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At this point, there can't be anyone left who truly believes that the debt ceiling debate taking place in Washington is really about what's good for America.
The truth is it's about the 2012 election – and the party that wins the debt ceiling debate will be the party that comes out on top next year.
It's politics – pure and simple.
Republicans and Democrats have their own respective agendas heading into the 2012 election. And with 16 months to go, there's just enough time for actions taken now to work their way through the system and swing the economy in one direction or the other.
Now, I'm not a believer in conspiracy theories, but I am a firm believer in Public Choice Theory. That means I believe we can make clear statements about what economic conditions each party would like to see 16 months from now – considering their own selfish political points of view.
The Democrats would like to see rapid growth, with unemployment coming down sharply. They don't care so much about whether inflation is ticking up a bit, or whether an over-large budget deficit may cause trouble in the future. If they get elected in November 2012 they figure they will sort out any problems after the fact – particularly if they can recapture the House.
Conversely, the Republicans would like growth to be sluggish, with unemployment stubbornly high. They also would like to make the painful decisions that bring long-term growth now, so that they can benefit from the growth and not suffer the political cost of the pain if they capture the Presidency and ideally both Houses of Congress in November 2012.
Both parties, of course, have strong beliefs about what policies work better, about what policies are better for the interest groups that support them, and about what policies are best suited to their ideology. But at this stage of the electoral cycle, they're pragmatists.
Here's how the election cycle breaks down:
- The time for politicians to put their favorite ideas into effect is in the first year or two of the election cycle, after they've won a big majority. That's why President Obama and the Democratic Congress spent so much political capital on the "stimulus" and the healthcare bill in 2009-10, and tried to get a "cap-and-trade" carbon emissions program passed.
- In the run-up to the election from next January onwards, the main effort will go into rewarding powerful interest groups that provide money and votes, and to electorally popular gimmicks.
- After the election, there's a short period in which the winning party can do any unpopular, "root canal" stuff that appears necessary.
- However, with the election still more than a year away, the natural impulse of both parties is to ensure that the economic picture faced by the electorate the following year will be as they wish. That's why President Nixon abandoned the Bretton Woods exchange rate system in August 1971, it's why President Kennedy advocated his supply-side tax cut in 1963 (it was passed early the following year) and it's why President George W. Bush pushed through capital gains and dividend tax cuts in 2003.
What Republicans Want to Get Out of the Debt Ceiling Debate
The Republicans currently have less power than the Democrats, but their objectives in the current negotiations are fairly clear. They want as big a spending cut as possible and as much progress towards reducing the deficit as possible.
That's not just because they like spending cuts and deficit reduction. They also believe that spending cuts will result in public employee layoffs and may cause a short-term impediment to the economic recovery – even though they will improve long-term growth.
Short-term pain for long-term gain suits the Republicans fine, as any economic slowdown and increase in unemployment will happen before November 2012.
Conversely, the Republicans don't want marginal rate tax increases, which would affect long-term growth prospects, and for which they would be blamed by the electorate.
However, they don't mind tax code rationalization through the elimination of tax subsidies. Such reform would have mostly short-term effects, resulting in the closure of subsidized activities with accompanying job losses.
Capping the home mortgage deduction for high earners, which would probably cause a further lurch downward in the housing market, is also fine. The Republicans also probably don't mind capping the charitable tax deduction for high earners. The vast majority of charities are natural Democrat constituencies, except for churches, whose donors are predominantly middle-income people rather than the wealthy.
The Republicans also have a clear self-interest on monetary policy, though they are less able to affect that directly other than by harassing Federal Reserve Chairman Ben S. Bernanke at Congressional hearings.
A "QE3" program of bond purchases would make the federal deficit easier to finance in the short term and boost the stock market while increasing inflation in the longer term. It would thus be bad news for Republicans, and for older people living on savings, a natural Republican constituency. Conversely, higher interest rates would help savers and slow the economy, both natural Republican wishes going into an election year.
