Occam's Razor

Revolution is breaking out not only in Egypt but also on Capitol Hill. While protestors demanding freedom are taking over Tahrir Square in Cairo, Republican senators and legislators complaining that oppressive “socialism” is diminishing our freedom.

On Capitol Hill, we have the expected noise principally from Republicans about how dreadfully awful our $1.5 trillion dollar deficit this year will be (I agree) and how it must be stopped now! The chess pieces are moving. Earlier in the week, Senate Republicans forced a vote on the repeal of the Affordable Care Act, which predictably lost. Certain federal district courts apparently don’t like the ACA either. One Florida judge declared the whole act unconstitutional.

Glimmers of Republican sanity are emerging. House Republicans, or at least its leadership, seem to be backing away from an earlier threat not to extend the federal debt ceiling later this year, realizing that the resulting economic meltdown may not be good for their reelection prospects. Meanwhile, President Obama is playing a clever game of defense, setting boundaries on what is acceptable and not acceptable to cut and vowing to veto bills with earmarks. Overall, the momentum certainly seems to be on the side of those trying to cut deficits and reduce the size of the federal government. This time will the cut federal spending and deficits crowd actually succeed?

My vote: bet on more debt. It seems likely that non-defense discretionary spending will be frozen for a few years. Of course, there will be lots of threats and wailing about how bad things are and how the dynamics must change now. However, that’s all they are: threats and wailing. To effect real change, new external drivers are needed. Specifically, our creditors need to stop lending us money (or slow the amount of money they are lending us) or bond rating firms (some of whom were bailed out by federal tax money just a couple of years ago) need to downgrade the U.S. Treasury’s AAA bond rating.

There is little evidence now that either of these things will happen. Why? There are many reasons but principally there is an enormous surplus of capital in the world, including trillions held by U.S. companies. Many of those holding the capital are already heavily invested in U.S. treasuries and do not want to see their investment’s value diminished. A lot of their extra money can certainly be invested in other stocks and bonds, but even blue chip companies are not as safe a refuge for money as U.S. treasury bills. Seeking safety, it seems unlikely that capital will flee U.S. securities.

The improving economy will eventually increase tax revenues. It will be hard to see over the next few years, particularly since Congress and the president have already agreed to borrow money to fund a cut in social security withholdings. Nevertheless, eventually the economy will pick up a head of steam, bringing in more in the way of revenues and thus lessening the deficit. As the deficit shrinks, however marginally, the animus to cut federal spending eases as well. Getting out of wars in Iraq and Afghanistan will help eventually as well.

Another reason to bet on debt is to consider what really matters. For Republicans, the deficit is a talking point toward their real utopian goal of cutting the size of the federal government. To seriously do this they need sixty plus votes in the Senate, a majority of the House and a Republican president. Two out of three are possible in 2012, but three out of three are very unlikely. As for right now, we will all have to muddle through somehow. What this will amount to in the end is probably a freeze on non-defense discretionary spending. President Obama noted in his State of the Union speech that this is only fifteen percent of federal spending, so a freeze does not solve any underlying problems. Medicare costs in particular will keep rising.

Republicans talk about cutting Medicare and Medicaid, but it is mostly talk. What they really want to do is cut non-defense discretionary spending. They want symbolic victories, like getting rid of the Department of Education and the Corporation for Public Broadcasting because these agencies offend them. Even if they succeed, which is unlikely, they don’t address the real problem. Discretionary spending outside of Defense has not been the principle cause of deficits since the Great Depression.

The real problems driving up the debt, aside from the bad economy and tax cuts are: Medicare, Medicaid and defense spending. Of the three, only one is a realistic target for major cuts. Can you pick the right target? If you said Medicaid, come up and claim your prize. Why Medicaid? Because when push comes to shove, the disenfranchised are always the first to go. You can see it in being played out right now in state and local governments. Here in Virginia, for example, services for the mentally ill were one of the first cut. A few people speak for the mentally ill, but not many and they are not well organized. Nor do they contribute to politicians’ war chests. Even with Medicaid, it is not going to go away, but if forced to choose between the three, it will be the first to be sizably cut. That is because those who buy influence ultimately win. The poor, being poor, cannot buy influence, and survive only on largess. So Medicaid stands a decent chance of being a loser, while farm subsidies will doubtless continue. (After all, they go principally to red states, and principally to large agricultural companies.)

The Defense Department may get symbolic cuts, but that’s all they will be. Secretary of Defense Robert Gates is proposing “cuts”, but this does not mean he expects DoD’s budget to go down. No, he is proposing slowing its rate of growth. While there are some Tea Partiers who would favor real and painful cuts to the Department of Defense, there are too many teats feeding off the military industrial complex. Cuts will be mostly symbolic and weapons systems built in large numbers of congressional districts, as usual, will be mostly immune to cuts.

Social Security is largely untouchable. Social Security will neither be abolished nor will it be replaced with some sort of voucher system. Any honest Republican knows this. At worst, the retirement age will be increased but that will prove unpopular with voters, who can hardly keep a job now. Moreover, social security is not insolvent. It will always have a steady revenue stream through withholdings. The only concern is that over the next twenty years it will be slowly drawing from its trust of already accumulated savings, i.e. Treasury bills, unless the law changes.

Medicare spending is the most chronic and largest problem. Cutting it and raising taxes are the only two things that will seriously reduce the deficit. Unfortunately, it remains popular with the public and retirees depend on it. Republicans live in a fantasy world that it can be converted into a voucher system. To fix Medicare will require making painful choices among many vested interests including doctors, drug companies, retirees, hospitals, ancillary insurance providers and clinics. For it to become solvent will require that hardest of work: everyone must share in the misery. Of course, everyone will want someone else to endure the misery, not them.

The last reason to bet on debt is that tax increases have become anathema. When push comes to shove, Republicans will put deficit spending ahead of tax increases. This is as sure as the sun will rise. The only way to seriously raise tax rates is to have a Democratic congress, sixty plus Democratic votes in the Senate and a Democratic president. That too is very unlikely.

So for the short term, unless our creditors and rating firms force our hand, expect barbarians at the gate, but wielding only noise as weapons. More debt will win because it is the least painful choice. Future generations, after all, aren’t yet of voting age.