Sunday, Jul 21, 2024

Washington’s Newest Game: Debt Ceiling Chicken

President Obama's news conference last week was a political declaration of war against congressional Republicans who are resisting raising the legal ceiling for the national debt without a guarantee of government spending cuts large enough to bring the federal budget back into balance. Treasury Secretary Timothy Geithner, one of the authors of the 2008 federal TARP bailout of the nation's largest banks and Wall Street, has been warning of an early August deadline, after which point the federal government will no longer have enough cash to pay all of its financial obligations, and will lack the legal authority to borrow any more. It is a matter of partisan debate as to whether or not the failure to raise the debt ceiling by the August 2 deadline would trigger a formal default by the US government on its debt service obligations. Less seriously, it may cause a serious “credit event” in the eyes of the international community, or force a 40% cutback in federal spending to match current tax income. In any event, the situation would be unprecedented, and the uncertainty alone could be damaging to the stability of the still fragile credit and security markets.

The problem, however, is that the powers in Washington which have the ability to solve this problem are now trying to use it to make political points with their constituencies. In previous years, raising the federal debt ceiling every few years had become a routine, if politically embarrassing exercise. Formerly, everyone in Washington would agree that raising the ceiling was a necessary evil to keep the government running, conveniently putting off the painful need to solve the lingering problem of chronic budget deficits for another day.


Part of the problem has been that, until now, the national debt has been a strictly theoretical concept with no direct impact on the lives of voters. It is unlike the rising cost of gasoline, which is in your face every time you pass a gas station, or the unemployment rate, which has inflicted real suffering on millions of jobless American workers who, unlike the situation following previous recessions, have been unable to find a satisfactory new job in the current recovery.




Another part of the problem is the massive size of the current debt, $14.3 trillion. The number is so large that it is simply unimaginable to most people. So is the fact that under Obama’s budgets, the debt is on track to keep increasing at the rate of $1 trillion a year for the foreseeable future.


Yet, if a failure to raise the debt ceiling by August 2nd causes another stock market collapse, or delays the issuance of August Social Security checks or payments for Medicare and Medicaid, all of which are possible, the national debt will suddenly become a matter of very immediate and real concern to tens of millions of impacted Americans.


While in theory, both Obama and congressional Republicans understand the stakes, each side seems convinced that the other one will blink first when the deadline comes, and give in to the other’s demands. Neither side wants to be blamed by angry voters who suddenly find their lives turned upside down by a political issue which most have never before considered to be very important.




The issue of runaway deficit spending is hardly a new one. In fact it was at the heart of last November’s midterm election. The new Republican majority in the House, including many who ran and were elected on a Tea Party platform, see it as their mandate from the voters to bring government spending back under control to end the deficit spending.


At the same time, the Democrats in Congress have forfeited their fiscal responsibilities. Last year, when they still controlled a sizable majority in both houses of Congress, they didn’t even make a serious effort to pass a 2011 fiscal year budget. When Republicans took over control in January, four months into the 2011 fiscal year, they were faced with a government which was being funded in a hand-to-mouth fashion, through short term extensions of the previous year’s budget.




Eventually the Republicans put their foot down. They refused to approve a budget extension for the rest of the 2011 fiscal year unless it included tens of billions of dollars in savings over the previous year’s budget. At that time, the threat was raised of a government shutdown when the last of the temporary budget extensions ran out, because Democrats refused to agree to the spending cuts the Republicans demanded. In the end, however, a compromise was reached and the shutdown was averted.


However, the result left the Republicans unhappy because many of the so-called “spending cuts” Democrats insisted on counting in the final tally were due to the “cancellation” of programs in the previous year’s budget that were set to expire anyway.


That trick poisoned the waters for Republicans on future budget deals with this administration. At the same time, Democrats are still complaining about the December tax cut compromise which Obama reached with the Republicans, which continued the entire Bush round of tax cuts for another two years, including those for higher income earners whose taxes Obama has been trying to raise using “soak the rich” class warfare rhetoric since taking office.


