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.

Why the Republican Party Needs Ron Paul

From the Washington Post:

Simply, Ron Paul is just too popular to ignore. Republicans will find it very hard to win with him running as an Independent. If anything, a three-way split might play out even more strongly for Paul, as he can bash both the incumbent and the Republican as emblematic of the establishment — an establishment that more and more is failing America.

Of course, many forces are deeply opposed to Ron Paul, because for better or worse, his small-government anti-Federalist policies are a drastic change from the status quo, and embarrass big-government Republicans like Newt Gingrich, Rick Perry and George W. Bush who claim they want to balance the budget and end up spending a heck of a lot more.

So Paul supporters can expect a deluge of negative claims: claims that he is a racist, claims that his foreign policy is dangerous, claims he wants to return to segregation, claims that he cannot win and is unelectable.

Ultimately, everyone knows that it is the status quo that is more unsustainable than anything else. America is now the most indebted nation in the history of our planet, bogged down in expensive wars and its role as global policeman, and increasingly in denial of her constitution and the principles of her founders. Congress and Obama — as well as extending the reactionary and unconstitutional Patriot Act — have recently signed some of the most reactionary and illiberal legislation ever in the NDAA of 2011, which allows for the indefinite detention of American citizens without due process. Americans voted for Obama hoping for change from the big-spending interventionist corporatism of George W. Bush, and got much more of the same.

Paul’s non-interventionist foreign policy, his civil libertarianism, his strict adherence to the constitution, his rejection of banking bailouts and his willingness to cut spending are not what every voter is looking for, but are a tonic to the disastrous policies of the status quo that are sucking down the American economy.

Of course, many Americans fear radical change. That’s why establishment contenders like Cain, Gingrich, Bachmann and Perry have rapidly risen in the polls and fallen, as voters scrabble around hunting for a viable alternative to the status quo. Paul’s gains have been slow, steady and consistent. This has been in spite of an earlier campaign of media ignorance, and now a campaign of media smears, including the charge that he is either or a racist, or has associated himself with racists.

These media attacks will prove ineffective. Voters are turning to Paul because of his policies, and the fact that he represents a radical departure from what to many Americans is a disastrously failed status quo. He could be the Grand Wizard of the KKK, a shapeshifting Reptilian from Alpha Draconis, or a cross-dressing drug addict, and that would not change a thing because Ron Paul will ultimately be judged on the content of his policies, not superficial smears that have nothing whatever to do with policy.

Voters — middle class voters, poor voters, factory workers, the unemployed — like the idea that the President will cut the debt. Voters like the idea that the President will respect a strict interpretation of the constitution, instead of passing authoritarian legislation like the NDAA, SOPA and the Patriot Act. Voters like the idea that the President will end wars, close foreign bases, and defend America, instead of practicing expensive nation building in the middle east and central Asia. Voters like the idea of not pledging future tax dollars to bailing out badly managed and corrupt banks.

While some of his stances are unpopular with some segments of the population, there is no other declared candidate from either of the major parties who offers any of the above. None. Ron Paul’s rise is just a symptom of the establishment not delivering to the people what they want, need and deserve.

The Dangers of the Era

Modern civilisation has its problems but right now it works. Electrical grids, water systems, mass agriculture, global shipping, the internet, road networks, governments and financial markets are all still functional, and life for the majority is significantly easier and more colourful than for most of history. In the presence of civilisation, most of our basic needs (food, water, shelter, culture) are fulfillable, even if civilisation is highly fragile.

Nonetheless, many people are angry. Angry with the system, angry with authority, angry with society. We see it in #OccupyWallStreet. We saw it in the spontaneous thievery and riots in England in August. We saw it in the ongoing Arab Spring. We see it in Greece‘s protests against IMF-imposed austerity. We saw it in the Tea Party’s shades of “mad as hell and I just can’t take it anymore“.

People are mostly angry about some combination of poverty, angry about inequality, angry about rising joblessness, lost civil liberties, the loss of Western manufacturing, economic weakness, bailouts, or simply perceived unfairness. This isn’t a partisan issue; it exists as much in so-called left wing (like anti-austerity protests) and right-wing (Tea Party) camps.

The essential problem (that affects everyone who is not part of the elite) is that while civilisation functionals reasonably well for a vast majority, it functions significantly better for a tiny minority.

