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We talked yesterday (Thursday) about the debt ceiling debate, and how the GOP is making the most of its opportunity to affect the economy in the run up to the 2012 election.
Well, the Democrats are doing the same thing – except whereas the Republicans are looking to make long-term fixes at the expense of short-term growth, Democrats are doing the opposite.
I'll show you what I mean.
As I said in my previous piece on GOP economic strategy, I'm a firm believer in Public Choice Theory.
And in this battle the Democrats would like to see rapid growth between now and November 2012. More than anything, they want to see unemployment come 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 can try to sort out problems then – particularly if they can recapture the House of Representatives.
Furthermore, the wish to get U.S. President Barack Obama re-elected is not confined to the president and his entourage. If Obama were to lose in 2012, after presiding for four years over a lackluster economy with high unemployment, this would seriously damage the Democrat brand.
The Republicans would very likely preside over a recovering economy and be re-elected in 2016 on the strength of it. That would give them eight years to write the history of the preceding period and cast President Obama's Democratic policies as a failure. After all, President Carter would be remembered much more fondly if he had been re-elected in 1980 and had presided over the 1982-84 economic upturn; conversely FDR would be remembered as a one-term president who failed to cure a deep depression if he had lost in 1936.
Regardless of their ideological preferences, Democrats are thus very keen to see policies enacted now that will produce a more vigorous recovery in 2012 and lower unemployment.
They don't much care if those policies cause inflation to surge, or leave the incoming president in 2013 with a dangerous budget position. If President Obama is re-elected, Democrats will have the first two years of his second term to take painful actions to control inflation and rein in the budget deficit. Even if those policies don't work exceptionally well, the Democrats would still have a chance in 2016 to blame any failures on the outgoing President Obama and campaign independently of his administration.
So for Democrats – for public choice theory reasons – short-term benefits from policies implemented now are the only benefits that matter.
In the current negotiations, the Democrats have more power. While their majority in the Senate is now too small to pass major legislation (which requires 60 Senators to the Democrats' current effective total of 53), the Democrats still set the agenda and can both block Republican proposals and advance their own. Add to that the enormous advantage of the Presidency's "bully pulpit" and control of the executive branch, and you'd expect them to end up with most of the marbles at the end of this round of the game.
The Democrats don't want spending cuts for two reasons.
First, their ideological preference is for larger government. The government workforce has declined by over 1 million since April 2009, offsetting by more than one-third of the rise in private sector employment.
Secondly, Democrats – being mostly Keynesians – believe that spending cuts have had a depressing effect on the economy as a whole, keeping the unemployment rate unexpectedly high. (Republican supply-siders would suggest that the government employees have to be paid for somehow, and that reducing government redundancies frees up money that often ends up in the hands of small businesses, boosting private hiring.)
To the extent that tax increases would dampen economic growth, the Democrats don't want those, either. For example, temporary cuts in payroll taxes are attractive because they could stimulate economic activity among the modestly paid and would almost certainly stimulate middle-class spending.
On the other hand, tax increases in the longer term – those that would take effect in 2013 or later – are favored, as they would push any pain (and much of the unpopularity) into the next administration while still encouraging the bond markets to believe that the deficit is being cut.
Higher tax increases on the wealthy and on oil companies also are welcome. Democrats think the income of the wealthy tends not to be spent, resting useless in a bank. They don't believe tax rates have a supply-side effect.
On monetary policy, the Democrats want more stimulus. They believe low interest rates stimulate economic activity and they want to make sure that Federal Reserve Chairman Ben S. Bernanke buys enough Treasury bonds to prevent the budget deficit from becoming a problem before November 2012.
Democrats don't worry much about inflation. They believe it will arrive fairly gradually, and can be prevented from becoming a big worry before November 2012 with creative accounting at the U.S. Bureau of Labor Statistics.
The bottom line is that the Democrats are likely to get more of what they want in the current negotiations, but they are taking a big gamble.
