Beyond Fixing the U.S. Government's Debt

After a number of failed attempts over decades to solve a problem, it is natural that the problem itself would barely get mentioned, let alone any cure. I submit that the U.S. federal debt is a case in point. President Reagan made it an issue in 1980, and Congress has tried to mandate for itself automatic spending cuts and tax increases, but to no avail. The desire for instant gratification outstripped self-discipline. This could perhaps be said of the society generally. 
In anticipation of the “fiscal cliff” steep U.S. tax increases and budget cuts that were set to go into effect January 2013 for a decade, Moody’s Investor Service served notice to Americans and their federal government that the sequestration of $1 trillion over the ten years and the immediate end of the Bush Tax Cuts would mean a downgrade in the credit rating of the U.S. Government. The New York Times reported that the rating agency, like S&P before, “emphasized political dysfunction more than soaring government debt. The agency said that Washington must come to agreement to head off billions of dollars in simultaneous tax increases and spending cuts scheduled to begin in January—and to put the government on a sustainable fiscal trajectory. Only then would the United States keep its AAA rating.”[1] Moody’s pointed to the need for “specific policies that produce a stabilization and then [a] downward trend in the ratio of federal debt to G.D.P. over the medium term.”[2] 

Moody's Investor Services     (Reuters)

Significant reductions in spending over ten years, plus an immediate end of the tax-rate reductions that George W. Bush had signed into law, would presumably have produced a downward trend in the ratio of federal debt to G.D.P. over the medium as well as long term unless a recessionary impact would be such as to counter the effect from the sequestration and tax increases. Pressure would have built to exempt spending on unemployment compensation and other sustenance programs, while the tax revenue would have fallen short. In other words, the sequestration, had it been allowed, would not have been a sure thing in reducing the federal debt. 
As of June, 2019, the debt stood at over $22 trillion. The will in a democratic system to take corrective action can be so deficient that a serious problem can get much worse. Whereas the rating agencies were ready to downgrade the U.S. Government's credit rating when the debt stood at $16.7 trillion, no such warning went up six years later when the debt was substantially more and no hint of any sequestration was in the air. 
Ronald Reagan had made balancing the federal budget a salient part of his 1980 platform, though once in office he pushed for tax cuts and increases in defense spending that undercut prospects for a balanced budget. The experiment in whether cutting taxes could actually boost tax revenue due to more economic activity failed. In 2013, sequestration failed even to launch. It is no wonder that as the debt passed the $20 trillion mark, the political discourse had given up on a cure. That such a debt might be too big to be paid off, that the U.S. Government was de facto already out of reach, was never mentioned even in conversation. 

1. Jonathan Weisman, “Moody’s Warns That U.S. May Face Debt Downgrade,” The New York Times, September 12, 2012.
2. Ibid.

Investor Assessments of Political Events

Although the various investors in the financial markets doubtlessly pay great attention to important political events, such as were a state in the E.U. to default on its bonds, I suspect that market analysts overstate the importance of more commonplace political events. For example, the New York Times reported in late September 2012 that investors were shifting their portfolios to reduce risk out of uncertainty regarding the upcoming American elections and the ongoing negotiations in Congress to avoid the huge budget cuts and tax increases set to begin automatically at the beginning of 2013 and run for a decade. Additionally, fears that E.U. leaders might hesitate on moving forward with the bailout program oriented to indebted states were prompting investors to be more risk-averse. Generally speaking, analysts were “anticipating that politicians may not act until forced,” both in the U.S. and E.U., “setting the markets up for weeks of angst.” In my view, this account is overstated.

“Right now, we’re much more defensive than we were a few weeks ago,” Martin Leclerk of Barrack Yard Advisors said at the time. He had shifted 20 percent of his company’s assets to the safety of cash. More broadly, investors were cashing in their gains, according to the Times, “on riskier stocks and moving into bonds and safer stocks, like consumer discretionary companies that are not as susceptible to a downturn in the economy.” Rather than presume that all this stemmed from uncertainty regarding the American elections or even the anticipated budget sequestration of the U.S. Government and the E.U. bailout program, I submit that the investors were taking a general reading of the global economy to assess how much economic growth would be likely in 2013. In this regard, the announcement by the Chinese government of stimulus spending is more significant than who wins what offices in the U.S. or whether the E.U. officials are really hesitating on Greece and Spain. The minor presidential election drama fueled by an all-too-innocent media and even the manipulatory threats by E.U. leaders as if jockeys bending the whip to get Greece to pony up rather than lax off are both dwarfed in financial importance by assessments of how the world economy as a whole is likely to do. Specifically, the question is whether the lower growth in China will be tolerated by government officials, and if so, whether that growth would be enough to offset the sluggishness in the E.U. and U.S. The U.S. economy in 2013 would not likely hinge on which party wins the White House because the other party typically has a veto in the U.S. Senate thanks to the ubiquitous filibuster. In the E.U., hesitations should be read more as efforts to manipulate certain recalcitrant state governments than as serious attempts to scuttle the bailout program. Elections do matter and programs do change, but the trajectory based on the status quo has such tremendous gravitational pull that even mandates tend to get watered down by the time they get implemented.

 Does expertise on these make one an expert on politics?  

Therefore, I suspect that the market discounts political “news” that you and I are presented with as “important” and “vital.” Often times, the importance is magnified in order to sell ads. The world economy is remarkably steady-state, and wise investors undoubtedly take a long-term perspective rather than allowing themselves to become ensnared by the titillating excesses fomented by the media. To be sure, jolts such as the effect the financial credit-freeze in September 2008 had on world trade do matter in terms of contractions in the world economy, and investors are smart to become more risk-averse in anticipation of such periods. Even so, a near collapse of the global financial system can be distinguished from which corporate party wins the White House in a certain election cycle or how an internal tiff among E.U. leaders (or states) gets resolved. My point is simply that elections are not usually the beginning of major course changes (and I am not even sure those have such a bearing on the economy as a whole), and that squabbles in the E.U. do tend to get resolved somehow or other. Neither "event,"  therefore, is earth-shattering even if it makes for good television. I suspect that investors know this and discount the white noise accordingly.

