Sunday, July 31, 2011

Compromise -- Like Kissing Your Sister

Everyone hates this compromise unlike anything I've ever seen coming out of Washington D.C.

President Obama failed to get tax hikes on the wealthiest Americans for now, but in January 2013 the Bush-era tax cuts expire. That's a tax increase by any calculation. But Paul Ryan gave Sean Hannity assurances tonight (Monday after the House passed the bill) the measure will not allow it to happen.

There's a bicameral bipartisan committee of twelve (six from each house) being handed authority to come up with more spending cuts (half defense and half entitlements) by November of this year. If they don't, some "triggers" kick in that are designed purposefully to be painful enough for both sides to compel action. We'll see. There is a troubling habit in Washington in recent years. We don't openly debate anymore. We appoint committees. It's a trip down memory lane.

The House has held its ground since the mid-term elections in 2010. They repealed Obamacare, they passed the proposed Ryan budget, and they passed Cut, Cap and Balance and got an assurance for an up or down vote in both the House and the Senate on the Balanced Budget Amendment. Apparently the sticking point for Democrats is a mechanism for a "super majority" vote of 67% in each house to raise taxes. Look for that provision to be modified to be more acceptable.

But tonight it's all political, not meaningful. Here's the biggest problem -- the entitlement spending is on autopilot and increases (because of the absence of a restraining budget) by 8% for the next several years. The "cuts" proposed in this compromise deal merely state we will cut 3% from the projected spending we haven't spent yet, and it's not real. The net result that just got cast in stone today is that S&P will downgrade the AAA bond rating, assured by this deal. Moody's may be more patient, but not for long. Strange, that knowing what the rating agencies wanted to see, the politicians couldn't satisfy their demands.

This is a political compromise of the first order, nothing more nothing less. It's avoided a default in the short term, but the structural economic weaknesses still remain. We're on a path to borrow 100% of our GDP, and this does nothing to short circuit that trajectory. The total economy is $14.8 Trillion, and we've borrowed $14.3 to date with more coming. The debt is accumulating at $4 Billion PER DAY! Astounding to me is Obamacare and its impact, already being

We need to take the baseline for this year, then cut 1% off that per year until spending comes down to the level of tax revenue. That's real. This deal is just more Washington compromise as usual. Watch for Paul Ryan (R-WI), the House Budget guru, to take up the return to the baseline budgeting in committee. We learned nothing from the TARP lesson of September of 2008, and you can add Obamacare to that pattern. Remember, "We have to pass this bill to know what's in it?" (That was Nancy Pelosi when they passed Obamacare).

And now we repeat the same pattern. This compromise deal was struck by Senate minority leader Mitch McConnell (R-KY) and Vice-President Joe Biden (don't let anyone tell you any differently -- that's who did it). Panic at the last minute is once again what this looks and feels like. Will anyone actually get to read and study this thing before a vote? Let's hope so.

Some members of the House and Senate complained that the details of the backroom deal were in the hands of the media for a full hour before getting a conference call to their respective caucuses. That doesn't sit well with elected representatives who were sent there as the representatives of the people. What a horrible example of Constitutional government!

However, lest we sink all hope with these comments, there is a ray of sunshine. The House and Senate freshmen Republicans who were sent to change things have held their ground and have succeeded in changing the conversation. Instead of being able to buy votes with more pork barrel spending, this time the POTUS and the Senate majority leader were compelled to have a conversation with Speaker Boehner in the back room, all of them realizing the American people now had representation and they meant business. We sometimes forget that only a year ago the Obama administration got a $1.9 Trillion increase in the debt limit rubber-stamped through both houses of Congress without anyone even finding the story in the mainstream media because it was buried on page 10 under the fold. Why? See Obamacare -- you'll find it there.

So that's some progress on some level; some, but not enough.

What comes next? We haven't really had a comprehensive debate yet about the underlying economic issues. That has to come next, and it isn't going away until after the 2012 election, like President Obama would have preferred. He's actually going to have to defend his record as the biggest spender in the history of the Republic.

So what we got after all the angst over the last two months was the one thing the country can least afford -- more uncertainty. We'll lose the AAA bond rating, there's little doubt. Whether or not S&P decides to follow through on their threat of a downgrade, that fact may be the least of our financial worries. A Democrat-controlled Congress seems to believe adding a "mere" $7 trillion to our debt between now and 2020 instead of $10 trillion represents a victory for prudent budgeting. GEEZ! And even a "modest" $3-trillion trim is a theoretical number. Further, nothing can bind a 2018 Congress to follow the will of Americans expressed in 2011. That's a lot more frightening than any credit downgrade. Married with inflation that's already on the way, the impact on discretionary spending is negative for everyone.

Last night CNN interviewed Senator Mike Lee (R-UT). Notice how many times the interviewers bring up the political implications, none of which Lee is interested in discussing. Instead, he's focused totally on the underlying economic issues that have not been addressed. Blitzer tried to suggest the Republicans got nearly everything they asked for, so why can't Lee be happy about that? Well, it's simple. This request for an increase in the debt ceiling is unprecedented in U.S. history, and cannot be granted without a structural reform to the way Washington spends our money in the future. This is a debate that has just barely begun, and I don't expect a political "deal" to tamp down that economic debate.

The rest of the story is even easier, which may make all this academic -- will the deal actually pass through both houses among the rank and file members? Lee first wanted to invoke the filibuster, requiring 60 votes in the Senate for passage to break the filibuster, then backed off when the votes lined up in support of the measure. It's the American way. It's the Constitutional way. It's not the political way Lee's interested in. Orrin Hatch (R-UT) also stood by his pledge to oppose it without the BBA.

We are finally beginning to wake up from our long national nap, it seems. If there is any good news, both sides are finally compelled because of the economy to end their lavish dreams. The Tea Party uprising has killed both the neoconservative dream of an ever-expanding American empire and the liberal hopes once entertained that roughly 100 years after Theodore Roosevelt and Woodrow Wilson, roughly 75 years after the New Deal and roughly 50 years after the Great Society, we were living in another great age of progressive reform.

Given the era of fiscal scarcity we’re now entering, those neocon and progressive dreams are now likely dead for many years to come. This recovery will take years, not months, to materialize. Meanwhile, the Tea Party’s dream of a government reduced to its pre-welfare state size becomes self-fulfilling.

Stay tuned, this thing isn't a done deal yet, even when the votes are in.

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