On The Debt Ceiling & Drowning the Government in the Bathtub

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The mainstream coverage of the debt ceiling standoff and the prospect of government shutdown and how that thing is seen by the people who might precipitate it is predicated upon a fundamental misunderstanding. To the Tea Partiers and Grover Norquist-Ted Cruz-Rand Paul wing of the Republican Party, a government shutdown is seen less as a potential disaster in which markets and society are sent into turmoil, and more as a potential wonderland of enforced austerity where with the government handcuffed, the creative forces of the free market are finally unleashed.

The libertarian financial analyst Mish Shedlock exemplifies these sentiments:

Looking for a reason to support a government shutdown? If so, please consider Obama Stripped to Skeleton Staff in a Government Shutdown.

Mish points to the austerity measures the government would be put under:

 A U.S. government shutdown means President Barack Obama will have fewer people to cook meals, do the laundry, clean the floors or change the light bulbs, according to a White House contingency plan.

About three-fourths of president’s 1,701-person staff would be sent home. The national security team would be cut back, fewer economists would be tracking the economy and there wouldn’t be as many budget officials to track spending.

Of the total, 438 people work directly for the president. Under a shutdown, 129 could continue working, according to the contingency plan.

Biden, who has a staff of 24, would have had to make do with 12.

Obama’s national security staff of 66 would be cut to 42. Similar staff cuts would be imposed at the White House Office of Management and Budget, the Council on Environmental Quality, the Council of Economic Advisers and the Office of National Drug Control Policy, which are all part of the president’s executive office.

Mish concludes:

Fantastic Idea

If you think that a government shutdown is a fantastic idea (I sure do), then please contact your elected representatives and let them know.

But there are at least two other factors beyond simply wanting less government that may make a government shutdown and debt default attractive to the Tea Party wing.

The first of which is that the austerian worldview exemplified by the Wall Street Journal editorial page — in which large-scale deficit spending was expected to precipitate soaring interest rates and inflation — has largely been proven wrong by events. Interest rates and inflation have remained low. The Tea Party wing of the Republican Party now has an opportunity to try to make their initially wrong predictions come true by throwing the United States into default on its debt, and sending a message to markets and international investors that the US government and US Treasury debt is not a safe asset. Whether or not a government shutdown would actually result in a debt default (the Treasury would under such an eventuality likely prioritise debt service), and whether this would actually lift interest rates significantly are other matters, but shutting down the government and defaulting on the debt would certainly enforce austerity which is what the Republicans and especially the Tea Party wing want.

The second — and perhaps the greater factor — is the desire to prevent Obamacare taking effect. Now, I am not convinced that Obamacare can bring down healthcare costs as much as a Canadian-style or European-style system. Obamacare is certainly not an ideal system, although its earlier implementation in Massachusetts does appear to be fairly successful . But it does bring the United States much closer to something approaching universal coverage. With the message of the last Republican election campaign being that 47% of the population (the “takers”) is mooching off 53% of the population (the “makers”), Obamacare is seen by the Tea Party wing and probably the Republicans in general as the last turning point on the road to socialism. And avoiding the implementation of Obamacare is something that, I think, the Republican Party and especially the Tea Party wing will go all out to do.

Now, how far the Republicans are willing to go down this road remains to be seen. The more moderate wing may be willing to settle for a deal that avoids government shutdown in return for increasing the pace of austerity. But the impending implementation of Obamacare, and the general attraction of a government shutdown will strengthen the will of the Tea Party wing to not negotiate.

Personally, while I do think we are in the long run headed toward a world of increased decentralisation and a lesser state role (primarily as the result of technology), I don’t think a government shutdown will do anything to advance the cause of human liberty. In fact, I think a longer-term shutdown would probably end in civil unrest — a lot of people are dependent on government spending for income — and market turmoil (not least because markets seem to have priced in an easy resolution to the standoff). So the standoff will almost certainly end in a deal permitting a debt ceiling increase. How much carnage will occur before then remains to be seen.

48 thoughts on “On The Debt Ceiling & Drowning the Government in the Bathtub

  1. What is ridiculous here is driving thousands into unemployment with a view to cutting down on the proportion of GDP taken by public spending.

    There are two decisions here which ought to ENTIRELY SEPARATE:

    1. What proportion of GDP is to be allocated to public spending (and how is that to be split between education, health, etc) That decision is a PURELY POLITICAL decision and should be taken by the electorate and politicians.