As a result, when bipartisan talks about a deal for raising of the debt ceiling began under the auspices of Vice President Joe Biden last month, both sides felt that they had something to prove.


The Republicans insisted that they would not be tricked again. If the administration felt that they needed a $2.4 trillion increase in the debt ceiling to carry the country through the 2012 election, then it would insist on real dollar for dollar budget savings in future spending in return.


At the same time, Democrats insisted that if government spending had to be cut in order to reduce the deficit, then they would insist on increased taxes for the rich, arguing that they are not paying their “fair share” of the federal tax burden.




However, that Democrat claim is not backed up by the facts. Thanks to the additional tax breaks for lower income families contained in President Obama’s stimulus package passed in 2009, last year, 47% of all US households paid no federal income tax whatsoever. That includes most families with two children under age 17 earning as much as $50,000 a year. By contrast, the upper 10% of households by earnings in this country, with an average income of $366,000, paid 73% of all income taxes collected by the federal government last year.


Thus, according to the Democrats, the “fair share” of taxes for families with $50,000 or less of annual income is nothing, while having the top 10% of earners paying three-quarters of the government’s income taxes is still not enough. These little known statistics reveal the truth about the forced income redistribution agenda of Obama and the Democrats, but unfortunately, the Republicans have largely failed to make this argument to the voting public.


In fact, the Republicans are not opposed to measures that would change the distribution of the tax burden, but they don’t want to see it done with more tinkering with the existing tax structure. They say that the tax code is already so full of special tax breaks for the politically well connected that it is inherently unfair. While allowing some wealthy investors and corporations to escape the bulk of the taxes they would normally have to pay, most American taxpayers who are unable to take advantage of these special measures wind up paying a higher tax bill. The only way to fix that fundamental fairness problem is to start over by redesigning the tax system from scratch. But the Obama administration is unwilling to even think about doing that.




In an attempt to gather some low-hanging political fruit, at his press conference last week, President Obama took aim at some of these special tax benefits. As part of the deal to raise the national debt limit, he challenged Republicans, to agree to eliminate tax breaks for corporate jet owners, hedge fund managers, multinational oil companies and ethanol producers, as well as some other changes which would come at the expense of American businesses and wealthier taxpayers. Obama argued that they would enable a reduction of the federal deficit by billions of dollars.


However, Republicans pointed out that the net effect of closing all of these loopholes in the tax code would be minuscule compared to the overall size of the deficit, while these same changes would have an undesirable effect on the rest of the economy. For example, changing the tax treatment on corporate jets would raise only .03% of the projected $9.5 trillion in new debt which Obama’s federal budgets would run up over the next decade. But it would hobble the domestic market for American commercial jet makers, one of the few manufacturing industries in which the US still holds a leading position in international trade.


Even though it represents only a tiny factor of the overall budget deficit, Obama mentioned the tax break for business jets six times in his press conference last week. He held it up to the public as a prime example of a wasteful and unnecessary tax break for the corporate elite.




Just the day before his press conference, Obama was in Bettendorf, Iowa, at the Alcoa Davenport Works plant, where he made a speech pointing to the plant as an example of his vision for the future of manufacturing in America. “Alcoa is showing us the future we can build here in eastern Iowa and across the country. The idea is to create jobs now, and to make sure America stays on the cutting edge of manufacturing for years to come,” Obama declared.


However, the factory Obama visited isn’t an ordinary aluminum plant. According to Alcoa, it specializes in making aluminum for American companies that manufacture the same business jets which Obama suggested the next day should be deprived of their current tax breaks. Currently, the center of American business jet manufacturing is in Wichita, Kansas. The manufacture of business jets is a very competitive international market. The leading US makers are Cessna, Gulfstream, Learjet and Hawker-Beechcraft. But they compete internationally with similar jets built by Canadian-based Bombardier (which owns Learjet), Dassault in France, and Embraer in Brazil.


