There still seems to be a lot of confusion about what happened the other day on capital hill. The shutdown had been going on for a few weeks based the inability for the house and senate to agree on a budget just as soon as that was running at a full boil, talk a the debt ceiling started up. American life as we know it was going to end, we’d all be living in mud huts eating dirt and dogs and cats would be living together. And then just as quickly it was all over. A budget passed. The debt limit increased. Nothing to see here…move along.
I have no inside line into why the change was so sudden, but I do think its important to understand a few basic things before having a discussion about who did what wrong. The first and most important thing to understand is that the government doesn’t actually produce anything. When taken as a whole and from an economic value add perspective they don’t produce – they only consume. This isn’t intended to be a value judgment, just a statement of fact. They don’t own factories, they don’t have mines, they don’t grow food. They are the original non-profit organization, but unlike any other NPO they have some unique fund raising opportunities.
So the government has no productive capacity, but it does have ever increasing obligations – both funded and unfunded. These obligations are owed to organizations the government funds directly (things like the military and administrative departments like the IRS, ATF or DHS) as well as government programs (like Social Security and Medicare). The organizations and programs are created by the passage of laws. Senators, representatives and the president pass the laws. It therefore stands to reason, by using some simple transitive logic, that it is the senators, representatives and the president that have created the obligations (some may argue that they “did it on our behalf” or “with our consent” – but that’s not really the point I am trying to make so if you’ll allow me, please put that aside).
What we seem to gloss over in all of this is that the obligations we are faced with today were not (for the most part) created by the men and women that occupy those offices today. FDR and the senators and representatives in place in 1935 created the obligation known as social security. LBJ and the senators and congressman in place in 1966 created the obligation known as medicare. And every president and congress since has simply added to the obligations for the simple reason that for them there is no downside and actually quite a considerable upside.
Imagine there were a really nice restaurant that had just opened up in your town. Everyone you knew that had gone there just raved about the food. You decide to try it out and make some reservations. On the night you arrive, the person seating you tells you that they are having some problems with their billing system so they won’t be able to get you a bill until at least 4 hours after you order, but that if you are done before then, no worries you can just leave. Wouldn’t you order the most expensive thing on the menu and eat it as fast as you possibly could? Our system of government sets up the same scenario for those elected to represent us.
In order to get elected a common approach has been to promise what you will do for people, the infamous campaign promise. While campaign promises have a well deserved terrible reputation for being only slightly more reliable than promises made in the back seats of cars near midnight, its not the ones made on the election trail that are of interest here. Its the ones made behind closed doors, when a serving representative, congressman or even president is trying to build their war chest for re-election. There is a huge incentive for them to retain their seat and to do that they need money. The only thing they have of value to exchange for money is a promise to help the person giving them the money. So the promises are made, the donations are received and obligations that the beneficiaries of the exchange will never have to pay are created.
But what does all this have to do with the magically disappearing budget and debt ceiling issue. To understand that, you have to look at the other side of the obligations, or how they get paid for. As I’ve already established the government doesn’t have a productive capacity, but unlike other charities, it has some special ways to raise funds to cover its obligations. Specifically, the US government has the ability to tax, plunder, borrow, or print.
The real question that each specific president and congress must wrestle with is which of the four do you use to keep funding all the past obligations in order to give you a free path to create more obligations (that future presidents and congresses will have to pay for) so that you can get re-elected? Taxes is off the list from the start – remember they want to get re-elected and no one in their right mind is going to vote for someone that raised their taxes. They tried to get some plunder going about a month ago, but a vocal majority of citizens and a former KGB officer foiled those plans. So that leaves printing and borrowing, which since the creation of the federal reserve have been closely linked and have become indistinguishable since the start of QE infinity.
So I imagine the conversation went something like this (again this is completely hypothetical and imagined…I don’t even know anyone in DC…and I never claimed to be a great writer of dialog…or anything else for that matter):
Speaker of the House: “Those tea party republicans are getting pretty strong, huh?”
Moderate Republican Rep who is caucusing with the so called Tea Party republicans: “Yeah, I guess”
“So what do you think is going to happen in the mid-terms if they win this one?”
“What do you mean?”
“Well, you are pretty moderate so how well do you think you are going to do if you constituents get the idea that those Tea Party guys can actually get stuff done?”
“uhh…not sure…”
“Well, I am sure and it ain’t pretty. But I can help you with that. If you can throw a yes vote towards H.R. 2775 then not only will you show those folks at home that the Tea Party guys are whack-jobs but you also might be able to secure a few PAC donations to your reelection fund. Its a win-win for you – you win twice!”
Moderate Republican Rep who is no longer caucusing with the so called Tea Party republicans: “I think we have a deal”
The future is scarified for the present. Dinner is served.
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