Monday, August 1, 2011

Behind the Debt Ceiling Fight

Here is a picture from an excellent post on Barry Ritholtz's The Big Picture blog:

Click to Enlarge

For all the heated rhetoric about "runaway deficits" the graph shows no such thing. It shows expenditures as flat over the last two years as the recession has ended. It was the recession that drove expenditures higher. Meanwhile, government revenues fell during the recession. The gap is "the deficit". But now that the recession is over, the gap is closing because revenues are growing.

But not a single politician in Washington bothered to look at these facts and see that deficits are normal in recessions and the deficits disappear if you let the economy grow.

Instead, the politicians have decided to put the economy in shackles during this period of recovery from a recession. Here is what University of California Berkeley economics professor Brad DeLong sees as the consequence of this "deal":
A first guess: -0.4% off of fiscal 2012 real GDP growth, with an unemployment rate in November 2012 0.2% above the baseline.

A hideous waste of opportunity. There is nothing in there to boost employment and capacity utilization. Absolutely nothing.
The idiocy of this "deal" is spelled out by the author of the post on The Big Picture blog:
I’d like to go on the record to state that I think any politician — Democrat or Republican — who signs a pledge (any pledge) is making a huge mistake, for the simple reason that there are only two ways to deal with having made such a commitment: either one abides by it, or one reneges on it. It forecloses on the notion of compromise, the key ingredient to getting things done in Washington. Beyond that, it’s fairly juvenile, and I look forward to the day when our politicians will bind themselves via pinky swears and/or double-dares. Really, it’s all so third grade.

Second, let’s talk about whether we have a “spending” problem or a “revenue” problem. Since politicians — up to and including President Obama — like to equate the federal government to the average family (a truly pathetic comparison), let’s look at it in that light: Say your household is spending $70,000/year on a $100,000/year gross (pre-tax) household income. Well, it’s easy to say you have a “spending” problem that would be solved if you took your spending down to, say, $40,000/year. Conversely, though, you might also solve the “problem” by getting a new job for $140,000/year (not saying that’s easy, of course, but certainly possible). The notion — espoused by countless politicians — that the problem resides solely on spending and not also on revenues is absurd on its face. Catherine Rampell has a very nice piece about this over at the NY Times website: “But there is, in theory, a happy solution to our debt troubles. It’s called economic growth. No need to raise taxes or cut programs. Just get the economy growing the way it used to.” Indeed.
Sadly, no politician felt that the medicine of "growth" was appropriate for what ails America. Instead, they were all like medieval doctors proscribing leeches and bleeding, and more bleeding, and more bleeding for an economy that is already exhausted and bloodless.

Go read the full post -- and carefully look at and think about all those pictures in this post -- from The Big Picture blog. It is well worth your time and will reward you with real insights that you won't get from "the media" or any "journalism" that supposedly covered the last few week's high drama in Washington.

If you have trouble following the argument, here is a picture that summarizes the "accomplishments" of the debt ceiling debate:

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