Obama’s withdrawal of tax advantages for owners of business jets would hurt both the plane manufacturers in Wichita, and those American workers at the Alcoa plant whom Obama boasted about last week. Thus, for the sake of a political talking point at a news conference, Obama attacked one of the few American manufacturing industries which remain in the lead internationally. These businesses are also prime clients of Alcoa’s US-based $3 billion aerospace business. They are the companies which order the products made at Alcoa’s plant in Bettendorf, Iowa. Thus, one day, Obama travels to the Alcoa plant to praise it as a model of the future, and the very next day he called for a tax increase which would hurt the same plant’s prime customers.




To be fair, Obama and his administration are not just attacking Alcoa’s business jet manufacturing customers. The administration has also declared war on the largest manufacturer of commercial jets in the United States, by trying to prevent Boeing from opening up a second manufacturing plant for final assembly of its newest product, the 787 Dreamliner. Boeing already has so many advance orders for the plane which is assembled outside of Seattle that those placing new orders for the jets will have to wait five years for delivery. Therefore, Boeing has announced that it intends to open a second assembly line for the new plane at a plant in South Carolina, creating thousands of high paying new American manufacturing jobs. However, the Obama administration’s National Labor Relations Board is trying to block Boeing from opening that plant, because it wants all those new jobs to go to members of the unions in Washington State, which contribute to Democrat political campaigns.


Yes, the Obama administration is interested in creating more American manufacturing jobs, but only, it seems, if those jobs will strengthen the unions which pay millions into Democrat political campaign war chests.


Unfortunately, when Obama was attacking the tax credit for corporate jets at his White House press conference, none of the reporters asked the president why he put that tax break into his 2009 stimulus bill, which was passed without a single Republican vote in the House and only three in the US Senate. The press could have asked Obama why he didn’t criticize Nancy Pelosi and Harry Reid for voting in favor of the business jet tax break at that time when almost no Republicans did. Instead, the media just replayed endlessly Obama’s challenge to the Republicans for supporting tax breaks for US industry that are creating jobs for US workers today, including those companies still building corporate jets in the US.


Under the tax law that Congress passed at Obama’s behest in December 2010, companies purchasing new equipment – including jets – are allowed to deduct the entire cost of equipment purchases in the first year instead of taking depreciation deductions over time, including corporate jets.


“It seems to me that the [Obama] tax policy here is all over the map,” said Gary Horowitz, an attorney at Wiley Rein in McLean, Va.




Another distortion in Obama’s press conference rhetoric was his claim that he only wants to raise taxes on “millionaires and billionaires.” His proposals actually call for hiking the tax rates of any married couple declaring a joint income of over $250,000, which covers a lot of people who still consider themselves to be middle class. That income level is also not a lot for a family trying to raise four or six children and sending them all to yeshivos or college at the same time. The truth is that most of the people in the income brackets whose taxes Obama wants to increase are not “millionaires” or “billionaires.”


There is considerable merit to the demand that the current US tax system be thoroughly reformed. As it stands today, it is both unfair and inefficient, and it creates vested interests with a considerable stake in protecting their special tax breaks by maintaining the status quo. This has led some Republicans, and thinking moderate Democrats like former Pennsylvania Governor Ed Rendell, to suggest that the only fair solution to America’s national debt problem is a total revision of the federal tax system. They argue for starting with a clean sheet of paper, and then requiring advocates for every existing federal tax break, from the home mortgage interest deduction to the oil depletion allowance, to make the argument that they deserve special treatment over other taxpayers.




Some say that the only really fair way to restructure the way we pay for our government is to eliminate all of the tax breaks for everyone, and require anyone who wants a special government subsidy for one or another worthwhile program to pay for it directly by putting a line for it in the federal budget, complete with the names of the beneficiaries clearly spelled out for everyone to see. It would then have to be justified, voted upon and passed by Congress every year, instead of being hidden away permanently in some corner of the tax code.


