July 25th, 2011


Debtordammerung, Part I: It is tempting, but not fair...

...in times like these...

...to inquire as to what rough beast slouches towards some holy city or other. However, most of the rest of the world seems to have that covered, so let's skip that, and move on to something a tad more analytical.

First, let's talk briefly about the politics of the situation, before moving to the economics. From what I am seeing, the Democrats universally see this as a ploy; Republican cynicism of the first order, an attempt by the GOP to hold the economy for ransom in order to engineer the defeat of Mr. Obama in 2012. It's seen as opportunism and irresponsibility so vile, so contemptible, that it borders on treason. (And so, everything has become treason; the circle is complete. But I digress...)

That's certainly the spin flying about, at least, and it's entirely understandable; both major parties have been controlled by the same corporate interests for so long, and so dissociated from their theoretical positions - other than corporatism and wedge issue pro-choice/anti-abortion/anti-gay activism - for so long, that anything other than gamesmanship seems flatly impossible.

And were we dealing with the traditional GOP, that reading would certainly be correct. But we're not, and I think this is a critical failure of understanding.

I have often chastised the progressives and left for failing to mount any kind of insurgency at all against the Democratic Party, and accepting the continuation of Mr. Bush's wars (and additions of Mr. Obama's own), torture programmes, unitary executive power grabs, police state tactics, illegal domestic spying, corporatism, banker socialism, and more, as soon as one of their own was in office. I still do. But while this new event has yet to play out - and may yet collapse like a flan in an ill-tempered oven - as of right now, I'm not sure I can chastise the right on this basis as completely any longer. The Tea Party may be an inchoate expression of political rage, and it may have been thought to have been completely co-opted, but I suspect that co-option was less successful than previously imagined.

Bear with me, here. The Democratic Party spin is reliant upon the idea that all this is a pose; that the GOP couldn't possible believe that an abrupt cutting of government could be anything but a disaster. The idea that they mean it is flatly impossible. And where the leadership is concerned, I completely agree.

But a lot of these are GOPers who have been demanding smaller government for 30 years or more. They've not got it. They've got corporate deregulation, which isn't the same thing. The best they've got, as far as they're concerned, has been slower growth of government, or less-by-percentage-of-GDP government, and it appears to me that they're no longer willing to settle. They're angry. They feel betrayed, by their own party. But they also see an opportunity, one where the "risk" isn't risk at all, but vital necessity, so their consciences are clear.

And perhaps most importantly, they're at least saying that they are ready to walk over this, and become a separate party. It's a hell of a bluff to be making, if it's a bluff.

I think the corporate GOP - the rump corporate GOP, really; it has the leadership but not so much of the rank-and-file - may believe them. And, as they want to perpetuate their party and influence... they may be stuck. Sure, they want to use this purely as a political crowbar to unseat Mr. Obama; they want to play the game the Democrats are expecting them to be playing. A couple of months ago, it was working beautifully; they got offered a deal they couldn't get in 2003, with cuts to Social Security growth. And they walked away, to the astonishment of everyone in the DC scene. I think that might be because they may not be able to play that game anymore.

If true, this has serious ramifications, both political and economic. The political, I'll leave aside, other than to say it's a pretty long way to November 2012, and that I haven't seen ideas like a "supercongress" seriously proposed in a long time. The economic - well, that's for Part II.

Debtordammerung, Part II: Why No Cuts?

So the first question, of course, is why hasn't the GOP actually cut government size before? Not "reduced growth of," but actually cut? For reals? They've had power for reals; why haven't they done it?

The answer is very simple: because every actual spending cut slices off from headline Gross Domestic Product (GDP). GDP, at the topmost level, is a pretty simple formula:

GDP = C + I + G + (EX-IM), which is to say:
GDP = private Consumption + gross Investment + Government spending + (EXports − IMports)

Let's fill in a couple of numbers, shall we? 2010:
US$14.7T = C + I + US$3.46T + (EX-IM)
Of that US$3.46T, 1.29T was deficit spending. In other words, borrowing. New debt.

What if, all else equal, that budget had been balanced entirely through spending cuts from the prior year? What's that to do GDP numbers? Not actual economic activity, let's pretend that's isolatable; just the raw numbers of balancing the budget that year, and doing it through cuts alone:
Revised GDP=US$14.7T-1.29T=US$13.41T.
Percentage of original: US$13.41T/US$14.7T = 13.41/14.7=0.912244898
91.2% of original GDP.
An 8.8% drop in reported GDP for 2010, that's what. That's gotta smart. And far more importantly, for political purposes:

Recovery? What recovery? 2009's last-estimate GDP was US$14.25T; you'd be looking at a headline GDP decline of 5.9%, year-to-year. And that ignores secondary effects - follow-on economic activity from that borrowing would also be lost, dragging actual economic activity down as well - but calculating how much would take days, so we'll just stick to "-8.8% same year, -5.9% year-over-year."

There are very, very few politicians who want to run against that ad, good times or bad, and that's why government doesn't get cut, ever. It's hard enough to slow growth down.

(I am, for the record, a balanced budget hawk. This is in no way an argument against a balanced budget; but I am not a cuts-alone supporter. Cuts-alone gets into the freaky intersection of fundamentalist religion and conservative economics for you to think that shit works here. But I digress.)

If the borrowing limit were not raised by August 2nd, and somehow remained static throughout the rest of the year, you'd have a similar event happen in the numbers for 2011 as to the hypothetical example above in 2010. Since we don't have numbers that mean anything here, I'm not going to calculate the actual 2011 numbers, but you'd have the effect in at least two stages; one in 2011, one in 2012, since we're midway through 2011 and a lot of borrowing already happened.

And that's why the GOP never cut the actual size of government: they didn't want to face these numbers. The Tea Party - the smarter parts of it, anyway - have finally figured that out. Some of them (c.f. Karl Denninger) are right up front about this and have in fact spent a lot of time saying this will hurt, and throwing around the GDP formula I show above. But they believe it's necessary. The rank-and-file? Honestly, I don't even know. But whatever they think will happen, they're pushing for this particular trigger to be pulled.

What happens if they get it? We'll talk more in Part III.