The inevitable cataclysmic collision

Byline: | Category: Above the Fold, Economy, Government, Taxes & Spending | Posted at: Friday, 4 October 2013

How is it possible that both President Obama and the “Tea Party” hold an advantage in the budget standoff?  It isn’t a contradiction if you understand that one side has a tactical and operational advantage, while the other side has the long-term strategic advantage.

For the next two weeks President Obama is at a tactical disadvantage as he is sacrificing the interests of his own forces in order to secure a greater goal.  So far those most hurt by the government shutdown are government workers who are denied a paycheck.  They are, in effect, on strike.  But unlike an ordinary strike, where a union’s rank and file walk off the job and accept a temporary loss of income in exchange for a negotiating advantage to secure a bigger benefit, in this strike the workers out of work don’t want the benefit that their union’s leadership (national Democrats) want to secure.  That’s because the benefit in question is Obamacare, which no government worker wants and many actual unions have exhaustively tried to avoid.

Normally a strike breaks when the rank and file perceive that the temporary loss of income is too great to justify the benefit in question.  In this strike, that was always the case:  government workers have been forced onto a picket line for a benefit that none of them want—and a majority of the American people don’t want.  This is the tactical risk that the President bears between now and 16 October.  And it is why he is maximizing collateral damage in the form of shutting down customer access to the government’s other “products” like parks and monuments.

However, if the President can get through the next two weeks, the advantage shifts to him.  That is because the dispute will no longer be narrowly confined to the issue of Obamacare.  Once the issue becomes the debt ceiling and potential of limited funding of all government, the President seizes an operational advantage.

Let me skip past the perennial 14th Amendment argument (read about why it is neither Constitutionally nor practically possible here) and tell you what must happen if Congress does not extend the debt limit:  the President would be Constitutionally obligated to negate the anti-impoundment law and would have the sole authority to pick and choose what he wants to fund.  First on the cut list would be those traditionally Republican spending priorities:  Defense contractors, banking interests, anything that the National Chamber of Commerce supports.  They will squeal and will happily cozy up with Democrats if the GOP refuses to budge on the debt ceiling.

This is why a debt limit fight is so devastatingly advantageous for Democrats.  Right now those in favor of higher government spending are split across the two parties.  Almost all of the current Democratic Party constituencies favor higher spending, but so too do a number of Republican-leaning group.  The President risks losing none of his current constituencies and stands the potential of putting big business groups wholly in the Democratic column, making it very possible that Republicans in ’14 and ’16 will be left with a Goldwater-sized minority.  The center of gravity of that new alignment would mean that the Democratic Party would draw strength from all groups who depend upon government spending—and you can always build a majority on the basis of giving away free money.

But what is the new Democratic Party’s operational advantage in the near to mid-term is its long-term strategic weakness.  Right now, Democrats can fracture a GOP that is made up of a disparate alliance of small-government Tea-Party types and big-government-business types by reminding the former of the presence of, and their party’s usual genuflection toward, the latter.  The Republican Party’s immediate problem is that it doesn’t have a center of gravity; it has two, each in conflict with the other.  Remember, Barack Obama won in 2012 not because his party turned out, but because Republicans—Tea Party Republicans—didn’t.  But if all people dependent on government handouts (individual welfare and corporate welfare) identify as Democrats, that leaves the Republican Party situated as its ideologically pure opposite.  While that is a smaller party now, its uniting principles are perfectly positioned should anything break down in the Democrat’s business model.

And break down it will.  There is not enough money to sustain all those who wish to suck from the giant government teat.  Believe it or not, the competition between welfare-spending Democrats and corporate welfare-spending Republicans actually serves to constrain Washington’s appetite for spending beyond what it otherwise would be.  Unconstrained by inter-party fighting, the amount of spending under a new Democratic alliance will far outstrip even currently high levels.  Now in the fifth year of larger than one-trillion dollar deficits, the nation is already at a point where the government cannot raise taxes high enough to cover the deficit.  (Here’s an easy-to-understand illustration of why that is true; start at 2:15.)  So the newly-aligned Democratic Party would become even more predisposed to profligate spending than it already is.

Prior to 2008—back when a big deficit never exceeded $400 billion—sustaining the debt relied upon growth.  So long as people thought that growth would continue indefinitely at or above the rate of the growth of the debt, there was the perception of stability.  Once the illusion that growth was permanent—that real estate and equities could never drop in value over the long term—was shattered, the system became unstable.  Quickly erected was a new system where government spending took the place where growth had been before.  Because government spending is far above what tax revenues can ever produce, new debt in the amount of a trillion dollars or more a year sustains the spending.  And that debt, in turn, rests on three legs: low interest rates, low inflation, and fiat currency.  If any one of those legs is kicked out from underneath it, the whole system collapses.