    2. How big should be deficit be. That decision is very a TECHNICAL one which should be taken by a committee of economists, not by economically illiterate politicians. Indeed that decision (i.e. how much stimulus the economy gets) is already in the hands of such a committee in most countries: central bank interest rate committees. Not to mention the fiscal responsibility committees that are springing up around the world.

    Positive Money’s proposals make an ABSOLUTELY CLEAR DISTINCTION between those two decisions.

      • A “Committee” is a very dangerous idea. Government should be limited to defence and national infrastructure to facilitate commerce. Everything else is a SOCIALIST experiment.

        • I agree, but it’s the definition of national infrastructure that is the problem. I’d probably include a lot of things under that. Hospitals, schools, transfer programs.

        • Buddy (9/28 @7:19 pm): Right on! Except there must be (minimal) regulation. And I would not use the word “experiment” — your “everything else” has been tried over and over, always failing. As in perpetual motion schemes, experimenters have been replaced by con-men and suckers.

          In any case, the US Constitution is the ultimate in simple transparent systems: the (federal) government has ONLY the powers SPECIFIED by the Constitution. We know this is definitive, because every con-man and would-be tyrant spends enormous ingenuity and effort to subvert and obfuscate it.

          John (9/28 @ 8:03 pm): “Transfer payments” are infrastructure?

      • I wasn’t suggesting that ALL DECISIONS relating to anything that smacks of economics should be taken by a committee of economists. I just suggested that, 1, measuring inflation, 2, deciding what inflation is likely to do in the short to medium term, and hence 3, how much stimulus is in order, is a decision for economists, not politicians.

        Put another way, the idea that politicians are qualified to measure inflation or gauge what it’s likely to do in the next 12 months is a joke.

    • There is no such thing as hyperdeflation

      Yes there is such a thing as “hyperdeflation”. It’s what happens when commodities or products become so abundant that producers no longer feel ay need to charge for them. Peer2Peer file transfers are one example of something that once cost money (entertainment) but now in the marketplace is effectively free.

      • If you think bandwidth is free, you clearly haven’t been paying attention to the ongoing battle between Netflix, ISPs, and the Tier 1 Networks.

        Similarly, if you think commodities are becoming more abundant, you haven’t been looking at the rising price of extraction or the degradation of ore grades.

        I’m actually a cornucopian (all natural resources are unlimited for human purposes), but your 3d-printers-in-every-home, guaranteed minimum income, utopian future is a fantasy.

        • Bandwidth isn’t free itself (although its cost per MB, again is hyperdeflating). But it has made entertainment’s marginal cost pretty close to zero.

          For iron ore, there are these things called asteroids with massive quantities of iron up there, you know. As price rises on Earth and as space technologies improve and become cheaper, it will make more sense to go and mine some.

          The future I’m imagining may never come to fruition, but if we continue on same trend lines and avoid any nasty black swans it seems inevitable that it will resemble it to a greater degree than most people today expect.

        • you only think commodities and products are abundant because you live in the most wealthy country on earth.

        • You know, living standards have improved all around the world. Abundance will always be measured relatively, and relative to the past we are already living in an age of high abundance built in significant advances in technology.

  2. Australia has the best universal health care system . It’s the only one where John Aziz can come to Australia and use a non photo ID “Medicare” card to get FREE GP consultation, then Specialist referral free of charge, then Free Surgery , then subsidised medicine post operation. No photo ID along the way. I know because I had carpal tunnel surgery and was never asked for photo ID. We have over a million non Australian accent citizens in Australia who could easily give their overseas friends or relatives a “Medicare” card and abuse our tax payer funded system. I have notified my local Member of Parliament to tighten up the Act to require photo ID, and if they don’t introduce new legislation I will lobby them with a citizen petition. And we pay bureaucrats to run our country. It takes citizen action to make change. I can’t believe this “Medicare” fraud opportunity fell through the cracks !

    • “It takes citizen action to make change.”

      If people really did get involved, they would have never set-up this kind of system up to begin with.

      Systems are designed by the few to benefit the few, ALWAYS have been, ALWAYS will be.

      The [representative] democracy thing is just a fantasy. Or, shall I believe my U.S. Senator [one of two from California] represents me and my 19M closest friends?

      Hell, they can’t even represent their own interests worth a damn.

  3. I have been a contrarian to the libertartian viewpoint on Mish’s blog for years. The austerian viewpoint is nearly impervious to insight. Of course the inflationary Keynesian viewpoint is nearly equally as opaque.