Source:

Nathaniel Popper, “Fearing Fiscal Cliff, InvestorsCash In and Seek Safety,” The New York Times, September 28, 2012. 

Handouts in Averting the Fiscal Cliff: The Price of Politics?

What is that nebulous thing called politics? Might it be that the practice is essentially exploiting or creating what are known as principal-agent costs? That is, might politics boil down to a skill in the agent (elected representative) in putting his political or economic interests ahead of doing the bidding of his principal(s) (i.e., his constituent body).  
In the U.S. Senate bill in early 2013 to obviate the “fiscal cliff,” for example, the Democrats may have agreed to benefits for the Republican lawmakers’ campaign backers in exchange for going along with a more progressive federal income tax system. Among the added provisions were special expensing rules for certain film and television productions—no doubt those made by particular campaign contributors. The provision for tax-exempt financing for the New York Liberty Zone around the former World Trade Center may also have been a favor to a particular someone. Lest it is wondered what an extension of the American Samoa economic development credit was doing in an expedited measure to obviate the “fiscal cliff,” the answer may have had to do with a particular Republican lawmaker’s relationship with someone having an interest in American Samoa. I can only speculate here, as I was not privy to the actual relationships and negotiations. However, the sheer strangeness of such provisions in such a bill suggests that the particular political or economic interests of particular Republican lawmakers may have been the culprit.

 Is money the language of politics?    citizen.org

Such interests need not stem from particular relationships. To get the Republicans to “move on principle” regarding progressive taxation, the Democrat negotiators may have agreed to give on particulars on another law—in this case, Obamacare. The bill also contained a provision to remove the Community Living Assistance Services and Support program, or CLASS, which was proposed to enable millions of elderly and disabled people to stay in their homes rather than be placed in institutional care.

Generally speaking, the pattern involves essentially “buying off” particular lawmakers so they will “shift over” on a larger principle—in this case, progressive taxation. Give a bit on Obamacare and include a provision financially beneficial to a particular Republican lawmaker or one of his or her financial contributors or patrons—anything satisfying a particular interest of a particular lawmaker—so he or she will move from the preference of his or her constituents. The agency cost is the difference that a lawmaker (agent) skirts for his own political or economic interest from doing the bidding of his or her official constituents (principals).

If the skill called politics involves a politician’s particular interests at the expense of one of his or her principles or official duties (i.e., to constituents), then negotiation cannot be expected to be confined to compromising on the merits of the bill itself. Rather than merely going back and forth on numbers for the upper income subject to the Bush tax cuts, a Republican negotiator might propose an unrelated provision benefiting one of his or her friends, business associates, or campaign contributors. Granted the provision, the negotiator would then give on the numbers. One might ask whether the inclusion of particular exogenous interests is necessary to negotiation on a given policy. Wouldn’t the final product in terms of the policy be better were the unrelated benefits kept out of the mix? That is to say, is their incorporation a decadent or inferior form of politics, or an essential element that cannot be removed? Perhaps the answer lies in whether negotiation on a given policy, such as deficit reduction, can be done without the negotiators bringing up their particular interests (as a means of shirking their principles or duty). Perhaps ethical leadership in politics involves refusing to enable (or exploit) another’s “agency costs” by incorporating the unrelated provisions, in which case politics itself could find higher ground and the resulting policy would more closely match the preference of the body politic.  

Source:

Reuters, “Fiscal Cliff Bill Proposed By Senate Packed With Mix of Handouts, Takebacks,” Huffington Post, January 1, 2013.

“Fiscal Cliff” in U.S.: Real or Hyped?

As the U.S. economy slogged through a recession following the credit crisis in 2008 and the E.U. was weighed down by the ballast of austerity in the most indebted states, developing economies, including those of China and India, kept the world economy afloat. As a group, those economies grew 7.4% in 2010, 6.2% in 2011, and 5.5% in 2012. In keeping with this trend, the Global Economic Outlook of the Conference Board predicted 4.7% for 2013. Fortunately, the Board also predicted a pick-up in consumer demand in the U.S. to pick up the slack. “The only really short-term positive impact that we can have is that we can see a faster return of demand, particularly in the U.S.,” the Board’s chief economist said. As of 2012, such a return was not necessarily “in the cards.” The pessimism can be seen in the projected world economic growth of 3 percent, which is lower than the 3.2% expected in 2012 and the 3.8% achieved in 2011. That the projected growth rate of only 1.8% for the U.S. in 2013 is less than the projected 2.1% for 2012 indicates that increased demand in the U.S. was not expected to fully pick up the slack for the slowing-down of the developing economies. Here I want to point to a major factor in the U.S.: the possibly impending “fiscal cliff” of cuts in the federal budget and the end of the Bush tax breaks  that were scheduled to begin on January 1, 2013 unless Congress and the White House could come to a legislative agreement beforehand on an alternative way of holding down the deficits. Presumably that way would have a less recessionary effect.

In doing political risk analysis, one might be tempted to weigh in on predictions of a grand deal. I submit that predicting whether one comes together, as well as its differential economic impact would be, is not merely difficult, but also nearly impossible—unless one has “inside information” from the key players in Washington. Political risk analysis is not a sort of crystal-ball operation. Predicting the future is notoriously difficult for us mere mortals. However, we can assess how the prospect of a possible event, such as the “fiscal cliff,” is being played out in real-time. In other words, it is possible to determine whether the “fear-mongers” are exaggerating the probably economic impact (and why!). Assessing the severity of the worst-case scenario can thus be recalibrated, with implications for strategic planning.

Should the automatic cuts in the U.S. federal budget and end of the Bush tax cuts begin on January 1, 2013—a combined hit of over $500 million in that year alone—a “recessionary toll” was generally held to be the result. That is to say, the domestic demand made possible by increasing discretionary spending would be reduced as government spending decreases and federal income taxes increase. The Global Economic Outlook pointed to the prospect of Congressional and White House negotiations potentially obviating the sequestration as bearing on the global economic growth. Even though Congressional leaders could be counted on to rise to the occasion in delivering on sufficient dramatics at the last minute, the general public could not be sure that the denouement would involve a quick swerve away from “fiscal cliff” as though in some 1940s film noir.

Just by the numbers—around $500 million in 2013—the Conference Board may have been overstating the recessionary impact of the sequestration in an economy whose GDP was over $16 trillion. For one thing, the momentum in 2012 was in the direction of increasing demand. Also, corporate planning may have already “hedged their bets” so “going over the cliff” would not actually involve much change, at least initially, on their part.

I must add here the caveat that I not an economist. Hence, I do not have the quantitative expertise necessary to "run the numbers" on how much GNP would decline from the sequestration. However, I have run economic regressions, so I have some sense that the actual variables in a political economy are not as formulaic as those in a regression equation. The inherrent uncertainty in the political dimension in particular renders suspect the “empirical social science” approach of modern economics as determinative in political economy. Put another way, the political-risk-analysis dimension of an economic growth projection introduces considerable uncertainty in an otherwise quantitative economic numbers game, which might itself be overly deterministic or "exact." Even if we could untangle the myriad political factors going into political negotiations beforehand, we would still have to accept the uncertainty that is inherent in predicting the future, especially where human decisions are in the mix. That is to say, the future cannot be known for certain, given the respective natures of time and human beings.

I suspect the differential economic impact between a possible deal and sequestration was being exaggerated, particularly by the media but also by officials in government and CEOs—all of whom had subterranean reasons for doing so.  The media’s “fiscal cliff” label alone illustrates the proclivity to exaggerate. It is not as though a deal would have absolutely no drag on the economy, even if significantly less than that of sequestration. However, in distinguishing between “some” and “more” in terms of a drag on consumer demand in the U.S., the impact on the overall global economic output may be less than the “fiscal cliff” rhetoric implies because the world is much more than the American union. In other words, if the “differential” in terms of economic impact between a deal to cut the deficit and sequestration turns out to be less than portrayed in 2012, the resulting impact on the larger global economy would also be less.

In terms of a prognosis for 2013 from the vantage-point of late 2012, my best guess was that it would be largely similar to 2012 globally—the U.S. and E.U. continuing to climb out of deep recessions while struggling to inflict austerity on themselves for their own good, and the developing economies continuing to cooling their heels from growth rates that were probably unsustainable anyway. In terms of international business prospects, “continued languid” rather than “fiscal cliff” would be my headline. 

Source:

Matthew Walter, “U.S. Seen Propelling Growth of Global Economy in 2013,” The Wall Street Journal, November 13, 2012.

Unsustainable Structural Fiscal and Federal Imbalances: The American Union

The nonpartisan Congressional Budget Office (CBO) announced on January 26, 2011 that the U.S. Government’s budget deficit for the year would soar to nearly $1.5 trillion, which represents $414 billion more due to the extension of the Bush tax cuts. The deficit had been $1.4 trillion in 2009 and $1.3 trillion in 2010. According to the New York Times, based on the CBO, “the deficits of $1.4 trillion in 2009 and $1.3 trillion in 2010 are, when measured as a share of gross domestic product, the largest since 1945 — representing 10 percent and 8.9 percent of the nation’s output.” The budget officials also projected the deficit for 2012 would be $1.1 trillion. These figures dwarf the budget deficits even of the 1980s.

In his State of the Union speech on January 26th 2011, President Obama called for a partial five-year freeze in domestic spending by the federal government — what the New York Times calls “a more gradual imposition of fiscal discipline, while still increasing some spending in education, research and other areas.” It is hardly imaginable how a freeze alone could make a dent where the debt is over $14.3 trillion—a figure that is scarcely conceivable to a human mind, let alone sustainable. It is not clear that the U.S. Government will ever be able to pay off the mammoth debt, let alone arrest the annual increases in the debt (i.e., the deficits).

For their part, Republican congressional leaders used the need for a budget and an extention in the debt-ceiling in 2011 to pressure Democratic leaders to adobt substantial cuts, rather than merely a freeze. As a result, President Obama himself came to urge $4 trillion in cuts over several years. Yet even as the Republicans, whose penchant for less government (and perhaps restoring federalism) dovetailed with more cuts in federal spending, this position too did not take sufficiently seriously the U.S. Government's deficit and debt, for tax increases were to be off the table. 

In short, neither of the major parties were taking the structural fiscal imbalance in the U.S. Government sufficiently seriously.  It is as though they were urging the use of a bicyle rather than a car or train to get from Orlando to Miami in Florida (and let's add just for fun, "in August"). Beyond other objectives (such as less government) being allowed to intercede, the proposals were not sufficient. Were reducing the structural deficits and debt of the U.S. Government the overriding goal, both trillions in tax increases and spending cuts would be instituted over many yeears. I contend that it to be a moral imperative that the debt amassed since the surpluses in the late 1990s be paid off before the mean age in the generation of 18 to 38 year-olds in 2000 retire. The remaining debt could be paid off in incremental installments over many years. Simply passing on our debt for others to pay would be as immoral as it is convenient. 

Fortunately for us, restoring a balanced federalism can facilitate paying off the debt in our lifetimes. Rep. Paul Ryan's proposal for block grants to the state governments for medicaid claims to shift that program for the poor from the U.S. Government to the states. It is thus in the direction of restoring a balance in American federalism. However, the block grant element retains the federal purse-strings, and thus falls short in this regard. Both in terms of reducing the federal government's annual deficits and restoring a federalist balance, Rep. Ryan should have proposed that the states both run and pay for medicaid by raising state taxes. It would be up to the respective voters of the states to decide the level of coverage and the amount of tax increase--taking into account their respective state's' fiscal position so as to deal with any deficit there as well. Medicare too could be transferred to the states, though it would not be prudent to leave it up to the states to fund it until after states such as Florida, California and Illinois have solved their own structural deficits. Policy decisions involving health-care for the poor and the elderly could thus be tailored to the circumstances and ideologies that tend to differ in a union on an empire-scale. However, federal taxes would not decrease accordingly on account of the structural deficits and the objective of paying off the accumulated federal debt. Once the latter is eliminated, the federal taxes could come down.

One might squauk, "But that would mean raising my state taxes without corresponding tax cuts at the federal level!" Correcto! The lack of symmetry here is the mirror image of the asymmetry that has been involved in running deficits of over $1 trillion for years and having amassed a federal debt of over $14 trillion. We like asymmetry when it is convenient but abhor it when it goes against our pocket books. This combination of sentiments is what we must counter, bottom-line.  

Sources:

David M. Herszehhorn, “Deficit Forecast Nears $1.5 Trillion, Fueling Partisan Battle on Federal Spending,” The New York Times, January 26, 2011.

Stephen Gandel, “View from Davos: How Bad is a $1.5 Trillion Deficit?” Time, January 27, 2011.

Distinguishing Entitlements from the Safety Net

In 2012, Congress lost sight of the fundamental purpose of a safety net, extending it beyond the difference between life and death. By zeroing in on the purpose of a safety net, Congress can both save money and better provide for the survival of those who are not providing it for themselves. Of such people, where survival itself is at stake, questions of being deserving pale in comparison to society’s obligation to fend off starvation, sickness and homelessness. Ironically, by extending the safety net beyond survival, Congress has undercut its role in providing for its citizens’ survival.

The “government safety net was created to keep Americans from abject poverty, but the poorest households no longer receive a majority of government benefits. A secondary mission has gradually become primary: maintaining the middle class from childhood through retirement. The share of benefits flowing to the least affluent households, the bottom fifth, . . . declined from 54 percent in 1979 to 36 percent in 2007,” according to a Congressional Budget Office analysis published in 2011.[1] Making the secondary mission primary undercuts the primary mission by putting it at risk.

Objections to the secondary mission as unnecessary can spill over as criticism of the primary mission as if it too were not necessary. “Many people say they are angry because the government is wasting money and giving money to people who do not deserve it. But more than that, they say they want to reduce the role of government in their own lives. They are frustrated that they need help, feel guilty for taking it and resent the government for providing it.”[2] A wealthy retired person drawing social security insurance ought to feel guilty; the insurance program is not a savings account. Criticism of this category mistake can impact politically the funding of social security for those who need it. For example, even as wealthy retirees draw on social security, the social security disability program is work-based, meaning that a minimum number of quarters of work are necessary even for one to apply for benefits. Making a safety net dependent on a work history cuts off the long-term ill from the safety net. Moreover, the requirement implies that a person who has a disability does not deserve to survive independently of work. For a safety-net program to be dependent on anything means that the program is not part of the safety net, as safety nets are by definition not conditional. Yet where a society so values work as a source of a person’s value (e.g., “I am a plummer”), a program can easily be assumed to be part of the safety net without actually being part of it.

Related to the political cost of criticism of superfluous programs (i.e., beyond survival) is the refusal to fund true safety-net programs sufficiently. Congress has “expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt. In 2000, federal and state governments spent about 37 cents on the safety net from every dollar they collected in revenue, according to a New York Times analysis. A decade later, after one Medicare expansion, two recessions and three rounds of tax cuts, spending on the safety net consumed nearly 66 cents of every dollar of revenue.” One “benefit” of tax cuts is that they “starve” entitlements, which are all grouped together and presumed to be unnecessary rather than serving a true safety-net function.

The result of the prejudice and related starvation is that over the next 25 years from 2012, “as the population ages and medical costs climb, the budget office projects that benefits programs will grow faster than any other part of government, driving the federal debt to dangerous heights.”[3] In other words, safety-net programs are fair game on the chopping block without respect to whether people die without them or are merely inconvenienced. The failure to distinguish between these two is dangerous to the abject poor. Were the distinction made, corporate welfare and even middle-class welfare could be cut by more, I submit, than the additional funds needed to provide the least well-off with sustenance. In other words, we as a society can have a solid survival-oriented (and limited) safety net that is not conditional while actually saving money as benefits are narrowed to people who really need them.

The key is focus in place of upward drift. As just one example, money saved from a means test for social security retirement insurance could be spent in expanding social security disability such that its benefits are not conditional on the long-term ill somehow having worked thirty or forty quarters in the last ten years. How exactly is a retarded adult supposed to find and hold a job for that many quarters?  Making the benefits unconditional with respect to work history is crucial, as the social security supplemental income program is insufficient to meet sustenance needs. It is unconscionable to expect the long-term disabled to have worked in order to receive enough to live on while the middle class receives entitlements classified as “safety net.” The key to making survival a human right is recognizing the need both to expand programs at that level and severely restrict programs aimed at higher levels. Whereas middle- and high-income beneficiaries of government largess can justifiably be blamed, it is sheer cruelty to blame those who are not able to meet even their own basic needs from work for receiving subsidies.

In my rather ignorant, presumptous hometown, an unemployment rate of around 20% went with the recession of 1980 as the machine tool industry went to Europe. The city had the highest unemployment rate in the state in the post-September 2008 recession, and yet the first vote the re-elected U.S. House representative made in 2010 was to cut off unemployment compensation. His claim was that people should get off the dole and work for a living. It was apparently beside the point that there were no jobs; the unemployed were supposed to have them anyway. This is like telling people that the empty space on a table is to be imagined as spaghetti and then getting mad at them for not eating it—as if they should be expected to eat air. Such warped, illogical thinking as the Congressman evinced in 2010 in the rustbelt of America can be linked to reducing a true safety net to a society of entitlements. To hold the poorest of the poor to such warped thinking is utterly cruel as well as ignorant. I hope American society has not come to such a selfish and short-sighted end. The society is only as good as we treat the least among us, for such treatment reveals our true colors.

1. Binyamin Appelbaum and Robert Gebeloff, “Even Critics of Safety Net Increasingly Depend on It,” The New York Times, February 12, 2012. 
2. Ibid.
3. Ibid.

Direct and Representative Democracy: Colorado on the Hot Seat

In ancient Athens as well as Renaissance Florence, direct and representative democracy co-existed. The representatives elected or chosen by lot were viewed (and viewed themselves!) as standing in for the people assembled. From a practical standpoint, it is difficult even to legislate by town hall meeting or by a series of referendums on election day. Accordingly, power in democracies has been delegated to representatives and even appointees. In February 2012, this principle, and direct democracy itself, were set to be challenged in a federal lawsuit against Colorado. In my view, the principle is valid whereas the suit is not. Direct democracy outranks representative democracy—the latter having been created not to save a people from themselves but out of sheer practicality.

Colorado's Capitol (seat of government)       Matthew Staver/NYT

The object of the lawsuit is Colorado’s 20-year-old taxpayer-controlled budgeting process known as Tabor, which requires that tax increases (and presumably spending increases) be passed by referendum rather than legislative vote. The 33 plaintiffs argue that Colorado’s Taxpayer Bill of Rights “blocks the ability and jurisdiction of the . . . Legislature to properly do its job.”[1] The rationale is that subjecting tax increases and budget figures to popular referendum usurps Colorado’s legislature’s prerogative. In the early U.S., James Madison had “pushed strongly for a barrier between the passions of the popular will and sober governance . . . through a legislative branch.”[2] Representative governance, in other words, has the benefit of acting as a check on popular passions in the best interest of the people. This objection could be obviated by requiring a revote in a year or two to make the referendum’s results final.

I submit, however, that Madison’s concern is trumped by a more basic relationship that undergirds the relationship between direct and representative democracy: that between the popular sovereign and government. Arguing on the basis of a benefit such as checking passions, for example, is not to furnish a rationale for prerogative. In other words, that the popular sovereign may not always be wise or prudent does not mean that its agents therefore trump their principals—the people. Even if an agent has expertise that his or her principal does not have, this does not, as in the business judgment rule, necessarily mean that the agent becomes the principal (and the principal, the agent). In the case of corporations, maximizing profit is merely the default—something the owners should be able to deviate from and their hired hands (e.g., executives) would be obliged to devise strategy in line with the new mission.

If, as the plaintiffs claim, Colorado’s legislature is “unable to raise and appropriate funds” and thus “cannot meet its primary constitutional obligations” under the “guarantee” clause of the U.S. constitution, it is because the principal has taken that constitutional role back, through fully constitutional means, which the popular sovereign, as the principal, has the right to do. Remember, the people as a group have delegated authority to representatives.

In other words, popular and governmental sovereignty are not incompatible. Constitutions are ratified not by the member governments, but, rather, by the people, precisely because the authority of the people goes beyond that of their agents. The popular sovereign does not have to continue even with its constitutions. Indeed, that sovereign could change any American constitution in any way that sovereign desires, as per the Constitutional Convention of 1787. We could even hold a convention proposing a totally new constitution and with its ratification the current one would instantly be dust. Remember that the Constitutional Convention of 1787 tossed out the guidelines set by the Continental Congress limiting the convention to amending the Articles of Confederation. The convention started over and invented modern federalism in the process. I raise this point only to show that a popular sovereign trumps its government—really by definition. Yet it seems that the legislators in Colorado have their arrows crossed concerning this relationship—most likely a case of good old-fashioned arrogance.

Rather than the Colorado legislature being hamstrung, it is the obligation of the dutiful agents to furnish their master, the popular sovereign, with options that do not privilege the agents themselves or their body over the principal. General tax policy and overall budget numbers decided by the popular sovereign are more legitimate than had they been decided by legislative means even if the people are stupid and willful. This difference in legitimacy exists because the popular sovereign is politically superior to its agents. It is not really a question even of getting the best policy—“best” at this level involves judgment rather than the expertise of a legislator, professional or scholar, anyway.

Instead of being usurped by agents who take themselves as principals and thus somehow illegitimate in a democracy, direct citizen lawmaking is an ideal toward which we should strive to the extent that it is practicable. The agents have too often succeeded in limiting the actual sovereign to speaking once every two or four years, and then only on the vague decisions of filling offices, leaving policy decision to themselves. All too often, this means nothing gets decided, which I submit reflects the tenuous authority of the agents to be definitive for the people. One reason why the Congressional vote on health-care did not settle the matter is because the people themselves did not have a direct say on such an important, life or death, matter. Similarly, the ongoing controversy on abortion partially reflects the “limbo” status from how it was decided (i.e., not by us, as in direct democracy).

Policies like declaring war (in a non-emergency), abortion, whether to extend a tax cut, overall deficit spending, overall drug policy (e.g., legalization), and especially constitutional amendments bearing on government should be up to the people, with the judiciary stepping in when needed to protect individual rights against either legislative or popular encroachment via majority rule. Should abortion be decided by the states? Should the Bush tax cuts be extended for all or excluding the rich? Should the U.S. get out of Afghanistan?  (Should the U.S. have invaded Iraq?)  Should pot be legalized?  Should financial regulation be strengthened or is deregulation the general principle we want to follow? Considering health-insurance, should it be by a public single-payer, a public option with private options, or exclusively by existing private insurers? Should everyone be covered or just those who can pay? The questions would have to be very basic and oriented to basic judgment calls, rather than requiring expertise; our legislators could see that it is incorporated under the rubric of the general principles decided by us.

Along this line, constitutional questions bearing on our system of government are particularly legitimate for direct decision—such as on the role of the states and whether we should have more of a federal or consolidated system. Should corporations be considered as persons, politically? Should money be deemed as “speech” politically? A degree in law is not required to make a judgment on such basic governmental questions. Even the Greek slave Meno knew geometry without being taught, according to Socrates. In fact, experts, like legislators, are properly agents of the popular sovereign, rather than being an alternative wiped out by direct democracy but somehow integral to the legislative process. Federal constitutional amendments in the U.S. could be ratified by referendums (as is already the case in some of the E.U. states in ratifying amendments to E.U. basic law). Amendments could even be sourced in referendums. As it stands, the American people have no direct say on changes to the U.S. Constitution—either in proposing or ratifying amendments. Nor do we have the opportunity to have a say on the existing planks—something Jefferson thought every generation has as a right. Would it be so traumatic were sections of the U.S. constitution forced to compete with a few alternatives, taking say one Article every four years? This is just one of many ways the American people could decide on what binds us.

Admittedly, such changes expanding direct democracy would indeed alter the nature of legislative business; it would more closely resemble what one would expect to find from agents (e.g., technical working out of broad policies already decided and working on submissions for further “instructions”). As a people, we have allowed ourselves to be hoodwinked into viewing our agents as our principals, and this is reflected in the power they have with respect to a near-monopoly on decisions. It is no wonder that the Colorado legislators feel threatened by something that is decided by others. Those legislators suffer from a rather basic category mistake: conflating themselves with their principals. Out of this error has come the representatives’ assumed false entitlement to the near-monopoly that they have enjoyed while the rest of us have been asleep. I can’t even add “at the wheel,” for we have ceded that to our driver without even supposing that we have the right—as the owner of the car—to tell him where to go. We are Ms. Daisy sleeping off a hang-over in the back seat while Morgan Freeman decides where we’ll go. We even expect him to decide, as if it were his job. We are indeed quite asleep. Perhaps we don’t deserve direct democracy?

1. Kirk Johnson, “Colorado Lawsuit Challenges Wisdom of the Ballot Box,” The New York Times, January 31, 2012. 
2. Ibid.

The Payroll Tax Cut: A Luxury?

As U.S. deficits and thus the federal government's debt had been increasing since the Clinton Administration in the late 1990s, proposals for a payroll tax-cut entailed risking the financial condition of the U.S. Government. To be sure, increasing government spending above inflation was risky too. Here, though, tax policy as it relates to deficits, and thus debt, is analyzed. 

During the summer of 2011, Rep. Eric Cantor (R-Va), the U.S. House's Majority Leader, opposed continuing a tax cut. It was not the tax cut that had been enacted under George W. Bush that disproportionately benefitted the top brackets. That tax cut was sold to the American public as good under the supposition that the growth of jobs would result. The tax cut opposed by the Majority Leader in 2011 pertained to the payroll tax. Workers’ contributions to social security were to be cut from 6.2% to 4.2% until the end of 2011. A spokesman for the Majority Leader argued that if “the goal is job creation, Leader Cantor has long believed that there are better ways to grow the economy and create jobs than temporary payroll tax relief.”[1] However, it could be argued that whereas the tax cuts at the upper-income brackets tend to be saved because the wealthy already have the means to purchase what they want, workers tend to spend any extra disposable income precisely because they don’t have the means to buy even all that they need, particularly in the case of families. Moreover, workers would feel the end of a tax cut more than a rich person would.

It does appear that the Republican party’s support of tax cuts hinged on the financial interest of the rich—tax cuts are not created equal. This asymmetry eclipses the party’s ideological goal of smaller government, for otherwise any tax cut would be sought because it would mean less government taking as well as the possibility of starving government spending. Furthermore, the asymmetry trumped a priority on reducing a deficit that had been over $1 trillion in 2010. A deficit is the annual addition to the U.S. Government’s debt, which was around $14 trillion at the start of 2011. On the heels of S&P downgrading that debt to AA, continuing any tax-cut, even to prop up the economy, can be reckoned as foolhardy unless the money that taxpayers would otherwise pay in taxes is spent or invested sufficiently to boost the economy enough that the government would take in more tax revenue than the amount lost due to the tax-cut.

It is possible that Freddie Mac and Fannie Mae could have done more for the economy by allowing homeowners in trouble to refinance to the lower interest rates in 2010 and 2011 than would have been lost from ending the tax cuts. If so, it could be that we could do better in lowering deficits while stimulating the economy. Even with some drag on the economy, the numbers on the baby boomers retiring suggests that the social security fund could not afford the payroll tax cut in 2012. In fact, it could be that the fiscal impacts of government policy are less significant on the overall economy than on the deficits and debt, which are more immediate to the government's financial position. Debating whether to continue tax cuts with respect to economic growth (and even jobs) may reveal a lack of attention on reducing public debt as a priority if the tax revenue given up by the Internal Revenue Service is more than additional tax revenue to be obtained from the added economic growth from the tax-cuts. Indeed, analysis of the Bush tax cuts had shown that the tax revenue given up was more than the induced take. In technical language, the Laffer Curve had already been discredited by 2011. Therefore, ignoring the cost of a tax cut in terms of tax revenue, and thus higher deficits, is negligent and irresponsible, whether by Congress, the media, or the citizenry itself.

1. Jennifer Steinhauer, “For Some in G.O.P., a Tax Cut Not Worth Embracing,” The New York Times, August 26, 2011.

A Self-Inflicted Compromise on the Debt-Ceiling in the U.S.

On August 1, 2011, the Republican and Democratic Congressional leaders and the Democratic President came to an agreement--a compromise of sorts--on raising the debt-ceiling and spending. According to the deal, cuts of roughly $920 billion over ten years would be followed either by adopting a twelve-member Congressional committee's recommendations (including possible cuts and revenue increases) or watching another round of automatic across-the-board spending cuts. Structurally, this arrangement is unbalanced with respect to the nature of compromise between the two parties. In short, it proffers a relatively easy out for the Republicans.

Specifically, the "enforcement mechanism" that would automatically activate should the "super" committee's recommendations not be voted and signed into law contains only cuts even though the Democratic position is for a mix of cuts and revenue. In other words, the mechanism itself is biased to the default of one of the parties. The only incentive the Republican party would have to accept the committee's recommendation would be to avoid the military cuts in the automatic cuts. To obviate any revenue increases, even if only for the wealthy, the Republicans in Congress need only scuttle the committee's work or vote it down. The mechanism being counted on as "teeth" for the committee's work to be adopted should have included both across the board cuts AND revenue increases (including on the very rich). The incentive would have been on BOTH parties to work something out in committee.

Therefore, if I am correct, the structure, or arrangement, of the compromise is itself unbalanced, at least from the standpoint of incentives. It would seem that even with the possible cuts to defense, the compromise itself is a win for the Republicans. Once again, Democrats can be left wondering why their representatives gave up the store, or at least kept the door unlocked. In terms of the public option in the health-insurance reform, the matter of breaking up the biggest banks (too big to fail), and finally in permitting a spending-cuts-only outcome to the debt problem, Democrats, it seems to me, have real cause in withholding their votes from "their" man in the White House in 2012. Yet they have no practical alternative absent a primary challenger. They may be in a very tight box in "staying the course," lest they want to risk seeing the keys of the White House store formally change hands to the other party.