Again, there are no conspiracies involved here – just the politicians' self-interest.
So when scoring the debt ceiling debate and other economic policy moves this year, you can put a tick in the GOP column from all the policies on the above list. Needless to say, some of the wins will be accidental from Democrats failing to figure out where their true interests lie – and likewise GOP ineptitude may hand the Democrats a few freebies.
Tomorrow (Friday) I will look at the motivations behind Democratic policy-making, and we'll see what's really behind that party's side of the debt ceiling debate.
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Even on the Brink of a Government Shutdown, Congress Still Doesn't Get it
A sad commentary on politics in America. Neither party cares about what happens to the general middle class. The republicans only care about the graft and corruption how much money they can get from special interests like oil, and drug companies. I always wondered the difference between lobbyists and bribers. Why are they legal? Why are there no term limits for congress, they have them for the President. The campaign for the Presidency starts the day the President is elected. Great minds and thinkers don't run for President because with our adversarial two party system nothing gets done well but… Read more »
You left out one important point. The tea party is demanding spending cuts and will give a primary challenge to any republican that caves on that issue alone. They could even split the party if republicans don't hold firm.
This is a great article, and absolutely correct! I have to believe that EVERY middle class American who understands what is going on has to be furious with Washington in general. I realize that politics is a dirty business, but I have to believe that when one political party is willing to make moves to keep unemployment high for political gain, that party will receive a negative payback at election time. Understand, this is not about using the bad economy as a platform to win an election; which the Democrats obviously did in '08, this is about a party that… Read more »
If any of the clowns in washington were making decisions about their own households or personal business, they would all be making better decisions, and the truth about what it takes to survive would be clearer. I would bet 95% of congress would agree on exactly what to do in the best interest of their constituents. Politics are necessary only to keep one side from running away with things, but it's become like a sporting event where it's all about the bragging rights instead of the fundamentals. I'm sick of it all since nobody really is held accountable.
"Official Treasury Reports: Coffers Full Enough to Cover Social Security, Medicare, Medicaid, Veterans, Federal Salaries and Interest—Without Borrowing a Dime" Tuesday, July 12, 2011 By Terence P. Jeffrey (CNSNews.com) – President Barack Obama told CBS News today that there may not be enough money in the U.S. Treasury to cover Social Security checks after Aug. 3 if Congress does not agree to lift the legal limit on the federal debt and allow his administration to borrow more money. "I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue. Because there may simply not… Read more »
I think you should stick to telling me how the choices the politicians are making will impact me as an investor otherwise you are simply stating an opinion about the motives of the elected officials positions. This kind of journalism is unhelpful and I will find another source for my financial information.
dems were n charge and did what they thought would work 2 get the economy going. it did not. it will not.
The Politics of inaction. The corruption is almost complete in our political world. Money predicates every thing. The more money the easier to sway votes. Meanwhile millions of Americans are the pawns in this travesty. This is why education of the majority of the poplulation to the real solutions that are available but through deciet and deception of our current political process prohibits any or all of these solutions from ever becoming publically known.
This national debt is hurtlling the US towards 3rd world status…as a solution we should bring all troups home and abandon IRAQ,AFGHANISTAN, AND QUIT BOMBING LIBYA. We should cut the federal budget 30%over the next 5 yrs…by cutting every category OF federal spending by 5% per year for the next 6 yrs….EVERYTHING…NO EXCEPTIONS…AND I MEAN CUTTING MEDICAID,MEDICARE FEDERAL PENSIONS,FARM SUBSIDIES,OIL SUBSIDIES,SOCIAL SECURITY…ALL OF IT…..BUT NO POLITITION HAS THE SPINE TO DO IT!
Too Machiavellian. Your understanding of economics is much stronger than your understanding of American politics. Raw self-interest IS always a primary factor. But if you think that's ALL that motivates human behavior, you are mistaken, and your analysis will be deficient – as it is in this case.