If you want to assign to those three legs a single characteristic, it is confidence.  If there is a loss of confidence in the future value of a dollar, interest rates and inflation will rise.  And since there is no other source of revenue large enough to sustain what the Democratic Party must keep in place to maintain its center of gravity, debt will grow even larger, a vicious self-reinforcing feedback loop will develop, and the very value of the currency itself will collapse.

In isolation, a Democratic Party united about the principle of “free government money” is politically stable and  guarantor of a majority.  But politics does not exist in isolation from economics.  While a majority will believe that the status quo can be maintained indefinitely, it takes far less than a majority to destroy the illusion of confidence.  Consider a bank:  if just ten percent of its depositors lose confidence in the solvency of the bank, the bank is insolvent.  The same is true of interest rates, inflation, and fiat currency.  The flight of just ten percent of the nation’s “depositors” away from government debt or American dollars will collapse the system.  So what is politically stable is economically unstable.  (BTW, now you can envision why it is so easy for a demagogue to convince a large majority that blame for economic collapse rests upon a small minority of greedy moneyed-interests, and how easy it would be to create a plausible 1933 Germany scenario for our own nation’s not-too-distant future.)

Furthermore, the very dependence upon low interest rates to sustain the status quo diminishes the possibility of an off-ramp to growth.  As soon as investors perceive that there are higher yielding investment options than Treasury securities, the yield on those securities will rise, requiring the issuance of even more debt to sustain the spending that keeps the governing elite in place.   So not only has the potential for future economic growth become less likely, growth itself is actually a threat to the new system, and thus must be controlled.  (The cynic would be forgiven for believing that beside hubris, another reason why the President has to fight to maintain Obamacare, is that glimmers of economic hope risk destroying the foundation on which debt and spending currently rest.)

So how do we get out of here?  The sad truth is that we probably don’t get out of this situation before a complete economic collapse.  The only real way out is to slash government spending, which Democrats and Old Guard Republicans have a disincentive to doing, and Tea-Partiers don’t have the ability to do.

The old saying that “where you stand depends upon where you sit” applies to the national Democratic Party.  Not since 1964’s landslide Democratic advantage even without the formerly “Solid South,” has a party willingly jettisoned a constituency.  In 2012 Democrats eked out a bare majority.  They can’t possibly constrain spending to any one of its groups without sacrificing the party’s slim lead.  In fact, they are constantly on the lookout for new groups to add to the fold—hence the willingness of the last five years to appeal to traditional Republican-aligned big business constituencies.  Meanwhile, Tea Party type groups, confident of the inevitable unsustainability of the new system, have no incentive to cave on principles and nothing in common with the Old Guard of the Republican Party.  And as they are already without power, they don’t risk losing it through intransigence.  Currently, the only losers in this struggle are big business interests that choose to stay aligned with a Tea-Party-leaning Republican Party.  Thus it probably won’t be long before either big business bolts the GOP, or the Tea Party does and the GOP collapses on itself.

In the immediate weeks ahead, Democrats can’t cave for fear of losing votes.  Meanwhile, because it would be a violation of principles that gains them no tactical, operational, or strategic advantage, Tea Party Republicans will not cave.  If I had to guess, I would wager that Speaker Boehner will blink and negotiate a deal in order to preserve Republican-leaning big business groups under the GOP banner.  But that in 2014 and 2016 Republicans will get crushed as the Tea Party goes rogue and that by 2020 the GOP will cease to exist.

But regardless of what happens in the near to mid-term, the long term conclusion is clear:  we are on the course to the inevitable cataclysmic collision between those whose livelihood depends on government largesse and those who sustain the system.  Ultimately, the latter group has to win or it will be the American Republic that comes to an end.

POSTSCRIPT:

Given that the strength of the Democratic Party depends upon spending and debt purchased at low interest rates, any Presidential hints that default is possible are just empty bluster.  Sure, he may be able to get away with blaming it on Republicans, but once Pandora’s box of default is opened, the bond market will demand a higher yield for future debt.  In other words, he would surrender his party’s operational advantage to secure a limited tactical victory that might not last to November 2014.  This, however, doesn’t mean that national Democrats are completely immune to such a stupid blunder.

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Support for my contention that the Obamacare/Budget debate is a loser for the President and that they want the debt limit discussion instead comes from Ben Domeceh:

It’s interesting how quickly conversations with the left about the government shutdown run to the debt ceiling battle, as opposed to sticking to the furloughed bureaucracy. On CNBC the other day, Obama went right to the message that Wall Street should be totally scared of these crazy Republicans on the debt limit… even as Boehner’s already indicated that he’s ready to deal on it. That’s interesting, because it suggests that Obama is far more comfortable making the argument that the Republicans are a bunch of extremists when it comes to the issue of debt and default, not a government shutdown.

The President knows that he loses if the story is about poor pitiful government workers out of a job striking in defense of their beloved Obamacare.  The conversation that he wants to have is the one where he wins over big-business groups beholden to government spending, thus dividing the two wings of the GOP from each other.

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