If nurses, teachers, soldiers, electricians, tradesmen, scientists (etc) are getting $50,000 a year for their labour, and traders on Wall Street who were bailed out after their businesses failed are getting $5 million bonuses, eventually the majority will start to seethe with questions like “why are they more valuable to society than we are?“, “if they failed to see the last recession coming, why are they still getting rewarded?”, “if unemployment is so high the economic system cannot be working, can it?, and so forth.

Corporations — and by extension, governments — have much reason to be fearful.

From the Washington Post:

Recent protests—Occupy Wall Street, of course, but also the Tea Party movement as it first began—rise out of a profound rage over unfairness in this country. The scale of this unfairness and inequity makes it hard to know where to direct that rage, to know what to do. Occupy Wall Street has the right target; but where their rage will go, nobody today knows. I am certain, though, that any alert board should be instructing their managers to do three things: admit the problem exists, take positive steps to make the corporation function fairly, and consider what other steps would address the concerns of the protests.

Simple? Not quite. But necessary? You bet.

If the present Occupy Wall Street protests do not create an unignorable threat, they certainly raise the prospect of one in the near future. Rage at unfairness is not easily quenched and once started can be hard to curtail. We’ve seen this time and again throughout history. Shareholders may think of themselves as victims of CEO power, as innocent shareholders , but we need only look to the Russian and French Revolutions to see that everyone having anything to do with fallen power, or in this case “guilty corporations”, may be attacked and injured—even if, like shareholders, their only crime is doing nothing.

But the real danger of all of this is not to corporations, or governments, or Wall Street, or the power elite. The danger is to society itself. Corporate and financial hygiene is at an all-time low, and the global financial infrastructure is an interconnected hyper-leveraged house-of-cards ready to come crashing down. The higher joblessness and wage inequality go, the  sooner the smouldering embers of fury we see today will be transformed into a burning conflagration of rage in wider society. If people with electricity, water, food and Chinese consumer goods are getting furious today, while civilisational is still functioning reasonably well, imagine what might happen if another financial crash caused by a Euro-default raised unemployment another 5%? If gasoline costs rose another 50% in response to an oil shock? If a new conflict or war significantly raised the cost of imported goods?

Establishments need to quell the furies of the population before they reach tipping points by letting bad banks and businesses fail, by reforming the tax code so that everyone pays a fair share, by creating jobs, and by finding ways to reduce citizens’ and institutions’ debt burden. Unfortunately, I believe that the global financial and political systems are so entrenched that at this stage deconstruction (rip it up and start again) is impossible because vested interests make any such changes highly unlikely.

The real danger is that in desperate times people will follow any charlatan who can offer food and security. In the 20th Century, Germans, Italians, Russians, the Spanish, the Chinese, the Vietnamese, the Libyans and others all discovered the dangers of overthrowing corrupt entrenched establishments, and replacing them with new regimes with no respect for individual liberties, religious freedoms, the freedom of speech, the freedom of association. I want the revolutionaries of the 21st Century to understand that the problem is not capitalism, nor liberal democracy. The problem is that a tiny minority are rigging the system to enrich themselves.

America Priced in Gold

Let’s imagine that the gold standard was not abolished in 1971, and was instead maintained — or, alternatively, assume that only gold is money and that other things are merely paper intermediaries. What would be the shape of economic data under that paradigm? Here’s retail gasoline:

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The Problem With Military Keynesianism

Did World War 2 really “get us out of the Depression?” According to Paul Krugman it sure did:

Think about World War 2, right, that was actually negative social product spending, and it brought us out.

Really? Spending vast swathes of capital, labour, life, sweat, tears, infrastructure, time and effort to fight a war “brought us out.” Well, that’s news to me. World War 2 was one huge festering conflagration, diverting productive resources to global destruction. Now that was the fault of Hitler, not Chamberlain, or Churchill, or Roosevelt, or indeed Krugman. But the point stands — the opportunity cost of World War 2 was all of the productivity, all of the infrastructure, all of the life, all of the goods and services, everything that could have been created in lieu of fighting the war. Sure, the years following World War 2 were boom years — but that’s precisely because societies mobilised to compensate for the years lost to destruction, infernos, genocide and bomb building. In reality, the 1950s were a lost decade — lost in making up for the destructive excesses of the 1940s.