If Bernanke's monetary stimulus fails to create new jobs (and both theory and evidence suggest very low interest rates encourage companies to substitute capital for labor, thereby destroying jobs), then unemployment may still be high in November 2012, with inflation increasingly a problem.
That would make it very difficult for President Obama to be re-elected – in which case the Democrats' only hope (but it's a substantial one) would be that the eccentric Republican primary system produces a flawed opponent.
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GOP Spending Cuts Fuel Readers' Federal Debt Debate - Money Morning:
Obama Deficit Plan Sets Stage for Capitol Hill Budget Debate - Money Morning:
Even on the Brink of a Government Shutdown, Congress Still Doesn't Get it
Are you kidding. Your premise that " After all, President Carter would be remembered much more fondly if he had been re-elected in 1980 and had presided over the 1982-84 economic upturn"; would be laughible if it wasn't so sad. If Carter had been re-elected there would have been no recovery from '82 -'84. Recovery doesn't just happen – measures must be put in place. Carter never had a clue and would have just continued to stumble along, as our current occupant of the White House has, and all at the expense of the American taxpayer. As the President, Ronald… Read more »
Amazing, The more we see of government, the more we see how the system is broken, no better way to say it, the two party system is no longer functional. With the obvious issues of a bankrupt country, what is the anwer? The only answer that comes to mind is to dump the whole system and start over for we cannot expect change when a system is totally bankrupt with no way to reverse this situation with the out of control spending and waste we have all seen since the beginning of federal reserve, all we have seen is waste… Read more »
What Bob Krause said!!!!
Great minds think alike….. Just got finished posting on the WaPo site (which is probably going to have a server meltdown!) that the GOP's seeming intransigence is the direct result of a President who thinks he's running a daycare center, not the world's largest economy. With: no deal on the table (IN WRITING, please), the same Party aparatchiks showing up in front of the cameras to say "we're running out of time," plus the states of Minnesota & NC New Majorities getting results just this week overriding their Democrat governors' ignorance of the 2010 election, they run a serious risk… Read more »
big government might not solve the problems completely but neither will the privatization of government. I agree that the two-party system is no longer functional as we know it and understand it, but at the moment until enough people see that we need to replace the entire system the two-party system is all we have. We know what in not raising the debt limit will do, it will cause run away inflation, panic on Wall Street, panic on Main Street, and extreme pain and suffering the most honorable in our society the elderly and the disabled. On the subject of… Read more »
To Amazing: You said it so accurate and there is nothing one could add. Your assessement is correct and there is no way out. With 30 Millions illegals in the US, 40% of the population depending on Government assistance. The Reoublicans will have not much of a chance. All these people who had a free hand out for so long will not agree to a budget cut. They want more and more of the wage earners money. They will vote for those who promise them continuation of this mess. they do not care what will happen in the future, they… Read more »
Nothing will ever get fixed until we get rid of the lobbying and campaign donation system we currently have in place. Each party gets into power and pays off their constituencies. The American people get SCREWED!!!! The Republicans were in total control until 2006 and paid off Wall Street and Oil Companies. The Democrats got in and paid off Unions, environmentalists and lawyers (no tort reform in Obamacare). Until our lobbying and campaign system is designated for what it is (CRIMINAL BRIBERY) and our politicians GO TO JAIL (as any other ciitizen engaging in similar behaviour does) then NOTHING will… Read more »
Greetings,
It is time to let those hard working politicians show how much they love their country. Put them on the front lines of the nearest war zone with a rifle, so they can protect the country. At the moment, I believe that would be on the border of Mexico. No doubt, a few of them would get killed, but no matter, they can be easily replaced with smarter idiots. Let God sort them out. No, he would not dirty his hands.
Just my two cents worth which would not buy a piece of bubble gum !!!!!
Take care,
Mike
Bob Krause: Don't forget who appointed Paul Volcker and who got the benefit of his hard-nosed economics.