    Austerians are “bean counters”. Keynesians are anti-bean counters. What we need is for economists to look not at accounting in general, which is just another form of bean counting, but to take the empirical data within accounting known as cost accounting. Thinking about the economic and monetary effects of the individual income costs in ratio to overall costs found in that subset of datums, and then understanding that any dollar actually in or re-circulated back into the economy is ALWAYS subject to that same effect exposes the fundamental problem that plagues economics:

    Under the current rules of cost accounting (A) will not pay for (A + B)

    So, under the current rules of cost accounting, the entirety of the productive process is price inflationary and hence fundamentally erosive of business profit and individual incomes. Austerity does not deal with this problem. Neither does continually injecting money into the economy in the form of loans. It can only be remedied by a direct payment to individuals, which unlike a loan does not incur an additional cost to the productive process. Yes, yes, yes you could get into a price inflationary problem by doing this, unless you take adult and responsible control of that possibility with a general discount on prices to consumers based on the statistical costs of consumption over the costs of all production for an equivalent period of time, and which discount monies is rebated back to retailers so that they can be whole on their margins and overhead.

    When the rules are flawed. Change the rules so that the economy works. Of course to do that one has to confront the empirical data instead of relating to it from some orthodox theoretical viewpoint….either austerian or Keynesian.

    • And remember, demand pull inflation is an endemic problem of a profit making economic system. Not confronting that truth by falling back on an economic equilibrium orthodoxy is just acquiescing in chaos under the guise of “free” market theory. Taking the engineer’s perspective on economic problem solving instead of the religious (orthodox) one, is essential.

  4. If monetary policy was efficent the central bank could pick up the economy so that gov revenue increased. It could therefore maintain its current level of spending while balancing the budget.

      • I think MP would be efficient if it wasnt overly dependant on banks and the credit channel. Directly interacting with the public by directly targeting broader money measures to pursue inflation targets etc…

        • Let businesses borrow from the Banking system as they will to expand and yet have an independent credit creating agency distributed a universal dividend/basic income guarantee directly to individuals. This would insure more robust effective demand for the economy in perpetuity, reduce monetary inflation, break up the monopoly on credit creation enjoyed by the way too powerful Banking system, enable you to reduce taxes and government by making unemployment insurance, welfare and even eventually social security redundant and last but not least make every individual economically free by making the system serve them instead of making them serve an onerous one…like now.

  5. “Now, I am not convinced that Obamacare can bring down healthcare costs as much as a Canadian-style or European-style system.”

    Obamacare is a massive disaster; simply more corporate welfare, and little else.

    • Right, Imp., and more personal welfare-for-votes, or at least touted as such. This is not conjecture — results are pouring in.

  6. The Republicans have gone off the deep-end. And Americans will suffer.. the Republicans don’t give a damn about America.. just look at how “well” the average citizen is in strong Republican states.. http://en.wikipedia.org/wiki/List_of_U.S._states_by_income 15 of the poorest 17 states are traditional Republican states. its a house of cards, the Republicans have been getting away with the illusion for years; but they don’t give a damn about America.

  7. “Interest rates and inflation have remained low.” I.e., the Tea Party is wrong?

    The Fed adds $3.6 trillion to their “balance sheet” and interest rates are low. Do you think? And we are still in a Depression*. Is upward pricing ability (aka inflation) really an issue during a downturn? Considering the Depression, we have had significant inflation in energy, higher education, health care, many food items, etc.

    As evidenced by the equivocating on taper, the Fed is on eggshells about what will happen when the unprecedented QEx actions are done. We have already seen the bellwether 10 year bond rate take off as taper is anticipated (or come down when taper is delayed).

    * I believe in the Greater Depression and not the Great Recession as the govt/media propaganda has portrayed it. Would the government ever tell us we are/were in a Depression?

      • You hit the nail on the head, Paul. Political and financial “elites”, “the government-class”, cesspools of bureaucracy in higher education and media, etc. will fight to the death — our death — to keep their power. We are beginning to see the grass-roots (Libertarians, tea parties, patriots, Independents) fight to restore OUR (Constitutional) power.

        Remember — federal government employees are paid almost twice the private-sector equivalent, and Washington, D.C. has the highest per capita income among big US cities and is rowing the fastest.

      • As has been pointed out, most economists did not see the 2008 economic crash coming because most economists do not understand finance.

        • Most economists did not see 2008 coming because few understand cost accounting and few accountants think in terms of the economic implications of ever increasing debt. Steve Keen saw one graph expressing this and that is why he yelled: wait a minute!