This would establish more political accountability for the expenditure of the taxpayer’s money, and provide an annual mechanism for reviewing and doing away with programs which no longer can justify their cost.


The overall goal would be to reduce the total number of winners and losers in the tax code due to special provisions benefitting only the privileged few. Ideally, the new system would generate roughly the same amount of tax revenue as the old one did, but it would do so much more fairly. By eliminating most of the special exemptions, it would spread the tax burden more evenly, resulting in the average tax burden for the ordinary citizen going down.




This is not a novel idea. Something of this sort was recommended just last November by President Obama’s bi-partisan commission on reducing the deficit, chaired by former Republican Senator Alan Simpson and former Clinton White House chief of staff Erskine Bowles. It would start by eliminating all tax deductions in the federal tax code including those for state and local taxes, dependent children and interest on mortgage payments. It would also do away with all spending earmarks, freeze federal salaries, eliminate non-defense related government contractors, require higher payments for Medicare patients, and delay the start of Social Security retirement benefits until age 68. Last, but not least, it would chop $200 billion in annual spending from the federal budget by 2015.


Its goal was even more ambitious than the Republican target for a $2.4 trillion spending reduction in return for raising the debt ceiling. The Simpson-Bowles proposal called for reducing federal expenditure by a total of $4 trillion by 2020.


Unfortunately, President Obama and the Democrats declared the commission report to be dead on arrival, and did the best they could to pretend that it simply did not exist.


By contrast, the three congressional Republicans on the commission, including Congressman Paul Ryan, now head of the House Budget committee, were generally supportive of the commission’s approach, although they expressed some reservations about the specifics of the Simpson-Bowles plan.


In the end, Ryan, along with fellow Republican congressmen and commission members Hensarling and Camp issued a statement saying, “this is a provocative proposal, and. . . we commend the co-chairs for advancing the debate. We will continue to work toward solutions that help spur economic growth and restrain the explosive growth of government spending.”




The Republicans have been true to their word. Ryan, in particular, has issued a long term budget plan with proposals for spending cuts and the restructuring of government entitlement programs every bit as drastic and controversial as those proposed by Simpson and Bowles.


Meanwhile, the Obama administration has failed to show any seriousness about reducing runaway government spending, or reforming the entitlement programs which, if left untouched, are on track to bankrupt the nation.


In recent months, the Democrats have rejoiced over the push back against Ryan’s proposal to gradually transform Medicare into a defined cost program, very much like the health care retirement packages now being offered by American industry to their workers. The Democrats are again trying to scare seniors by claiming that the Republicans want to destroy Medicare. In fact, Ryan and the Republicans are only suggesting ways to control Medicare’s costs so that the country can continue to afford to provide it to our senior citizens over the long haul. The Democrats have also ignored the fact that the changes that Ryan is suggesting in Medicare would not become effective for ten years, and that everyone already on traditional Medicare will be allowed to stay there.


While the Democrats loudly insist that Medicare as it exists now must not be touched, they have no answer to the question of how the country will be able to pay for it if it retains its current form for another 20 years.




The talks on raising the debt ceiling which were led by Vice President Biden appeared to be making some progress on identifying significant cuts in government spending that both the Republicans and Democrats were at least willing to consider. The extent of the initial bipartisan agreement has been the subject of some debate, but it appears that the two sides managed to identify savings of about $200 billion in the Medicare and Medicaid program, and another $200 billion from other government direct payment programs, such as farm subsidies and federal employee pensions.


After that, the negotiating process became more difficult. House Republicans wanted $1.7 trillion over the next ten years cut from the budgets of the various federal agencies, but balked when Democrats insisted that the cuts be made in defense as well as non-defense spending. But the issue over which the Biden negotiations broke down was the insistence by the Democrats on tax increases, as a matter of political principle. This prompted House Majority Leader Eric Cantor to lead a Republican walkout, followed by a flat declaration by Senate Minority Leader Mitch McConnell that tax increases of any kind were simply not the subject for discussion at this point.




