Posts Tagged ‘economics’

With Apologies, But I Am Off On A Tear

In which I go off on an economic and political tear.

So, post news cycle, last evening, it was announced that President Obama has reached a “compromise” with the GOP over tax cut extensions for the wealthy. The compromise is tax cuts for the wealthy will be extended for another year, along with a 2% reduction in payroll taxes across the board (payroll taxes help fund social security and Medicaid, by the way), and in return, the GOP will approve the extension of unemployment benefits for an additional 13 months. Everyone gets what they want and no one really gives up anything, which is exactly what compromise means in Washington.

And all this is paid for how? Adding $900 billion to the national debt over the next two years.
The New York Times says:

The package would cost about $900 billion over the next two years, to be financed entirely by adding to the national debt, at a time when both parties are professing a desire to begin addressing long-term fiscal imbalances.

Here’s what bothers me about it all. All those Republicans and Tea Partiers who got elected last month did so on the premise of cutting government spending and curbing the reach of government. But that all went out the window the minute they were elected. The proof is in the pudding; all their rants about out-of-control government spending and the national debt was just an act, all part of the election circus.

What does this mean for you and me? For John Q. Public and Jane C. Doe? Well, the tax cuts we have been enjoying the past couple of years will continue. For the so-called “Nintey-Niners,” those unfortunates who have been unemployed for 99 weeks or more, their benefits are turned back on and they are kept, hopefully, off the streets for 13 more months. All great news, right?

Sure. Yes. Absolutely it is good news that fewer people will lose their extensions and lifelines. Absolutely it is good news that everyone will get a little extra breathing room in their budgets next year.

But remember that another almost trillion dollars (why not round up, right?) added to the debt means another almost trillion dollars we will owe someone else, that has to be paid at some point, and paid with interest. Some would argue that that is not a big deal. The US dollar is the world’s reserve currency, very low risk, and we have great interest rates on our debt. What’s a little more debt on top of our piles of debt if it saves us some pain right now? Well, ask Greece. Ask Ireland. Ask Portugal and Spain how it feels to be constantly in the news for their crushing debt and increasing spreads on their bonds. The higher our debt rises, the greater the risk that there will come a day when we cannot pay our debts, and the greater that risk, the more interest our debtors are going to want for taking the risk on us. Rising interest rates combined with a reduction in value of our currency equals economic pain and austerity for you and me. In fact, the ONLY thing saving us from European-esque austerity measures is the fact that Europe is struggling more than we are at the moment, increasing the value of US dollars over the Euro.

So maybe we will see an extra thousand dollars in our net income next year, but if inflation continues to rise on energy and food prices (not included in the flat CPI figure that Ben Bernanke goes on about) because of weakness in the US dollar or speculation by nervous investors, then what good will that $1,000 be? In case you aren’t in the group that believes that commodity prices are rising, I offer you this site that gives you a nice visual of how prices are moving. Prices are going up. Gold and silver are at record highs. Investors buy precious metals when they have lost faith in fiat currencies; it is telling when investors are shedding dollars and euros, and putting their money into metals that tend to hold value but will not earn them interest.

Perhaps the most important thing about this compromise between President Obama and the GOP is it exposes the deep running hypocrisy of both parties. Republicans sold out in a minute to make sure those people making $250,000 and more in a year do not face higher taxes. And President Obama did too to make sure those people who have been unemployed for a year and a half or more don’t lose their lifelines, but neither do they have any extra incentive to take whatever work they can get. Neither side addressed the budget deficit that everyone in Washington was so rabid about all year leading up to November. Sure, they have made some rattling about cutting spending. Federal employees are not getting raises anytime soon, as if that makes a huge dent in the deficit, but Congress will. It must take a serious pair of brass ones to vote to approve a pay freeze for the people who work for you, and vote yourself a “cost of living” increase, too.

Oh, and one more thing. Unemployment is expected to remain around 9% throughout 2011, which is terrible. And this latest extension of unemployment benefits are scheduled to expire when, now? Thirteen months after this is approved, so what, January or February of 2012? What’s special about that time period? The 2012 presidential election cycle kicks into high gear at the same point. If in December 2011, unemployment is still 9.1% (just an example), and a massive number of people are on federal extended unemployment benefits, what politician facing re-election in the coming months will vote against extending unemployment again? Likewise, if unemployment is still high and the economy is still anemic, what politician is going to vote against extending the tax cuts even further?

How far are we going to kick this debt can down the road?

And how can I face another election cycle of politicians on both sides declaring incessantly that things will be different when they are elected, when we all know, and have perfect proof that nothing ever changes?

Edited to add that Mike Shedlock has hit the nail on the head this morning and does a great job summing this all up while expressing the same frustrations I was.