And Free: Don't just throw up your hands. "We" is the government. It's our handiwork.
Hey, Free, what are you wanting? Do you want a one party system, a dictatorship, or a king? We have the best system of government in the world if it is made to work right. What we need is elected officials who have the interests of "the people" (the common citizen) at heart instead of special interest groups and their "fat cat" cronies. The only way to bring back government "by the people, by the people" is to outlaw political contributions by corporations and outlaw lobbing by corporations and "for profit" special interest groups. Keep political contributions from individuals and… Read more »
This article is about political motives as compared to statesmanlike motives with long term interest at the center. Politics is reprehensible because it about your "club" and not the interest of the nation. Statesmen cannot get elected because the tipping point has long been reached where most look to government for solutions via political action for short term group benefits. Who was the Scottish economist who said "Democracy will last until the electorate discover the keys to the treasury". Every subgroup now smells the money and sees the keys in political action.
The major flaw in the American economy is not necessarily government spending or tax cuts. It is the loss of jobs to outsourcing and automation. Every time that you see reports on the productivity increase of workers, you know someone has lost their job or their wages have been reduced. With current global trade practices, the American worker is on a race to the bottom in wages. Around 40% of U.S. investment money goes to overseas concerns, that is where we are creating the jobs and destroying ours. In the meantime we are slowly bleeding ourselves by importing vast amounts… Read more »
Great posts kelly and Bob Krause
I have 'two words" that'll fix our government…..TERM LIMITS. We don't need career politicians who get reelected over and over cause they raise more money than their opponents. Our founding fathers, Thomas Jefferson I believe, said politicians are servants of the people and should serve the public good for an amount of time. Then return to the public life professions when they got elected. We don't need career politicians because after a time they get this power hungry complex and start to serve their own agendas and not the peoples. The congress voted term limits for the presidency, now we… Read more »
Like your analysis better this morning Martin. You have at least cast the liberals and deems in the correct ideological and political light. What's missing is only that they have only failed policies to achieve their desired aims and therefore will have to resort to lying and blaming to convince the sheep that what isn't so is or that it's the republican' fault should the current economy be the same. Thus your comment about who the Republicans select is cogent. It should be Paul Ryan or John Kasich who could dance circles around the boob Obama on economics and have… Read more »
this is hogwash. "The Democrats dont want spending cuts." On the contrary, Obama has offered deep spending cuts as part of a deal, including cuts in entitlement programs. He is just insisting that pain be shared widely, including by the more affluent, and that unjustifiable tax subsidies (such as tax credit for ethanol) be ended. "The Democrats want larger government." Also hogwash. The Democrats favor spending cuts plus some higher revenues. The Ryan budget plan calls for spending cuts and further tax cuts — ie, more deficits as far as the eye can see.
I have a solution I believe would get wide spread support in Congress because it is fair to the politicians. If we cut the budget 40% across the board, including Congress and gov't employees, the budget is balanced. If gov't is too big cut it.
Some observations – (1) Obama wants to repeal the "Bush" tax cuts – but only partially, for those making over $200,000/250,000 per year. If the Clinton rates were so great, then lets repeal the "Bush" tax cuts for everyone. The pain of higher taxes should be shared as much as I do not like it. (2) "Special Interests" depends on whose ox is being gored. For Democrats "special interests" are the oil companies and big business in general. For Republicans "special interests" are labor unions, Plaintiff's lawyers and conservationists among others. In short, the other side. (3) Finally, spending cuts… Read more »
As far as the principle of the thing goes, Obama offered the Republicans lots of what they wanted and they gave nothing back in return. That is not "negotiation", regardless of your own opinion of what the best thing to do is. As for taxes: Maybe we don't have to raise base rates, but many Republicans won't even agree to getting rid of some loopholes and inappropriate distinctions. For example, I wince every time I hear conservatives gripe about 47% of filers don't pay Federal income tax. First, that's misleading becasue they do pay FICA which is still a "tax"… Read more »
Nothing short of a miracle or massive voter fraud will lead to an Obama victory in 2012.
