Tuesday, January 4, 2011

Politics: Congress' game of Budget Chicken. Does it matter? Yes!!!



Bill Clinton and Newt Gingrich before closing the government in 1995.
 
Remember how they played "chicken" back in the 1950s?  Two guys in hot-rod cars drove toward a cliff.  The first to jump out was Chicken.  His friends all laughed.  Click here to see how it played out in the classic film Rebel Without a Cause.   Notice how the winner got to celebrate by being killed while his friends drank beer.  

James Dean with Corey Allen before
Allen drives off a cliff in Rebel Without a Cause.

What a perfect game for politicians: pointless, self-destructive, with big headlines.  Not surprisingly, playing chicken with American finance has become a favorite sport of the US Congress.  And  2011 seems destined for a spectacular crash, with a choice of two on-rushing cliffs to drive off:

  • First, on March 4, the Continuing Resolution (CR), the law that funds most of the US federal government, expires.  This is no accident: Republicans last December insisted on the short fuse. Unless the CR is extended or replaced, the government must shut down that day.  

  • Second, in late March, the Debt Ceiling, which limits the total amount of money the Federal Treasury can borrow -- set last year at $14.3 trillion -- is scheduled to be reached.  Since Treasury borrowing is needed not just to fund the government but also to replace expiring bonds and pay interest, failure to raise the ceiling could cause the US government to default on its bills.  
Government shut downs?  Defaults?   The last time Washington shut down was in 1995 when then-House Speaker Newt Ginrgich insisted then-President Bill Clinton accept a list of spending cuts, which Clinton refused.   For a full week as the polticians jockeyed, offices closed, benefit checks froze, and national parks and monuments went dark.  The public cringed at the whole futile exercise.  As for defaulting on bonds, the US government has never done this in its entire 213-year history (with a partial exception in 1933 when FDR eliminated the "gold clause" in US obligations, allowing debt paid in paper currency.( Click here to see Alex Pollock's take on this from the American Spectator. )

US "full faith and credit" -- its commitment to pay bills -- is enshrined in the Constitution as the basis of our national ability to borrow.  It is as close to sacrosanct as anything in finance, and the only thing that separates us from Greece and Ireland in the eyes of lenders.

So why are Congressmen and Senators -- particularly Republicans of the Tea Party stripe -- threatening once again today to play chicken with America's global fiscal standing by refusing the raise the debt ceiling or extend the CR?   Is it really just simple, self-serving, annoying politics-as-usual?   

Take a look at this chart:  It shows the US national debt since 1940, in constant dollars.  Notice the explosions starting in 1980 (Reagan tax cuts), in 2002 (Bush tax cuts plus two wars), and the near-vertical climb since 2007 (Wall Street financial melt-down).  Today, US debt is nearly 80 percent of our gross domestic product.   Almost nodoby disagrees that, unless reversed soon and sharply, this trend threatens to swamp our economy, our national security, and our future. 

For years,  politicians have gabbed about cutting the debt, but almost never do anything about it.  Just last month, President Obama and Senate Republican leader Mitch McConnell negotiated a tax cut deal increasing the debt by a projected $900 billion in two years, while solemnly promising to "get serious" about the debt "next year."  The fact is, nothing can be done to save money in Washington -- not spending cuts, not taxes increases -- unless some politician on one side or the other agrees to surrender. 

He or she has to agree to jump out of his car and be called "chicken."  And unless the car is careening toward a cliff, nobody will jump.

This is why, as much as I hate to admit it, the Tea Party crowd has a point.  IF the goal really is to force Washington to do something serious about the debt, then playing chicken with the CR and Debt Ceiling is a bold way to do it.  Presumably, the Republicans will refuse to relent until Obama agrees to big spending cuts. And then, their egos protected, a few of them will jump from the car and let everyone avoid the crash.

If Obama refuses, the government will close or default on its bonds.  Or, if Obama reciprocates, using the Tea Party gambit as an excuse to put forward his own set of perhaps-more-reasonable cuts and modest revenue enhancers, all sides could walk away with a victory.

This is a dangerous game.  Remember James Dean in Rebel Without A Cause.  His rival, Corey Allen, got his sleeve jammed in the car door and, as a result, when he needed to jump, he couldn't.  Off the cliff he flew.  So too could Obama or the Tea Party if they play this wrong, and the big loser will be the US economy.  Knowing when to jump, when to refuse, and how to open the door, are key.

Have we really come to this?  I've given up on trying to find the adults.  Let's just hope the children don't burn down the house.


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