We all know that our elected representatives DO NOT really represent OUR best interests. Instead they represent the interests of the PARTY and the special interest groups that support them. And the Republican party has always been the party of the "RICH". Unfortunately, the Democrat party has also become the party of the rich also. Why? Because it takes so much money to run for office now that any Congressman or Senator is so beholden to their "MONEY" backers that they cannot represent the "COMMON" people of their district or their country. In other words, the American people are "SCREWED".… Read more »
To make the statement, "It's politics – pure and simple" is true. However, the politicians need to get off the political rhetoric and start solving the problem or else we are doomed to a bankrupted USA. You also simplify the argument when you say that Democrats want rapid growth while Republicans want long-term growth. Either way would be better than what we have now. Politics is the problem. We are at a stalemate because neither party wants to give in. The end result is that nothing of any value gets done. This mixed bag of good, bad and ugly legislation… Read more »
Politicians are vermin.
How about we just boil this down to good 'ol financial responsibility. They're spending our money. Whoever takes the least amount or our money and spends the least amount of our money are the heroes! I think getting rid of unfair taxes and regulation is why we our Founding Fathers created the greatest nation in human history!
Having practiced law for years and handled my own investments during all that time with an eye to practical politics and macroeconomic currents I deeply appreciate Hutchinson's analysis and frank recommendations. I hope more and more readers do as well and follow his suggestions in regard to influencing our representatives in Washington, or at least attempting to.
This situation is extremely bleak, but not hopeless! I think the article's analysis is pretty accurate when you consider how BOTH PARTIES have no concern for the U.S. Economy or our future. We simply MUST stop looking at this as "Our Debt". This was CREATED by the banksteres, and we MUST hold them responsible for THEIR DEBT. There is only ONE option to saving the economy, and it requires three (3) steps. 1. Seize and Audit the Federal Reserve, under the laws of RICO for racketeering and illegal holdings. That means the BANKERS pay and lose. There are many laws… Read more »
Sounds like the Republicans are finally doing the right thing.Doubtful that entitled Americans are going to accept the long term cure,which would be painful in the short term.If the Republicans are finally walking the walk,I may go back to voting for them.
This whole debate is so negative and political. Its all about blaming the other party. This whole thing sounds like a big set up by Obama so he can blame the other party, but I do not see or hear how he is going to the othe party to work this situation out to restore confidence.
Why can't the people we elected in Washington DC have the ability to retract there heads from thier anus and get down to some serious and collective decisions to benefit the American people instead of thier political agenda ?
Want to cut the deficit ? Balance the budget ? Pay for the entiltlements ?
STOP PAYING FORIEGN AID to any body !
GET OUT OF IRAQ, AFGANISTAN,KOREA,JAPAN,LYBIA, and bring back our armed service personnel from any and all countries. (LET THEM TAKE CARE OF THEMSELVES )
We need to take care of OURSELVES and OUR FAMILIES 1st. and foremost
Barack Obama came to office in the middle of a financial crisis caused largely by Fannie May and Freddie Mac and a multitude of government "affordable housing" mandates. He spent the first year and a half forcing "Affordable Health Care" on us behind closed doors in a straight party vote notwithstanding the fact that the existing government public programs, Medicare and Medicaid, were known to be heading for bankruptcy. Only a communist ideaologue interested in destroying the capitalist base of this country could do what he has done in his short tenure.
Any time the dems come even remotely close to what repubs want, they (repub) back away from their stance..call it the party of "NO" and that means "NO, even if its exactly what they wanted. Repub wanted 85% cuts..dems came to 83% cuts..Result ? "NO" Repubs wanted 15% revinue..dems came to 17% revinue..Result ? "NO" Best way to beat the republicans is to just "attemt" to give them what they want and they will beat them selfs at their own game. America is starting to wake up to what the repubs are all about. I dont know any republican (personally)… Read more »
It is unconsionable to say that getteting re-elected or the "next election" takes precedence over fiscal responsibility. The antics on display in Washington are a clear indication that the United States is now an empire in decline. This is the End Game. We are living it and taking part in it for the rest of time.