The tax increases suggested by Biden were taken from the same “menu of options” which Obama suggested in the budget message he sent to Congress in February. They are meant to generate more than $400 billion in tax revenue over the next decade. They include limiting the value of tax deductions for the wealthiest families, changing business tax rules on inventory, and the elimination of the tax advantages for owners of corporate jets, the oil and gas industry, and hedge fund managers. The Republicans rejected those proposals four months ago, and found nothing in the Biden talks that would make them change their minds.


“The disagreement remains over hundreds of billions of dollars in tax hikes that Democrats are trying to impose on individuals, small businesses, and employers,” Cantor’s spokesman said after he walked out of the talks with Biden.




Obama’s one-on-one discussion with McConnell was meant to take the negotiations to the next level, and lead the way to a deal on a compromise that would allow for the required increase in the debt ceiling before the end of the month. But Obama had nothing new to offer, prompting his mean-spirited outburst at his press conference last week meant to shift the blame for the impasse to the Republicans.


Obama campaigned for president three years ago on a promise to heal the nation’s political divide. Instead, Obama heaped political abuse on the Republicans, saying that his two young daughters were more conscientious about doing their homework than the Republicans in Congress were about doing the nation’s business.


He accused the Republicans of protecting “millionaires and billionaires” in a classic “soak the rich” argument meant to distract public attention from the simple fact that the current federal tax code is so complicated and full of narrowly drawn provisions that it is inherently unfair, and that any attempt to further tweak it to raise more tax revenue would just make it worse.


In addition, the Republicans point out that the specific tax increases which Obama is calling for would only further hobble the recovery and slow the growth of job creation, which is the single highest priority in jump-starting the American economy. Obama’s call for increasing taxes on successful American industries, such as the business jet makers, would just cause the loss of more high-paying American manufacturing jobs, and raising tax rates on high income earners would just reduce the capital available to small business owners to reinvest by creating more jobs.


Democrats have tried to blame the deadlock on the raising of the debt ceiling on a Republicans commitment to protect the tax advantages of the wealthy and the corporate elite to the very end, but that is not true.




At least three senior Republican senators have said that they might consider raising the total amount of government tax revenue as part of a debt ceiling deal, but only if it is part of broader reform of the federal tax code intended to reduce overall rates by eliminating many of the current special tax breaks. However, they warned that time was running out to enact such a comprehensive tax deal.


Republican Senator John Cornyn of Texas, said, “I think it’s clear that the Republicans are opposed to any tax hikes, particularly during a fragile economic recovery. However, when he asked rhetorically ”Do we believe tax reform is necessary? I would say absolutely.”


His only caveat was an insistence that any changes in taxes be “revenue neutral,” meaning that, as a whole, the government would not take in any more money from taxes than it does now.


Senator John McCain and his colleague, Senator John Kyl, both of Arizona, went even further than Cornyn, saying that they would be willing to consider some “revenue raisers” as part of a broader deal on tax reform.


But both McCain and Kyl feel the emphasis must be on cutting government spending. McCain noted that eliminating the tax breaks that Obama mentioned in his press conference would have only a negligible impact on deficit, and defy the will of the voters.


“The principle of not raising taxes is something that we campaigned on last November, and the result of the election was that the American people didn’t want their taxes raised and they wanted us to cut spending,” McCain said in a broadcast interview.


This was in contrast to Obama’s statement at his press conference that, “every single observer who’s not an elected official, who’s not a politician,” agrees with him on the need to raise taxes as part of any deal on increasing the deficit ceiling and balancing the federal budget.




Obama’s mean-tempered press conference accusations, and his inability to make any progress in negotiating a deal with Republicans to resolve the looming debt ceiling crisis can be seen as a measure of his failure as a national leader. That failure has become more critical as the August 2nd deadline nears.