Geoffrey Hoffman, please use smaller words. You are making me feel stupid. Im not sure who's side you are on. Is it good or bad to be a aparatchiks? What does intransigence mean? Is it good or bad? :-)
David Hume's thinking is as up-to-date now as it was in his day. "Logic," he said," is the the slave of passion." Democrats and Republicans each have their passions, including yourself. Your passions tend to lean to one party and so your logic may not be as objective as it ought to be. Your presentation would be far more persuasive if you included charts and graphs that show the sources of our debt, and when those sources kicked in (with timelines) and under what circumstances. Examples might include wars and legislation that were unfunded, as well as the impact of… Read more »
A view from outside. I studied politics in the late 1960's and the American political system is fascinating. I live in the UK, we do not even have a written constitution, and our political system evolved over centuries with new parts co-existing with old tradition. At least the American founding fathers thought about the separation of powers and designed a system in its entirety. But they seemed to think that lack of revenue raising powers would limit the size and power of government. They were wrong. They might have put in the constitution a requirement that each President must balance… Read more »
As overseas observer I feel it strange how somebody would side with the GOP in this particular discussion, because it is only few years ago that the finances of the US was well ordered with an outlook to eliminate US debt. It has been GOP policies which have changed the course.
Unfortunately everybody continues to regurgitate comments about problems. You see few suggestions about solutions…. Consider the Fair Tax. Abolish the IRS and the capability of politicians to reward their contributors and supporters. Institute the retail sales tax and almost double the tax base (compared to the income tax). With the retail sales tax in place, jobs could come flooding back from overseas. Go to fairtax.org H.R. #25 and S. 13. This proposal places the decisions about the size of the federal government in the hands of the people, not the politicians. Each person can choose how much he pays for… Read more »
Love the idea of term limits. Way overdue.
Amend constitution to include balanced budget amendment AND a TABOR as well as making Congress subject to all laws passed. Then the interests of management (using the term loosely) will be aligned with shareholders.
FLAT tax and end all deductions except personal/family deduction for up to 3 kids.
Tort reform. Simplest way is LOSER PAYS. That's how it works in England. Instant tort reform.
Kelly if you're serious then read a book or go back to school. If not then I don't get the joke.
I think that once you start giving large numbers of people easy handouts on a regular basis it is impossible to stop.
They become dependent on the handouts and do not develop the will or ability to look after themselves. They are like baby birds waiting for food to be put in their mouth. They are helpless and very demanding.
This has happened in most developed countries where everything is done for political gain, regardless of the consequences.
Now there are too many baby birds to feed, and too many politicians offering to feed them in return for votes.
The only battlefield I see is unemployment and no future. All the political crap in the whole world is not going to me pay the bills or secure employment. Obama is offering major cutback on spending and is asking for tax increases on those 200k secured taxpayers. I did not see improvement with Bush's wealth transfer to the rich …no jobs. I have not seen improvement from Obama's wealth transfer repeated. America does not have an emerging industry to provide tax shelters for the rich and make them money, soooo, there just isn't going to be a reduction in unemployment… Read more »
Martin sounds like a political hack on this one. If the GOP is one-tenth as good at governing as you make them out to be, we'd be nowhere near where we've sunk to as a nation. Your assertions are not backed by any kind of intelligent analysis. The two parties are like two fighters in a ring. Each wants the prize, can't blame them for that. However, it's naive to think that they are trying to give us the best outcome we want. We are spectators and we are not unanimous in what we want. We set lousy rules for… Read more »
"We have the best government money can buy."
The only way to get elected is to prostitute yourself to those willing to give you money and then you are beholden to them.
Until the the "people" are willing to either provide election finanacing or restrict campaigns to 90 days, then this mess will continue until it self destructs.
The people in power have no interest in changing a system that benefits them.
We need a revolution, maybe like in Egypt, etc.