We must look like complete morons to the rest of the world, since all eyes are now upon the good old USA to see what happens in the next 17 days to fix the crisis caused by the irresponsibility of our political parties. To even think that conversations are happening across the globe about the crisis we are in is immoralizing, since this country is supposed to be the strongest nation in the world…but is it? Maybe we handed that title over to China awhile ago??
First, I would like to thank Mr. Hutchinson for clearly identifying the biggest problem that we face in the US today is the two party systems. The government is driven by politics in where elected officials on both sides are unable to make the tough decisions to do what is best for America. The sad part is that the majority or the comments from readers are split on the same party lines. How do we get through our own prejudices as a people and a country to make things better? Get rid of the two party system…
I broke my neck after having paid into Social Security for 20yrs. Now I hear you saying that taking away my $900 a month Disability payment and Medicare/Medicaid insurance which totals $9600 for SSDI and $18,000 medical expenses yearly for a total of $27,600 a year will save the U.S. All the while paying 1 million a year per soldier in Iraq or millions for every missile launched in Libya, totaling BILLIONS every year. Yet you are all saying taking away my families and my livelihood is the cure for this country. Come on now bringing one soldier home for… Read more »
I detect a more than slight bias toward the left in your piece. This debate may very well be about the 2012 presidential election but it's really much more than that. It's more about power and control than anything else. Obama believes his Marxist ideology is winning the day because he perceives himself more of an international leader of the socialist European school than he does president of the U.S. All you have to do is look at his policies and his attitudes; they are not consistent with either protecting or preserving the American people or our way of life… Read more »
Why the total twist of truth? Medicare and Social Security have worked and will continue to work if we can keep the politicians hands out and have them put back what they have already removed. There seems to be plenty of evidence showing that there is plenty left to pay out indefinetly at this time and then we have jokers saying it's about to go bankrupt. Whatever the elite meme of the day is and the sheep will follow right into the mouth of the WOLVES!!!
The comments are as revealing as Martin's article. I find it amazing (as one of the "bazilllionaire" class) that so many people apparently are on the dole and/or have such a vested interest in raping their neighbor's wallets that they would believe the political nonsense to which Martin is responding. Look, if someone stole your credit card, maxed it out to a tune of nearly twice your income, and threatened to send the police, called you names, and demanded that you increase your spending on the minimum payment, what would you do? If someone else said he would stop the… Read more »
like it really makes a difference as to which party gets in,,,,you need to wake up to reality, its predetermined already who gets in, do you guys like financing all these wars….and do you really know why, you should,,,,and it is all about money and oil,,,soon the picture will become clearer
I hope tomorrow's analysis is better than today's. There's a big difference between financial and investment analysts, economists and political "scientists." Stick with what you do best.
I think you miss the most miss the difference between the Dems and Reps, there isn't much. How fast they spend our money is about it. We need to stop penalizing people (tax for working hard) for making money and start to congratulate them (no income tax) and start taxing consumption. Revenues grow to the gov., business grows, employment grows. Sounds much closer to freedom to me.
Topeka has it right. The problem we now experience is decades of bias via pay-offs of one sort or another. Either its through SSI, Medicaid, Medicare, tax codes or campaign contributions. If someone is willing to do the hard things today, we all benefit tomorrow its that simple. Our parties have been leading the country as we all live, FOR TODAY and we'll worry about tomorrow when it comes. If you don't have skin in this game, its unlikely you have an unbiased outlook. If you don't pay taxes, your interests lie with the DNC to maintain your position. If… Read more »
I have been checking into what percent of the national debt was incurred under presidents from either main party. Over the last 30 years, the debt ceiling has been raised by $2.83 under Republican presidents for every dollar it was raised under Democratic presidents. I understand that the tea party movement and others are pressuring the Republicans but I still find their sudden aversion to debt disgusting.
