 1930s. I note one of his observations:

. . . the policy responses to the current crisis are consistent with the second reason that I think we are in a recession and not the start of a depression. The US has undertaken massive and coordinated fiscal and monetary stimulus measures, to the point where it is hard to tell where fiscal policy ends and monetary policy begins. This is a good thing for ending the recession, provided of course we are able to return to balanced-budget policies in the near future. The risks for a more serious slowdown come not from the recession so far or from current large deficits, but from other long-term fiscal imbalances that have been looming on the horizon for decades, primarily pension and health care deficits. These problems haunt budgets at the federal, state, local, and even firm levels (and the federal government acts as insurer to firm pension funds). [Emphasis added]

* Decession – coined here, signifies an economic collapse of greater depth than the worst American recession but lesser depth than the Great Depression. For example, at its worst a decession will cause unemployment greater than 12% but less than 20%.

It’s Just a Flesh Wound! Now, I venture into criticism of Professor Parker like a man armed with a fountain pen in a broadsword competition, but I do wonder about a thing or two. He implicitly credits the government with avoiding the primarily counter-stimulus policies of the pre-Roosevelt Great Depression, “The US has undertaken massive and coordinated fiscal and monetary stimulus measures.” However, he also notes that it’s needs have reached a “point where it is hard to tell where fiscal policy ends and monetary policy begins.” He goes on to forecast a non-Depression, but with a big “provided” – “provided of course we are able to return to balanced-budget policies in the near future.” It’s here where I believe, with humility in his presence, that the Professor may have underestimated the ability of the U.S. to return to balanced budgets soon enough to avoid serious repercussions of a, pardon the pun, depressing nature.

Firstly, he notes that monetary and fiscal policy are today difficult to separate. They generally act as a checks and balances system. For many years, the Federal Reserve, for example, kept interest rates exceptionally low to support the fiscal needs of the country to finance GOP deficits created by their tax policies unsurprisingly creating huge tax revenue shortfalls. This is particularly true in the Dubya Bush years given his massive transfer of wealth from below to above via his tax policies. GDP “growth” was stimulating but it was also both employment anemic and built upon the funny money bubbles created in housing and other areas. In other words, it was a chimeric “expansion” at best and created to benefit and expand the wealthier class.

Now, given the predictable economic collapse following from GOP policies, President Obama must stimulate job growth on Main Street and bail out/rescue (you choose) and rebuild the financial system. So, the financing needs of the government this time around as opposed to any other time since the Great Depression trump any well-intentioned attempt to quickly return to balanced budgets, short of completely dismantling the federal government infrastructure. Eliminating every bit of discretionary spending – i.e. 100%, including all military spending – would yield savings, to be sure, but likely would also (1) leave us a completely unprotected America and (2) cause a revolution. Cutting all but military spending would be politically infeasible and would bring about $550 some odd Billion in savings – nice but utterly impractical and politically impossible.

So, realistically speaking, balanced budgets are a dream for many years given the massive needs of discretionary programs and non-discretionary items, like Medicaire and Social Security, each of these presently exacerbated by the decline in tax revenue and payroll taxes due to high unemployment. See the chart below for more meta data . . . it’s a dated chart . . . and the imbalances therein have grown. What, for example, do you imagine the interest expenses percentage will look like next year after a trillion dollars more of borrowing . . .?

For the present estimate of discretionary versus mandatory spending in the President’s 2010 budget, see the budget summary here.

A Bridge Too Far? Professor Parker writes of returning to balanced budgets (remember those halcyon Clinton years?). Parker writes that the massive governmental stimulus will not be problematic “provided of course we are able to return to balanced-budget policies in the near future.” [My emphasis] Now there’s a BIG “provided of course” and an undefined “near future.” There’s little likelihood that the U.S. can return to the glory years of Clinton balanced budgets soon, and I’ll leave “soon” undefined, just like Professor Parker leaves “near future” hanging out there in the wind.

The facts are grim for attempts to reduce funding of deficits. Whatever “soon” or “near future” meant in the past we are now in a new era. The craven fiscal policies of the GOP during their years of “governance” from Reagan forward, have left Obama few choices, and, as I’ll write soon, I believe that was their purpose. And yes, fiscal and monetary policy are no longer separate pillars; they are one. They both are needed “pedal to the metal.” Our fiscal needs, via Main Street stimulus, are paramount; our monetary needs, via Federal Reserve accommodative policies like zero short term interest rates and a quantitative easing program for long rates are equally vital. And, here’s the important point, these policies are going full bore simultaneously. That’s big.

For example, in the recession of the 1980’s Volcker’s high interest rate policy broke the back of an inflationary advance – then, monetary policy worked. Today? Monetary policy has pushed rates to near zero on the short end of the yield curve and the Fed can do no more than that with short rates. So, given that credit is still all bollixed up regardless of minor improvements, the banks are still not lending, and we consumers are not buying. In fact, we’re saving, and paying down debt. Quite different from the previous recession. Then, Fed easing led inexorably to improvement. Not today.

So now the Fed, having lost the battle to stimulate with zero percent short term rates is forced to engage in quantitative easing (QE) to both stimulate Main Street and keep long term interest rates from rising due to demand shocks. That’s a big move and has caught the rapt and worried attention of the credit marketeers (forget for now the equity markets). There is so much federal paper coming to market that in the last ten days the 10 year Treasury note has risen from 3.10% to 3,83% (as of 4:00 p.m. DST today), and that’s a pretty scary move for a government that needs to finance trillions. It’s getting the Chinese and Russians apoplectic and whispering about finding or creating a new world reserve currency, ironically, based upon some supposedly dead Keynesian ideas of a commodities-based currency regime.

A return to balanced budgets is not in our near future, however you define “near future.” We are stuck with more bad news coming too – from commercial real estate, credit card defaults, dollar depreciation, etc., and that will increase the pressure to expand federal borrowing – the Fed is already talking of increasing its QE programs. The Professor may be correct that we can avoid a depression, but his qualifications – his “provided of course” and his “near future” – may very well be a “bridge too far” for us to cross without suffering first the precipitous decline of the American dream and our financial trump card, the hegemony of the dollar.

Clinton’s Pyrrhic Victory? And, as I alluded above, this is the logical outcome of Republican fiscal policies since Reagan. They were the true spenders, they were the truly profligate ones, while constantly professing the opposite. They quietly and perhaps unconsciously cheered deficit spending and the resulting need to finance through government debt the concomitant massive deficits. Their “philosophy” led inexorably to this result.

Dubya was the zenith.The GOP hoped to break the back of the federal government and to hamstring any Democratic president who hoped to reverse the trend. Their previous mistake was in not spending enough, in not reducing taxes enough; Clinton was able to reverse their planned obsolescence of the federal government. He was able to produce budget surpluses, the enemy of GOP government devolution.

They did not make that mistake with the Dubya years, though. It was tax cutting and deficit spending at every turn, despite their lying that they sought fiscal responsibility. President Obama and the mountain he must climb to bring our country to normalcy may very well defeat him. In fact, the Dubya years of craven profligacy and kleptocracy may very well have won them the war. Without some luck, we may be facing the final destruction of the federal government. More on that next week.

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