The Parable of the Broken Window

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Rick Perry: Heir to Bush & Cheney

So a slick, folksy Governor of Texas just parachuted into the Republican Presidential race. Remind you of anyone? Hair coiffed, teleprompter set to patronisingly moralistic, Rick Perry — who previously promised America he would not run for President — has decided that the country needs yet more faith-based initiatives, public prayer and foreign excursions. In his own words:

One in six work-eligible Americans cannot find a full-time job. That is not a recovery — that is an economic disaster.

He’s right. But of course — rather than investing in dilapidated infrastructure — Perry believes that righting our economic woes is just a matter of getting right with God. From CNN:

On August 6, Texas Gov. Rick Perry wants you to drop the Texas BBQ, grab a moist towelette and fold your hands to pray. On Monday, Perry declared the date a “day of prayer and fasting for our nation’s challenges.”
“America is in crisis, ” the Republican governor says on a website promoting the event. “We have been besieged by financial debt, terrorism, and a multitude of natural disasters.”

Perry invited the 49 other governors in the U.S. to issue similar proclamations, “encouraging their constituents to pray that day for unity and righteousness for our states, nation and mankind.” He wants other governors to join him at Houston’s Reliant Stadium, home to the NFL’s Houston Texans, for an August 6 event called The Response, organized by a conservative Christian group.

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Teabagging for the Military Industrial Complex


From Tea Party Nation leader Judson Phillips, via the Economist:

If we decided to build a couple of new carriers, thousands of workers would be hired for the shipyards. Thousands of employees would be hired for the steel mills that would provide the steel for the hull and various sub contractors would hire thousands. Do you know what that means?It means they would receive paychecks and go out and spend that money. That would help a recovery. That is a shovel ready project!Increasing spending for the military does a couple of things. It not only not only stimulates the economy, it protects our nation. That is a better investment than say spending money on teaching Chinese prostitutes how to drink responsibly.

I hold very strong views regarding the claim that military spending helps the economy. As I explained previously:

The most obvious example of the unproductive use of money is war. Time, labour, materials, ideas and spending go into warfare, and what comes out? Destruction — bombs are destroyed when they hit the ground, and they destroy the area around which they hit. They destroy infrastructure, they kill people, and they create hatred and resentment that very often triggers more and greater warfare.

Most bizarrely, the Tea Party has since its inception (supposedly) been committed to reducing government expenditures, to pay down debt. Military expenditures are still huge. And is America safer than ever? Is the additional military spending helping us pay down debt?

No.  America’s indebtedness allows China to boss America around. The level of taxation and debt necessary for high military spending is preventing America from investing in the poor, in youth, in alternative energy, and in infrastructure that would create wealth, opportunity and security for the nation, instead of short-termist gains for corporations, bureaucrats and the military industrial complex.

Phillips’ bizarre statement adds fuel to the fire of the view that the Tea Party is (largely) a manipulated group of poor and lower-middle class voters who are in fact manoeuvring for the interests of a tiny corporatist and industrialist elite. The “all government spending is bad” rhetoric has quickly been turned around to “spend less on welfare, spend more on bombing brown people to death”, the rallying cry of big government neo-Conservatives like George W. Bush and Dick Cheney. That administration increased the national debt by a higher proportion than any Presidency in history, creating deeper debt woes, and handing huge power and wealth to investors like the Communist Party of China. Those early anti-tax and anti-debt protests were long ago astroturfed by corporatists who want more and more government handouts to big business and to the military industrial complex.

Should you hate the Tea Party? No. The Tea Party protesting on the street is not your enemy: the poor and lower-middle class are “taxed enough already”, often paying a higher nominal income tax rate than hedge fund billionaires. Like many in America, they and their children are increasingly unemployed. Their house prices have fallen. Their businesses have stumbled. They are having difficulty getting loans to invest in new projects and businesses. So the Tea Party are right to get mad. They are right to get angry. But their targets — immigrants, welfare recipients, climate change scientists, foreigners and liberals — are way off the mark. The real enemy of freedom in America is corporatism, and billionaires who live off government handouts and military spending, who prevent tax hikes on the super-rich, and who prevent spending on jobs and infrastructure for the poor. The Tea Party movement has been deliberately misdirected, and now we see what its leaders are gunning for: more military spending, more government handouts to big business, more jobs for the boys. This is what has to end for America to get back on its feet. So once again, I give you Eisenhower’s 1961 speech: