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Republicans Finally Confronting Reality: They’re Trapped!

Posted by on Oct. 7, 2013 at 3:28 AM
  • 23 Replies


Salon.com / By Brian Beutler

Photo Credit: By United States House of Representatives (http://republicanleader.house.gov/Bio/) [Public domain or Public domain], via Wikimedia Commons

After struggling for weeks and weeks in stages one through four, Republicans are finally entering the final stage of grief over the death of their belief that President Obama would begin offering concessions in exchange for an increase in the debt limit.

The catalyzing event appears to have been an hour-plus-long meeting between Obama and congressional leaders at the White House on Wednesday. Senior administration officials say that if the meeting accomplished only one thing it was to convey to Republican leaders the extent of Obama’s determination not to negotiate with them over the budget until after they fund the government and increase the debt limit. These officials say his will here is stronger than at any time since he decided to press ahead with healthcare reform after Scott Brown ended the Democrats’ Senate supermajority in 2010.

There’s evidence that it sunk in.

First, there’s this hot mic moment in which Senate Minority Leader Mitch McConnell tells Sen. Rand Paul, R-Ky., that the president’s position is ironclad.

Then we learn that House Speaker John Boehner has told at least one House Republican privately what he and McConnell have hinted at publicly for months, which is that they won’t execute their debt limit hostage. Boehner specifically said,  according to a New York Times report, and obliquely confirmed by a House GOP aide, that he would increase the debt limit before defaulting even if he lost more than half his conference on a vote.

None of this is to say that Republicans have “folded” exactly, but they’ve pulled the curtain back before the stage has been fully set for the final act, and revealed who’s being fitted with the red dye packet.

If they got the same explanation from the president that I and several other writers got from senior officials at a White House briefing today, they know that for Obama this is more than just about preventing his own personal embarrassment (at having caved) and more than about his individual legacy (which will be harmed even if Republicans bear the brunt of the blame for a default). He sees “right sizing” the executive branch, and leaving it in better shape than when he inherited it, as a core responsibility of his presidency. Reducing the scope of executive powers in the foreign policy realm is one piece of it. But it would be a complete abdication, in his mind, to leave the next president vulnerable to the nullification of his or her election.

This is the crucial context in which to read separate reports that Republicans want to revisit the “grand bargain.” For the most part, this is just a hangover from the denial phase — Republicans talking to each other, trying to convince themselves that they can walk away from the debt limit with some concession. But they’re also hoping to draw Obama into a negotiation he can’t later extract himself from. It’s not going to work, administration officials say. They are happy to entertain budget negotiations after the debt limit increases. And during those negotiations they believe Republicans can legitimately use the leverage sequestration gives them to extract concessions. But only then. No more negotiating over the budget before the debt limit goes up, as long as factions within the Republican Party are prepared to default.

The only thing that might change Obama’s position is if Boehner decided to sprint into his waiting arms, burning his bridges to House conservatives behind him. If Boehner wanted to finish the budget deal he almost reached with Obama late last year, revenue and all, then throw in a debt limit increase, and a budget for the government, Obama wouldn’t freeze him out. But  it doesn’t sound like that’s what Boehner has in mind.

Boiling it all down, this means that Republicans only have one viable way to save face. And that is to come up with something non-substantive — a procedural side-car like “ No Budget, No Pay” — that’s independent from the debt limit itself, tack it on to a debt limit increase, and put it on the floor.


  


by on Oct. 7, 2013 at 3:28 AM
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Replies (1-10):
stormcris
by Christy on Oct. 7, 2013 at 3:34 AM
1 mom liked this

Here is the question what are they trapped about though. People have been talking about them giving concessions and raising the debt limit but by all practical purposes if they do we are doomed.If they take the austerity route which is quite possible we are in for a hard road ahead. Every focuses on the idea of the shutdown and the debt ceiling but what do we really need to do. What are they really planning to do? And the further question: Is everyone hiding out pointing fingers because they fear the reprocussion of what is required?

Bottom line: They are all trapped to some degree or another. We cannot simply go on like this.

NWP
by guerrilla girl on Oct. 7, 2013 at 7:10 AM
Austerity is a proven failure. Ugh
Carpy
by Ruby Member on Oct. 7, 2013 at 7:55 AM
1 mom liked this

No it isn't. History shows the economy recovers best when governments spend less and tax less, as the recoveries up to the 1920's prove.  The great depression spending more and taxing more, stagnates recovery.  just as it is proving, today.

Quoting NWP:

Austerity is a proven failure. Ugh


Minnow Slayer

LIMom1105
by Bronze Member on Oct. 7, 2013 at 8:00 AM
Not true for some EU nations such as Great Britain.

Raising the debt ceiling basically tells our lenders we will pay them what they are owed. Are you guys suggesting we act like deadbeats and not pay our bills?


Quoting Carpy:

No it isn't. History shows the economy recovers best when governments spend less and tax less, as the recoveries up to the 1920's prove.  The great depression spending more and taxing more, stagnates recovery.  just as it is proving, today.

Quoting NWP:

Austerity is a proven failure. Ugh


Carpy
by Ruby Member on Oct. 7, 2013 at 8:03 AM
1 mom liked this

We do not need to raise the ceiling to pay what we owe.

Quoting LIMom1105:

Not true for some EU nations such as Great Britain.

Raising the debt ceiling basically tells our lenders we will pay them what they are owed. Are you guys suggesting we act like deadbeats and not pay our bills?


Quoting Carpy:

No it isn't. History shows the economy recovers best when governments spend less and tax less, as the recoveries up to the 1920's prove.  The great depression spending more and taxing more, stagnates recovery.  just as it is proving, today.

Quoting NWP:

Austerity is a proven failure. Ugh



Minnow Slayer

Carpy
by Ruby Member on Oct. 7, 2013 at 8:03 AM


5 Reasons Why Austerity Failed in Greece

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5, reasons, why, austerity, failed, in, greece,

5 Reasons Why Austerity Failed in Greece
© Wikimedia Commons

Greek citizens spoke loud and clear during the last election.  They will not tolerate further cuts and skyrocketing joblessness. The conflict over cuts has resulted in Greece’s failure to form a new governance system. Additionally, austerity has hurt the nation, increasing a political polarization that has hurt Greece and the euro.  

As we have watched this economic trainwreck occur, many have chimed in with various insights ranging from Greece’s entitlement system to corruption with their various economic models demonstrating the benefits of austerity, and yet the question remains - why hasn’t this worked?    

Here are the top 5 reasons Greece continues to fall and why austerity worsened its economic situation:

1. Greece is Greece’s largest revenue generator:   

 

40% of Greece’s GDP comes from the public sector – this includes government jobs, entitlements, as well as government contracts Greece businesses have relied on.  Austerity has mandated that Greece pays outside creditors first.  When the largest revenue generator does not/cannot pay their bills to private business, business fails, banks fail, and citizens become outraged as they continue to struggle to put food on the table and a roof over their heads. 

2. The Protests:  

15% of Greece’s GDP comes from tourism.  A politically unstable nation is not a desirable vacation destination and cuts into revenue potential.

3. A History of Corruption:  

As Policy Mic Pundit, Romain Champetier, details in his article, Greece’s political system has been mired in debt and corruption for centuries. This level of corruption has led to ineffective policy, excessive government bloat, numerous governance model changes, and a dependency on the government due to policy instability. 

4. Lack of Economic Diversity:  

 

Outside of the government, tourism, and the shipping industry, Greece has not diversified their private sector economy to better absorb economic shocks and reduce the risk of complete economic implosion we see today.   

5. Excessive and Unstable Taxation and Budgetary Management:  

 

Greece taxes everything.   Since the implementation of austerity, Greece’s tax rates have fluctuated and only increased.  Each tax increase and change has been met with more cuts to aid and more loopholes. Another challenge in stabilizing Greece’s unstable tax structure is the volume of tax evasion that occurs.  The unintended consequence of austerity is reduced resources to combat institutionalized evasion.  Because the tax structure has become completely fluid, their budget management practices become more fluid as Greece tries to fit their national budget into their unstable tax policy. 

Greece has some tough decisions coming up and there are no signs of political stability for the country, or region, much less budgetary and tax stabilization. Their financial sector has completely failed to plan for the worst case scenario by independently rising their capitalization ratio (in layman’s terms – their nest egg) further eroding the Greek citizen’s confidence in their national economic security thus causing a run on banks. 

The first step all European nations in the Eurozone must take is to realize that neither Hayek nor Keynes will be the end-all, cure-all.  Secondly, their citizens need to hire managers, not charismatic ‘leaders’ carrying false hopes.  Third, they must declare a financial sector holiday to fully assess the depth and breadth of the contagion, force the clearing of bad financial practices, and create a plan to emerge on a more solid footing. 

All countries will continue to struggle and be riddled with strife until the macroeconomists come to their senses and realize that cutting to cut works about as well as spending to spend.  They simply must find balance. Until the balance is found, Greece, and other nations, will struggle.

Picture Credit: Wikimedia Commons

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smalltowngal
by Platinum Member on Oct. 7, 2013 at 8:06 AM

I hate articles like this. 

Carpy
by Ruby Member on Oct. 7, 2013 at 8:08 AM


Why European Austerity Fails

Voters in Greece and France on Sunday voted decisively against the austerity policies of their governments – and for good reason. European austerity has failed, producing higher unemployment while doing little to repair the fiscal imbalances it was supposed to fix.

But why?  The comments to my last week’s column: Austerity, And The Failure of the Governing Elite, revealed widespread confusion if not complete misunderstanding of why a policy that has been the focus of the governing elites in Europe, at the IMF, and in Washington, has gone so far awry.

Ever since the 1930s when classical economics allegedly could not explain sustained 20% plus unemployment and idle factories, we have been taught a government-centric view of the economy.

  • An increase in government spending adds to demand and therefore “stimulates” economic activity directly or through the magic of the “multiplier.”  The Obama Administration, for example, argued that every dollar in its $787 billion stimulus bill would lead to $1.50 of additional output, and hence would keep the unemployment rate below 8%.
  • Raising taxes on the rich can lead to more growth because those with high incomes do not spend all of their money, and besides, they can afford it.
  • The budget deficit is the key fiscal variable.  Austerity policies see little difference in the macro economic effects between reducing government spending and raising taxes on the private sector.  Both reduce demand.  To the extent a difference exists, tax increases are preferred because the government will spend all of the money it collects, while those taxed may have saved some of the money, thereby reducing consumer demand.

The problem with this government-centric view of the economy is that it treats the private sector as a mere appendage to government. From the vantage point of the individual worker or saver in the private sector, these same actions look quite different.

  • An increase in government spending does not add to aggregate demand.  Every dollar the government spends must be taken first from individuals or companies. All that has happened is government spending has displaced private sector spending or investment.  In addition, since individuals are better at spending and investing their own money than elite public servants, every dollar of increased government spending would lead to less than a dollar of additional output. A more recent economic study indicates every dollar of increased government spending leads to a fall in total output of as much as 40 cents.
  • Following the same logic, a reduction in government spending does not reduce aggregate demand.  Instead, it increases the resources in the hands of individuals in the private sector, leading to an increase in output and employment.

Of course, a sharp reduction in government expenditures is likely to cause a short run dislocation in the economy. It takes time for employees who are laid off, or vendors who lose a key customer to find new work or new customers.  But, this adjustment is no different from those that take place when companies have to downsize or adapt their operations to changes in consumer preferences.

An extreme example is provided by the U.S. experience after World War II. Total federal spending was slashed 38% in 1946 and another 38% in 1947 or by a combined 29% of GDP.  That is equivalent to reducing current federal expenditures by $4.4 trillion in two years. The federal budget went from a $54 billion deficit to a $3 billion surplus.  Eight million men and women (12 % of the workforce) were released from the armed forces.  Real GDP did decline by 11% in 1946.  But, the economy stabilized in 1947, and then grew by 4.4% in 1948.

The reason European austerity has failed is not because of the reductions in government spending, but because those spending cuts have been paired with tax increases.  The Europeans are struggling to reduce government spending by less than 5% of GDP. But unlike the U.S., which paired extreme budget cuts with across-the-board reductions in personal income tax rates, the European austerity combines spending cuts with massive tax increases.  The result is a toxic brew which shrinks both government and the private sector, producing recession, rising unemployment, and massive budget shortfalls.

Here’s why:

A tax increase does far more than simply take money out of the private sector and give it to the government.  Increases in marginal tax rates also reduce the opportunities for domestic economic activities in the same manner as increases in tariffs shrink the opportunities for international trade.

For example, a 2-percentage point increase in the Value Added Tax raises the price of goods and services by 2%.  Faced with higher prices, individuals demand less, both because prices are higher (the incentive effect), and because the same amount of euros can now purchase 2% fewer goods and services (the cash flow effect).  Suppliers, faced with the fall-off in demand, may choose to absorb some of the tax by lowering the price they receive.  However, the lower price received reduces both their desire (incentive effect) and ability (cash flow effect) to maintain the current level of supply.

As noted above, the cash flow effects are offset at least in part by government spending.  But, here is what the government-centric view of the economy completely overlooks: The combination of higher prices-paid and lower prices-received shrinks the opportunity set for mutually beneficial exchanges, so fewer exchanges – and less economic activity – takes place, even if every dollar of tax revenue is spent. Imagine for example what would happen if a 20% tax were imposed on the proceeds of selling a stock.  On a $20 stock, the bid-ask spread would widen from 25 cents to $4.25!  In order for the seller to still receive $19.75, the buyer has to pay $24.  We can only imagine how much the volume of trade would fall, and how many individuals associated with the securities business would lose their jobs.

The higher the marginal tax rate – whether it be a VAT or income tax or property tax – the greater the spread between the price paid and the price received, and the greater the obliteration of economic activity that otherwise would have taken place.

The final error of the government centric view is that the budget deficit is the key economic variable.  Instead, chronic and exceptionally large budget deficits are a symptom of a government sector that has become over-sized relative to the private sector.

Austerity that combines the “shared sacrifice” of spending cuts and tax increases fails because it seeks to maintain this imbalance.  However, the contraction in the private sector typically leads to increased government spending on unemployment and other relief payments, further increasing the size of government relative to the private sector.

Carpy
by Ruby Member on Oct. 7, 2013 at 8:09 AM


The solution to Europe’s sovereign debt crisis is the policy mix that worked in the U.S. after World War II: monetary stability, reductions in government spending that shrink the size of government, and reductions in marginal tax rates which permit the private sector to expand.  Reducing government-imposed rigidities in labor markets also would increase the opportunities for mutually beneficial exchanges, thereby leading to increased employment.

But, most of all, resolution of Europe’s debt crisis requires that, if not the governing elite themselves, then a majority of voters recognize the governing elite are not capable of managing the economy, and demand that those in power, with new found humility, admit the spontaneous order of the market, rather than government programs, is what will produce economic growth, rising living standards, and ultimately the revenues required to restore fiscal balance.

Private sector growth, not austerity or increased government spending, is the answer.

idunno1234
by Silver Member on Oct. 7, 2013 at 8:15 AM
1 mom liked this

 The recoveries up to the 1920's had nothing to do with spending and taxing less, quite the opposite:

The Economics of World War I

"The total cost of World War I to the United States (was) approximately $32 billion, or 52 percent of gross national product at the time."

Did World War I produce a major economic break from the past in the United States? Did the U.S. economy change in some fundamental and lasting ways as a result of that war? NBER Research Associate Hugh Rockoff addresses these questions in his recent study Until It's Over, Over There: The U.S. Economy in World War I (NBER Working Paper No. 10580). After surveying the U.S. mobilization and financing for the war, Rockoff concludes that perhaps the greatest impact of World War I was a shift in the landscape of ideas about economics and about the proper role of government in economic activities.

When the war began, the U.S. economy was in recession. But a 44-month economic boom ensued from 1914 to 1918, first as Europeans began purchasing U.S. goods for the war and later as the United States itself joined the battle. "The long period of U.S. neutrality made the ultimate conversion of the economy to a wartime basis easier than it otherwise would have been," writes Rockoff. "Real plant and equipment were added, and because they were added in response to demands from other countries already at war, they were added precisely in those sectors where they would be needed once the U.S. entered the war."

Entry into the war in 1917 unleashed massive U.S. federal spending which shifted national production from civilian to war goods. Between 1914 and 1918, some 3 million people were added to the military and half a million to the government. Overall, unemployment declined from 7.9 percent to 1.4 percent in this period, in part because workers were drawn in to new manufacturing jobs and because the military draft removed from many young men from the civilian labor force.

Rockoff estimates the total cost of World War I to the United States at approximately $32 billion, or 52 percent of gross national product at the time. He breaks down the financing of the U.S. war effort as follows: 22 percent in taxes, 58 percent through borrowings from the public, and 20 percent in money creation. The War Revenue Act of 1917 taxed "excess profits" -- profits exceeding an amount determined by the rate of return on capital in a base period -- by some 20 to 60 percent, and the tax rate on income starting at $50,000 rose from 1.5 percent in 1913-15 to more than 18 percent in 1918. Meanwhile, Treasury Secretary William Gibbs McAdoo crisscrossed the country peddling war bonds, even enlisting the help of Hollywood stars and Boy Scouts. The prevalence of patriotic themes created social pressure to purchase the "Liberty bonds" (and, after the armistice, the "Victory bonds"), but in practice the new bondholders did not make a tangible personal sacrifice in buying war bonds, since the yields on the se debt instruments were comparable to those on standard municipal bonds at the time. As Rockoff notes, "patriotic motives were not sufficient to alter market prices of assets during the war."

As part of the war effort, the U.S. government also attempted to guide economic activity via centralized price and production controls administered by the War Industries Board, the Food Administration, and the Fuel Administration. Rockoff judges that the overall impact of these programs on reallocating resources was "rather small." Timing played a role, since some of the agencies were only established once the United States entered the war, and they took time to begin fulfilling their roles. Also, management problems emerged. For example, the War Industries Board attempted to create a "priorities system" for determining the order in which producers would fill government contracts for industrial goods. Unfortunately, all policymakers gave their order the highest rating ("A"). Leaders then created several higher priority ratings (such as "A1"), with much the same result. "Replacing price signals with priorities is not as simple as it sounds," surmises Rockoff.

Finally, the author assesses the legacies of World War I for the U.S. economy. When the war began, the United States was a net debtor in international capital markets, but following the war the United States began investing large amounts internationally, particularly Latin America, thus "taking on the role traditionally played by Britain and other European capital exporters." With Britain weakened after the war, New York emerged "as London's equal if not her superior in the contest to be the world's leading financial center."

In matters of economic ideology, Rockoff argues that, although the U.S. government took on such an active role in economic affairs during the war, this evolution did not ratchet up the government role in peacetime. Subsequent increases in federal spending resulted mainly from war-related matters (such as veterans' benefits), and the most of the wartime regulatory agencies soon disappeared due to the efforts of conservative politicians. Nevertheless, the successful wartime experience "increased the confidence on the left that central planning was the best way to meet a national crisis, certainly in wartime, and possibly in peacetime as well." This view became increasingly important after the Democrats reached power during the Great Depression. "Almost every government program undertaken in the 1930s reflected a World War I precedent," explains Rockoff, "and...many of the people brought in to manage New Deal agencies had learned their craft in World War I." The author concludes that the scope and speed of gove rnment expansion in the 1930s were likely greater because of the impact of the war on the world view of new economic and political leaders, who in turn inspired future generations of reformers. "For America, to sum up," writes Rockoff, "the most important long-run impact of the war may have been in the realm of ideas."

-- Carlos Lozada



Quoting Carpy:

No it isn't. History shows the economy recovers best when governments spend less and tax less, as the recoveries up to the 1920's prove.  The great depression spending more and taxing more, stagnates recovery.  just as it is proving, today.

Quoting NWP:

Austerity is a proven failure. Ugh



 

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