Both sides would prefer an agreement on an increase in the debt ceiling that would put the subject to rest until after next year’s election. However, some observers are saying that it is already too late to negotiate and finalize a comprehensive debt ceiling deal that can be passed by Congress before the deadline.


They argue that it might be best, once the basic outlines of a debt ceiling deal are in place, to pass a temporary debt ceiling extension that would allow adequate time for the final legislation to be carefully written and reviewed before a final vote is taken on it. The down side of that proposal is political. It would require senators and congressmen to go on record a second time on an issue which is sure to irritate at least some of their supporters.


But others, like Democrat Senator Charles Schumer, say that there is still time to reach a deal on a last minute compromise to resolve the debt ceiling crisis. “The way these things work, there’s a lot of two steps forward, one step back,” Schumer said. But others suggested that Obama’s harsh press conference statements about the Republicans had made reaching a last minute deal much more difficult. Without a viable solution of his own to present, Obama seemed to be deliberately trying to goad GOP leaders with his inflammatory accusations.




Obama accused GOP leaders of taking vacations while the debt crisis threatened the country’s economic security, and that by doing so, they were showing less maturity in dealing with their responsibilities than his 12-year-old and 10-year-old daughters. Obama ignored the fact that his fellow Democrats who are still in charge of the Senate have largely the same summer work schedule as the Republicans running the House. He also had no new suggestions to offer about how to get around the fixed positions on the tax hike and entitlement reform issues on which both sides have dug in their heels.


Obama was also dismissive of those who have criticized his refusal to respect the limitations imposed by the War Powers resolution on the US military involvement in Libya, and suggested that the criticisms were politically motivated, even though many of them come from members of his own party. He also suggested that those who have called the continued US military involvement in Libya illegal were trying to protect Moammar Gaddafi.


Obama’s unusual petulance and combativeness at his press conference led CNN’s chief political analyst, Gloria Borger, to question what purpose the gathering served other than to give the president another media forum in which to browbeat his Republican opponents. She noted that one thing the press conference did not do was to “lead” the country toward a way out of the looming debt ceiling crisis. Instead, Obama’s bitter words only served to make the crisis worse.




Some have suggested that Obama’s newly aggressive tone was an attempt to answer a growing chorus of criticism within the Democrat left wing that he has been too soft on the Republicans, and that he does not have the courage to fight back when he and his policies are attacked. Some on the left wing were disappointed that he wasn’t even harsher, but most commentators concluded that if his intention was to try to intimidate the Republicans, and convince them to cave in on their demands for a debt ceiling deal, he failed.


He warned Republicans that if they did not back down on their refusal to accept new taxes aimed at the wealthiest Americans, the voters would hold them responsible for the effects of failing to reach an agreement on extending the debt ceiling, such as causing reductions in college scholarships, medical research and Medicare benefits.


At the same time, Obama said that he believes that in spite of the debt crisis, he can still increase federal spending on education, research and technology that leads to job creation, all paid for by increasing taxes on the rich.


But GOP House Speaker John Boehner was adamant in insisting that, “the new majority in the House is going to stand with the American people. A debt limit increase can only pass the House if it includes spending cuts larger than the debt limit increase; includes reforms to hold down spending in the future; and is free from tax hikes. The longer the president denies these realities, the more difficult he makes this process. “


So, while Obama challenged congressional Republicans “to do their job. Now’s the time to go ahead and make the tough choices,” Boehner was telling the president that if he expects one of those tough choices to be an agreement to increase taxes, he is living in a dream world.




Borger expressed surprise that the president called a press conference, “without anything much new to say on possible ways get to a deal to raise the national debt ceiling. . . What might actually have counted as news is if the president, as the nation’s leader, had proposed a definitive way out of the budget mess — or at least drawn some lines in the sand.”