Martin is clearly a self preservationist who's primary goal in life is to grow and preserve his wealth and I don't blame him one bit, which is one reason I am a subscriber. His step into the political arena smacks of desperation as he knows life gets harder for all if the US gets downgraded. He knows the Republicans hold the cards right now so of course you blame the one who threatens you the most. They all are or become liars. The difference now is that since Bill Clinton, it is no longer a death toll if you blatantly… Read more »
The Founders had it right. They stated that the federal government only has 4 jobs. 1. Establishing and maintaining law and order ( and thus protecting our God given rights enumerated in the bill of rights and the Declaration of Independence), through a police force and the courts, 2. Establishing treaties and dealing with foreign trade, and 3. National defense and the security of our borders. 4. The establishment and maintenance of our currency based on the gold standard. That's it. They are not supposed to be doing ANYTHING else. The only thing the founders missed is congressional term limits,… Read more »
Great post Dakota Joe.Especially like the fact that you work in govt and see just how inefficient and wasteful it is.Of course,anyone who attended the typical public school would know it.I think the end of public schools and a total voucher education system might be the single,most beneficial thing we could do to turn this country around.
I totally disagree on the purpose of the Democrats is to grow the economy regardless of inflation. If this was their intent we would have a growing economy now with all the money that has been spent.
Did I mention that politicians are vermin?
What nonsense. The Republicans don't want "growth to be sluggish with unemployment stubbornly high" and are the only ones who have put forth a plan. They believe and correctly, that the private sector is what creates jobs and wealth. The government taking money out of the private sector, thinking they know better what to do with it, is proven idiocy.
Republicans want to get out of the debt-ceiling debate because they now realize they made a gross miscalculation. They know that a default would be blamed on them. They know that over 70% of the American people do not share their opinion about deficit reductions without increasing revenue from wealthy taxpayers. The voters have said over and over that is the fair way to break the logjam. It is not good politics to be blamed for a gigantic train wreck that could have been avoided. That is the REAL answer to the question you raised.
No, it's not just about "politics" and posturing for the 2012 elections. It's about the choice the taxpayers of today and tomorrow have currently: paying for an enormous, inefficient, business-strangling government "footprint" that is 24 to 25% of our economy, or paying for a smaller, more efficient and less costly government "footprint" that does the tasks necessary without being a significant financial burden on the backs of generations of taxpayers. Presently, we are "doing" our government, stupidly – the costs are simply out of control and the taxpayers are "footing the bill" for a government that keeps getting larger and… Read more »
Lawyers are not business people, Did you ever see a lawyer or Law Ferm go bankrupt, I hane't and I am 73 years old. All they know is if they get a little behind on their bills they tell billing people to up the price, they don't know how to plan for the future or how to deal with financial proplems, their stratigy is if you run out money, charge more and that is exactly what they are doing to our government. Let's get some business people in office that know how to handle money wisely. A person with common… Read more »
I already typed a comment I forgot to sign up
This is the second try, and if you don't post it cancel my subscription. Does the truth hurt? It is nauseating to read all of these comments from obviously intelligent people that do not have a clue about what is really going on in the world, and especially America. You men have been jerked around all of your life with this two party crap, and still believe it could work, IF ONLY THIS OR THAT POLITICIAN OR PARTY WOULD OBEY THE CONSTITUTION. Let me help you off this merry go round fellas. There ain't any constitution to follow. America has… Read more »
I juyst spent an hour writing, sent it, nothing shows up (except this kept my name and e-mail and a blank message. You guys should allow us to keep a copy of what we write and let us know that the comment was received (or not).
There are many, many individual investors and Countries throughout the World involved in a certain venture including the United States as a government and many of our politicians. And, many of us try to analyze why this investment has not paid yet. Well, there are different schools of thought about that BUT no one wants to step up and ask our higher paid and high positioned politicians. First, it's impossible to "get through" to anyone in the White House willing to discuss this question and second, it's not easy to find a politician willing to admit they are wise to… Read more »