Wednesday, August 10, 2011

Misery Loves Company

One thing we can say for certain during this week of volatility, the world has joined the Gridlock debate. Last November we identified the debt ceiling as a point of Armageddon. We predicted that tax increases would be a huge sticking point. We lamented last winter that neither side embraced the Bowles Simpson Commission, which undercut the likelihood of a Grand Bargain. And now, the last minute debt ceiling deal, a 2000-point drop in the Dow Jones, and the S&P downgrade of U.S. debt has directed laser-like focus on not only the debt problem, but the toxic dysfunction of the American political system.

I promise to move the discussion (at least on occassion) to reform measures to address Gridlock, but I want to briefly take stock of what has transpired over the past week. Here are the bite size take-aways on the debt ceiling showdown on the positive and negative sides:

Positives (a shorter list)

Public engagement: The country is now engaged in a debate about taxes, spending, and borrowing. Misinformation abounds, especially over the differences between the short-term and long-term. Yet the issue has moved from budgetary wonkerdom to the mainstream. That is good.

Debt reduction process: We have a way clear to lopping about $2 trillion off the projected national debt over the next ten years. (It is important to use the word "projected" since we will be substantially increasing the national debt between now and 2021). Critics have argued that the budget caps, the Super Committee, and the possible sequester if the Super Committee cannot come up with a deal to pass Congress are gimmicks to paper over the inability of Congress to make tough decisions. Maybe so. But if you have a system that doesn't work, the first step to recovery in understanding you have a problem and trying to find ways to address the defects. We have not tried a bicameral committee with power to bring a fast track proposal to both floors without supermajority requirements before. And the sequester with cuts balanced between security adn domestic priorities is at least a creative attempt to incentivize good faith bargaining. To dismiss this effort as a gimmick before it has a chance to succeed wrong.


Out of touch: The biggest negative is that the disconnect between Washington's focus the past six months (the debt) and what the American people care about (the economy) has heightened public anger and brought confidence in government to historic lows. The response to many is to tune out the noise from Washington, when what we really need is a deeper level of citizen engagement.

No economic plan: The angry people mentioned above are right. It seems that we are always trying to get beyond one big debate to get to the question of jobs and the economy. And this one was no different. Republicans have an unorthodox theory that reducing government spending will increase jobs and growth. The short term data showing that large scale public sector job cuts are fueling the overall unemployment level undercut this theory for now. Both sides are lacking a narrative of how we dig ourselves out of the economic ditch we are in. In some ways, our fixation on the debt ceiling for six months while the economy groaned to a halt had a fiddling while Rome burns quality to it. The President missed a great opportunity to link a jobs program to the debt ceiling debate as a condition for his signature. That is something he could have fought for an won (rather than increased taxes on the wealthy).

The world groans: The international conseqences have been least covered but perhaps most damaging. Foreign nations hold trillions of our debt. If they change their buying patterns, the cost of our borrowing will rise and our debt problem will become more severe. But beyond economics, the world is wondering about our ability to lead in light of our inability to govern ourselves, let alone set priorities and standards for others to follow. We can't be a great nation just because politicians assert that we are on the campaign trail. We actually need to act like a great nation.

Hostage taking works: This month's crisis was brought on by the linkage of the bizarre concept of a debt ceiling (that is out of sync with congressional previously authorized spending and taxation levels) with debt reduction. Yet, the tactic worked because a minority of a minority appeared to be willing to inflict grave consequences on the economy. President Obama has proven to be an easy mark on negotiations and this too has encouraged recalictrance and out and out bad behavior. President Obama has backed himself into a position where if he does not set a line in the sand on some issue, endure some bad consequences (like a partial government shutdown), the hostage taking will continue and distort the normal compromise between the majority and minority that has historically characterized American politics.

Anti-tax absolutism: In both the summer drama and last winter's debate over the expiration of the Bush tax cuts, Democrats appear only to be willing to talk about tax hikes on those able to handle them, but will not go to the mat to fight for them, even when there is evidence the public is on their side. Until they do, anti-tax absolutism will continue to gain strength among Republicans and in the country at large, even though there is polling in support of a balanced approach, even though all the bipartisan commissions call for some revenue increases to reduce the debt, and even though we are at a 70-year low in taxation as a percentage of GDP.

Can kicking: The debt ceiling deal demonstrated yet again that politicians are unwilling to take on the big issues that are fueling the debt -- low taxes and high health care costs. In this respect, the deal was a kick of the can down the road. There were no health care cuts in the first trillion. And health care will not be touched if there needs to be a sequester. The Super Committee could address health care in its search for a new $1.5 trillion in cuts, but consensus will be hard to find on this issue. We could enter 2012 without any agreement to deal with health care costs, which is the number one driver of what is a long-term debt crisis.

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