That did not happen. Instead, at his press conference, the president offered what sounded like empty campaign sound bites rather than hard answers to difficult questions about entitlements, taxes and setting national priorities. In venting his frustrations at the Republicans, he all but announced that his debt ceiling talks with them had collapsed. It was, in fact, an admission of his failure as a national leader, and that other than by trying to bluff the Republicans into backing down on their no-tax demands, he had no viable way to reach an agreement with them on a debt ceiling compromise before the deadline.


Obama is now playing a cynical game of political chicken with the Republicans, in a test of wills as to which side will blink first as the level of the country’s deficit spending nears the debt ceiling precipice.


In contrast, Republicans now seem eager to tackle the roots of the deficit problem by undertaking a thorough overhaul of the tax code that would result in real reform and lower overall tax rates, in addition to reducing government spending. However, that will require taking on all of the special interests who benefit from the exemptions and special provisions which have turned the tax code into such a complex and unfair monstrosity. The newfound Republican political courage to do that is the result of the demands from the grass roots of the Tea Party movement.




As we saw in the White House reaction to the Simpson-Bowles recommendations, the Obama administration and the Democrats are unwilling to even think about tackling that challenge. Some Democrats say that Obama will address the deficit problem only after he is safely re-elected. However, his conservative critics suggest that Obama is too strongly committed to big government spending programs to ever make a serious effort to bring the budget under control.


In the meantime, all Obama has to offer millions of Americans still desperately seeking jobs are piecemeal efforts to stimulate the sputtering recovery which all have one thing in common: they call for increased spending which would increase the budget deficit. In other words, they would all make the fundamental deficit spending problem even worse. These include Obama’s suggestions of possibly extending this year’s 2% payroll tax cut, or permanently extending the Bush-era tax cuts, but only for the middle class.


This is the same kind of deficit spending that was at the heart of Obama’s 2009 stimulus package. The full extent of its failure was highlighted by a report released last week by the White House Council of Economic Advisors. The good news from Obama’s economists was that they believe that the stimulus added or saved just under 2.4 million jobs, a claim we’ve heard many times before, and which is almost impossible to document. The bad news was that those jobs cost the taxpayers $666 billion to date, which, when you do the math, comes out to a cost of $278.000 per job. This leads American taxpayers to the next obvious question: Did we get our money’s worth?




But there is more. The report also concludes that at this point, two and a half years after the stimulus bill was passed, its net effect on the US economy has turned negative. Over the past six months, the side effects of the stimulus have resulted in a net loss of 288,000 jobs. How is this possible?


Obama has already admitted that very little of the stimulus money was spent as advertised, to pay for “shovel-ready” infrastructure projects which would improve long-term productivity and make a lasting contribution to the American economy. Instead, a lot of the stimulus money was used to cover huge state and local government budget deficits, allowing them to keep on the payroll government employees whose salaries could no longer be covered by tax receipts. The stimulus money was used to keep these dead jobs on life support, with the knowledge that when the stimulus money ran out, the people would have to be fired anyway. As a result, now that the stimulus payments to states and local governments are ending, the plug has been pulled on 288,000 jobs whose regular funding disappeared two years ago, and never returned.


In his press conference, Obama admitted that further stimulus proposals only make sense in the context of a substantial deficit reduction package necessary “to restore business confidence and the confidence of the American people that we are on track.” However, piling more taxes onto American businesses is no way to restore their confidence, and the latest polls show that the American people have no confidence at all in Obama’s ability to handle the economy.


Even seasoned economists are becoming alarmed at the economic policy gridlock that Obama has brought to Washington.




Former Federal Reserve chairman Alan Greenspan is now openly calling upon Obama to step up to the challenge of resolving the partisan divide over the cure for the deficit because he fears that otherwise the leaders of the two parties are now too far apart and entrenched in their positions to reach agreement on their own by the August 2nd deadline.


When asked directly by Aspen Institute president Walter Isaacson whether Obama has fulfilled that role yet, Greenspan replied, “Not really. I think the whole expectation is that somebody’s going to blink. I’m not sure that’s the case.”