In Defense of the Tea Party

In the wake of the U.S. House’s “Tea Party” caucus in the Republican caucus on July 28, 2011, which effectively delayed the Speaker’s bill for raising the debt ceiling, it might be useful to row against the current for a moment if only to present a defense of the Tea Party’s agenda. To be sure, problems exist in it, but a defense can be made. I submit that the media has not been particularly accurate, or fair, concerning the movement or its involvement in the U.S. Government.

Most notably (but not obviously), Tea Party representatives are correct that August 2^nd does not necessarily bring with it default, for that refers only to the Treasury department not making the required interest and principal payments on the debt. That some government agencies have to shut down does not constitute default, for the latter pertains ONLY to serving debt. Indications are that the U.S Government could service its debt August from incoming tax revenue. If so, default would only be voluntary—if the Treasury should decide to use the tax revenue for other uses.

It is more accurate to say that delaying raising the debt-ceiling would increase the likelihood that the U.S. Government’s credit rating will be lowered to AA from AAA. On this front, the refusal to compromise can be excoriated. For its part, the Tea Party might say that it is worth risking if a structural re-alignment could occur.

What does the Tea Party really want: a reduction in government or a reduction in the federal government? Or both? Other things equal, I suspect that the party would prefer a given domestic program to be at the state level, but even there the spending (and taxing) would receive some ire. If the goal is primarily to restore federalism, the Tea Party is on firmer ground. Since the CSA-USA war (1861-1865), the United States has been trending toward political consolidation at the expense of the innate diversity coming with an empire-scale. Nothing—not even Ronald Reagan and his Supreme Court—could turn the tide. One could not blame the Tea Party for saying: if not now, when? Indeed, the existence of a $14.3 trillion U.S. Government debt—roughly the amount of the annual GNP—can be viewed as a manifestation, or symptom, of the imbalance.

So it makes sense to pick the debt-ceiling as the matter on which structural adjustments can be made. However, what if the majority of the people, or branches, prefer consolidation to federalism in any meaningful sense? Is it fair to foist a structural shift on the majority? Would not it be fairer to promote a constitutional amendment directed on the question of federalism?

Of course, the Tea Party representatives could simply be opposed to the debt, and therefore of increasing it. If it is unsustainable already, then raising the debt ceiling might make matters worse even if it assuages short-term difficulties. If the leverage possible in a debt-ceiling decision is given up, there might not be another chance to stop the trend of more and more debt being added to what is already unsustainable. Rather than force massive short-term spending cuts in federal programs and agencies, however, the leverage could be used to agree to longer-term cuts, say over ten years. This is what the Tea Party has been for, though at the risk of short-term shock.

However, it could be countered that were the Tea Party really focused on reducing the debt, the objection to increasing tax revenue, especially for the rich whose effective rate is eighteen percent, would not exist. That is to say, even if citizens and residents are being taxed too much, it is not too much relative to the debt (past spending that was borrowed). This is different than saying that spending should be cut, for that applies to current and future deficits. An enhanced Tea Party position would be to come down hard on the debt (and further deficits), and thus be for both spending and revenue means of closing the gap. Even combined, it will be difficult to pay off the $14.3 trillion.  From this perspective the spending/revenue debate is premised on a false dichotomy wherein one or the other is assumed to be sufficient. The magnitude of the debt relative to GNP—the highest since the end of WWII in the twentieth century—suggests that the Tea Party is not radical enough.

Compromise in Congress Impeded by Empire-Scale Federalism

While it may take much effort and skill to compromise on disparate budget numbers, whether to have a public health-insurance option for the poor or sick, and whether to add regulations for the biggest banks, these compromises are actually rather narrow relative to the political-ideological spectrum. Broadening out the poles could include adding revenue considerations to the differences on spending, replacing private health insurance companies with an expanded Medicaid/Medicare program, and breaking up the $1 trillion plus banks. It could also include a balanced budget amendment complementing drastic spending cuts, having the state governments decide whether Medicaid and Medicare continue as state rather than federal programs (and how), and deregulating the financial sector further. Were public officials to enlarge the domain subject to compromise, compromise itself would be more allusive even as more positions would be represented.

The complete essay is at Essays on Two Federal Empires.

Risking Default of the U.S. Government: Other Priorities

In mid July 2011, as several of the American states were in the midst of a heat-wave, the showdown on the debt-ceiling was becoming hot in Washington, D.C. The “heat index” on default was steadily rising with no end in sight. The refusal of republican representatives in the U.S. House to automatically increase the debt-ceiling had prompted unprecedented attention on what had been treated hitherto as a “housekeeping matter” of the U.S. Government. The attention can be referred to as a “fiscal moment.” Whereas a “constitutional moment” is one in which a citizenry’s attention is momentarily galvanized on a particular constitutional question, a “fiscal moment” is a window wherein heightened popular attention of the citizenry enables a societal recognition of what had been vaguely understood and recognized as a long-standing fiscal tendency or pattern.

The prospect of default by the U.S. Government was dire indeed. Talking to U.S. Senate leaders, Secretary of the Treasury Geithner said, as later recounted by Sen. Reid, “default would result in a complete ‘loss of capacity to function as a government.’ If this country defaults on its obligations, it will be ‘much worse than the Great Depression, and it would make the massive financial crisis of 2008 look mild. It will make what we just went through look like a quaint little crisis.’”[1] Sen. Reid concluded from the Secretary’s remarks, "Those who say this crisis would be a blip on the radar are wrong. Default would be a plague that would haunt our nation for years to come. Our credit rating would take years to rebuild. The country would never be the same."[2] In the context of this awareness of an impending yet self-inflicted catastrophe, the failure of the “players” in the Congress and Obama administration to mitigate rather than exacerbate real differences of opinion within the citizenry was apparent.

Perhaps not coincidentally, the attention of a crisis announced and solved at the last minute would serve the interests of, and be practically irresistible to a politician. Add to the mix a perplexing tendency to acknowledge what the catastrophe would bring and yet assert other priorities—of value to be sure—over that of extending the debt ceiling. Allowing other priorities to get in the way of an agreement oriented principally to obviating default is so perplexing that it raises the question of societal dysfunction and compromised representative democracy. That is to say, are We the People mature enough to self-govern when so much is at stake?