  8. Scenario: The Fed stops QE. The govt continues $1 trillion deficits financed in the credit markets. The Fed starts dumping the $3.6 trillion balance sheet on the credit markets. The govt services a rising debt well beyond $17 trillion. Any predictions?

    • The Fed is very unlikely to cease easing for any reason while deficits are still high, though for what it’s worth the Federal government’s deficits are now below $1 trillion and falling.

      The Fed is even less likely to start dumping its balance sheet on the market in the context of a continued depression.

      I think the main reason the Fed was tentative about going into QE3 last year is because they needed to do some significant work to calm large foreign investors like China and Japan who were really worried about their investments being inflated away. How could they potentially have calmed them? By saying that the choice is either you lose some of your purchasing power down the line via negative real rates, or we will be forced to default.

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  11. I don’t think a government shutdown will do anything to advance the cause of human liberty. In fact, I think a longer-term shutdown would probably end in civil unrest

    The Occupy movement and unrests in Greece and Spain have been recently seen by libertarians through “schadenfreude” glasses: they fantasised that masses, when pushed against the wall, would come to their senses and read the events as a lesson so they’d retreat back to sanity and thus liberty. they supported it hoping masses would learn from it. Germans learned from two hyperinflations a lot and changed. The Swiss in dark ages, the British in 16th century, US colonies 300 years ago and communist countries in 1980s did. a vision of hyperinflations in Germany, vision of Great Depression in USA are seen as factors that had driven masses towards sanity long term. hopes driven by assumptions of desire of change. is this perception true?

    civil unrest in communist countries lead to abandoning of that system. but only to replace it by the same thing only way more subtle.

    it was often pointed out that Greece leaving the Eurozone would get back to restoration. but it would be also doomed to hyperinflation, which wipes out middle class and make masses desperate and more controllable. if gov shutdown wouldn’t neccessarily be good, would eurozone breakup be?

    • I disagree that Germany’s hyperinflations have taught worthwhile lessons. I think they’ve made Germans extremely paranoid about the wrong things (remember the Nazis came to power during the hard money Bruning years, not during a hyperinflation?) which is why they are against any kind of accommodative monetary policy now, which is slowing the adjustment in countries like Greece and Spain that they could have made more easily under national currencies.

      So, I’d be pretty happy to see a Eurozone breakdown unless there is a full fiscal union with an explicit fiscal transfers policy to reinflate the peripheral economies. It is not, by any means, an optimal policy zone, and it is certainly not being managed well. The lack of growth we’re seeing today illustrates that pretty clearly.

      • Guys, I don’t wish to be a smartass, but here we are in the US on October 1 with “a government shutdown”. If past is prologue — and it surely is in selfish, gutless, brainless Washington, D.C., here’s what to expect.

        We have survived many “shutdowns” , e.g., Congress vs. Presidents Carter, Regan, and Clinton. Don’t worry about it.

        On the other hand, never before have we had as large (18%?) and important a part of our economy hijacked by politics. And Obamacare is a proven loser — more costly (than our already unnecessarily expensive system — hat-tip to Aziz)) to patient and government, less coverage, and lower quality. You don’t have to take my word for it — the cronies (big business, unions, Congress, etc.) are cashing in chips to get OUT of it! Furthermore, there is no doubt that it won’t work now and probably not ever. Why? No one wrote or organized the multi-ten-thousand-page monstrosity. Instead, every advocate of socialized medicine was invited to dump their dreams and revenge into Pelosi’s dumpster. In a rare outburst of honesty, she said publicly “We have to pass it so we can find out what’s in it!” I know of only one person who claims to have read it all (and it has expanded several hundred pages per day since); he claims to have found thousands of inconsistencies, redundancies, imponderables, etc.

        • P.S. As a rather typical “tea partier”, I deplore government spending/obligations headed for bankruptcy and creeping (now galloping) socialism including takeover of free-market and charitable healthcare. These positions are value-based, indendent of “austerian” economic theory and political ambition. Poverty and poor health work for revolutionaries, but are not good for people. If you would ask our Senator Ted Cruz, rather than believe the smear, I believe that you would find he agrees.

        • Addendum: There have been 17 (seventeen) US government shutdowns with no resulting permanent damage to the economy.

      • So, I’d be pretty happy to see a Eurozone breakdown

        even if it won’t do anything to advance the cause of human liberty. so why fon’t you cheer for gov shutdown then?

        It is not, by any means, an optimal policy zone, and it is certainly not being managed well.

        yeah and accomodation-through-hyperinflation is supposed to be somewhat more optimal policy and proof of good managment :P

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