Greenspan then described a grim scenario if the two sides can’t agree on a debt ceiling extension in time.


“This is a hard-wired event,” Greenspan said, explaining that once the deadline hits, the government will have only a few days before the situation spins out of control. “On the open of business on the day when we are locked into no borrowing,” he said, “the question as to who and how [the funds] are distributed has got to be judged by somebody. The trouble with that is that it’s a political hot potato.”




Treasury Secretary Tim Geithner will be forced to decide whether to use the available tax funds to make debts service payments, pay Social Security benefits, cover the federal costs of Medicare and Medicaid, or all of the government’s other day-to-day operating bills, including the paychecks for federal employees. One thing is certain, with taxes covering only 60% of federal spending, he will not have enough money to pay all of them.


Greenspan said that, “No secretary of the treasury … can allow the federal debt payments to lapse. “Medicaid and Social Security and defense … will be up for question–which is prioritized and to which extent–and there will be a horrendous set of arrears. There will be a lot of bankruptcies [by those dependent upon federal government payments].”


Regarding other economic policy issues, Greenspan repeated a suggestion which he has made before, that all of the Bush era tax cuts, including those for lower and middle income taxpayers, be allowed to expire, returning to the higher tax rates of the Clinton era for everybody; in order to generate enough tax income to balance the budget.




Greenspan also said that he has still seen no evidence that Obama’s economic stimulus package or current Fed chairman Ben Bernanke’s loose monetary policies have helped the economic recovery.


The former Fed chairman said that in dealing with recessions, the more “the government tries to make it painless, the worse it gets. Go back and take a look at the forecasts at the beginning of the Obama administration. They have been consistently significantly overestimating the growth in the economy despite the fact that every textbook type of suggestion for what you do [to boost the economy] has been employed … It’s failing and it will continue to fail … There is another option out there. It’s called ‘doing nothing.’ ”


Turning to other financial problems, Greenspan said that in the long term, there is no way to make the embattled euro into a viable currency and that despite all the bailout efforts, the Greek government is ultimately doomed to default on its debts. Greenspan also predicted that China’s rapid growth will eventually be slowed by high inflation and other difficulties.




One of the people in the audience at the Aspen meeting was former Senator Alan Simpson, who agreed with Greenspan’s predictions of economic chaos if the national debt ceiling is breached, but used far more colorful language. “That day we will have robbed the last piggy bank, drawn the last crumb out from somewhere under the bed,” Simpson said. “This is going to be greatest game of chicken you’ve ever seen.”


He predicted that every American citizen now benefitting from a government program will be adversely affected if the debt ceiling is reached. “Everybody in America will have skin in the game, and the fun and games will be over in the next six months to a year.”


The problem at this point is that time is fast running out for a compromise to prevent the debt ceiling from precipitating another economic crisis with worldwide ramifications. Furthermore, the solution requires both sides to cooperate.




With both sides being dug in to their positions, former Republican congressman Slade Gorton suggests that it is up to Obama to make the first move in breaking the impasse.


“The necessity for leadership does not end with Barack Obama, but it does begin with him. Only when the president is willing to announce that he understands the depth of our problems and that they require a course change that he had not previously contemplated can he seriously ask Republican leaders to do the same, to join hands with him and to dive into very cold water together,” Gordon said.


Washington Post economic columnist Steven Pearlstein, adds, “The problem is that this generation of political leaders has become addicted to brinksmanship. If all that matters is for your side to ‘win’ . . . then declare that the talks have reached an impasse, you’re not willing to give another inch and walk away. . . The idea is to demonstrate you are willing to be more irresponsible than the other guy, which is the level to which political leadership in American has now degenerated.”




How Did It Happen?

      Once again, we have seen that we are living in historic times. Very rare occurrences are transpiring on a regular basis, dramatically

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    Treading Water Anyone who’s ever taken an advanced swimming test knows the drill. Along with demonstrating proficiency in all types of swimming strokes

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