An accumulated public debt of over $14 trillion (plus $68 billion among the states) points to a basic imbalance, ultimately of values and rooted in psychology and its related culture. External discipline, while a tacit admission of self-government, is necessary where such an imbalance is countenanced, and perhaps not even recognized at large until a jolting fiscal moment of self-serving attention. One means of external discipline is a balanced budget amendment. To better understand, the rationale for this crutch, I discuss the ailment that is compromising our self-governance. The sickness is most apparent where incredulous claims are represented as taken-for-granted facts of reason.

Even in the context of a U.S. debt of over $14 trillion, and especially when an upcoming solvency deadline was looming, the question of whether the rich should contribute more in taxes was being allowed—incredibly—to prevent an agreement that would obviate default. Rationally speaking, it does not make sense to believe that default would be catastrophic while objecting to a solution because those who can pay more would face higher taxes. If something is crucial, it does not make sense to hold up because someone who can do something refuses because it is not convenient. At the very least, this evinces a problem of priorities, if not garden-variety selfishness at the expense of the public weal.

Put differently, if averting catastrophe is not enough of an incentive for people who can afford higher taxes to let an agreement go through with revenue increases as well as spending cuts, then closing the budget gap can be expected to be nearly impossible politically. “We have a terrible track record, Republicans and Democrats alike, of promising to get our spending under control and never doing it,” Senator Coburn (R-Okla) said on July 17, 2011.[3]  He could have added that the politicians do no better at getting their revenue in line with what they have decided to spend.

During the Bush administration (2001-2009), for example, the federal debt went from $5 trillion to $10.5 trillion because neither the Iraq and Afghanistan wars nor the prescription-drug benefit program were “paid for,” while tax cuts reduced federal tax revenue. This disconnect between spending and revenue, as well as the convenient decisions to spend borrowed funds, suggests that some form of external fiscal discipline. President Obama’s disclaimer that no such discipline, such as in the form of a balanced budget amendment to the U.S. constitution, is needed rings hollow. Even beyond the fiscal policies of the Bush administration, the pattern of debt-ceiling increases belies Obama’s claim.

We as a people, and our elected representatives, do not have sufficient discipline (and priorities) on our own. A balanced budget amendment, with a two-thirds majority in both bodies of Congress and a presidential signature necessary to go into debt (e.g. for an emergency such as to fight an invasion), ought not be so dismissed out of hand by such a people just because it would require us to confront our long-standing habit of living beyond our means governmentally.

The denial concerning the need for imposed or external fiscal discipline is itself indicative of the psychology sustaining the budgetary problem. It is to be expected that those used to spending beyond revenue levels would object to external discipline, but for officials to claim that such discipline is not necessary borders on recklessness. To be sure, a few years of preparation and adjustment would be needed for the Congress and president to get the U.S. Government’s spending and tax levels closer into line, and it is unlikely that such a task would be accomplished. The likely refusal to close the gap even to forestall a jarring adjustment is itself a testament to the need for the amendment. Even then, I predict that we would allow other priorities, such as the interests of the wealthy as well as debates on the size of government, to get in the way.

In other words, we, the American people, are not even close to a mentality capable of suitably managing our Union’s fiscal matters. We are like a bike tire out of balance and yet we seem to refuse even to recognize it. If there is to be recovery from our comfortable brain-sickness, a jolt, such as that which a balanced budget amendment could proffer, may be necessary.

Barak Obama’s claim that external fiscal discipline is not necessary and the republican decision to put the Bush tax cuts for the rich, a desire for a smaller government, and the (putatively tax-cut-related) priority on economic growth above an August 2, 2011 deadline on the debt-ceiling BOTH point to a serious underlying psychological (or, at the very least, political) problem inhibiting our collective ability to get the fiscal house of our Union in order. Given the magnitude of the problem, our distractedness and denial says a lot finally about us as a people and whether we are adequate to self-governing. If our representatives were inventing a crisis in order to be viewed in the end as the saviors after having stirred up attention on themselves, We the People could perhaps do much better; we might reconsider how we approach our exercise of popular sovereignty on election day. We blame one party or the other at our own peril, as we are the sovereign and are ultimately responsible as one people. Are we something more than distracted, blaming, angry, and selfish? 

1. Michael McAuliff, “Tim Geithner: U.S. Debt Default Means ‘Lights Out’ and a New Depression, Treasury Secretary Warns,” [sic] The Huffington Post, July 18, 2011.
2. Ibid.
3. Eric Lipton, “Both Sides Confident on Deficit Talks Despite Impasse,” New York Times (July 17, 2011).

Obama Caving to Plutocracy

I contend that Obama caved on his campaign pledge (or promise) not to extend the bush tax cuts for the rich.  The added growth expected in 2011 from ALL of the cuts is just a half of a percent of GNP growth.  I have read that the rich save their tax cuts rather than use them in ways that stimuate the economy.  As for savings, banks have enough capital to lend (this isn't why they are still skittish in 2010).  That the vacuous argument that tax cuts for the rich will somehow create lots of jobs and save the economy from another recession has had any weight or credance really discourages me about American political discourse.  That Obama didn't "just say no" is also discouraging. 

On December 14, 2010, Pat O'Reilly said on his Foxs News show that the "far left" is in retreat because Ameriicans have rejected it.  He said even Obama has rejected the left. I think the left has vanquished itself.  Perhaps it could be said that the left is willingly impotent. Where is Al Gore?  Ralph Nadar?  Micheal Moore?  silence.  Only the sound of Obama caving. He should have refused to sign a tax cut continuation for the rich and said the Repubs could refuse to extend the cut for lower and middle income people--it would be the Repubs provoking the resumption of higher taxes for everyone rather than just on those who can afford them.  We need a Teddy Roosevelt or an Andrew Jackson. Teddy stood up to Standard Oil, and Jackson stood up to the Second Bank of the United States.

By contrast, Obama has operated largely in line with Wall Street (e.g., the bailout for the banks rather than foreclosed homeowners) and the health insurance industry (e.g. not even a public option, which was odious to the industry).  Barak Obama does not want to displease the powers that be; I suspect reelection has a lot to do with this state of affairs.  This raises the question: is there a counter in American politics to plutocracy?