The end of budget scare politics

December 23, 2013

“Are you kidding me!” The cry of anguished disbelief from House Speaker John Boehner has brought down the curtain on a five-year-long battle over public debt that will not be lifted until the presidential election of November 2016.

There may be scuffles and there will be a good deal of wailing and gnashing of teeth, but members of the Republican leadership have concluded their attempts to pay down the massive federal government borrowing will be put on hold until they have control of the presidency and both houses of Congress.

This has been a long journey. America already owed a great deal when the financial freeze of 2008 sent the economy over a cliff. To save the nation — and the world — from penury not seen since the Great Depression 80 years before, George W. Bush’s Treasury team ignored the advice of many of their fiscally conservative supporters and proposed that $800 billion more be borrowed and spent without delay.

The incoming president, Barack Obama, took his predecessor’s advice and set out on a massive stimulus to keep the country he had inherited at work. It is one of the paradoxes of economics that to remain solvent, America had to go deeper in debt.

That lesson in how the world really spins came as a shock to many. To some it invoked anger. While ordinary Americans watched in horror as their homes became less valuable than the mortgages they were paying off, and as they tried to pay down their personal debt because they feared for their jobs, the thought of someone in Washington running up the tab on the people’s behalf caused fear that soon turned to anger.

The Tea Party sprang out of the realization that not only Democrats but mainstream congressional Republicans had fallen in with the Bush/Obama plan.

There was a more reasoned assault upon the logic of the economics being employed to halt the collapse of the economy that evoked the debate in 1931 between John Maynard Keynes, the British economist who believed the Great Depression could be cured by governments spending vast amounts of borrowed money, and those, like Friedrich Hayek, who warned that such profligacy would lead not to recovery but ruin. The new Hayekians preached austerity and paying down the national debt as fast as possible.

That quack prescription, favored by the rump of Tea Party members in the House, has now been abandoned. For a while, by repeatedly threatening a government shutdown, the minority dragooned their reluctant leaders into a series of pitched battles, each at root an attempt to slash government spending and prevent more borrowing. But after a series of public humiliations, the exasperated GOP leadership has called a halt.

The 16-day shutdown of the federal government in October, notionally to defund Obamacare but part of a wider plan to shrink the size of government altogether, ended in defeat and humiliation. Boehner’s wild-eyed riposte to those who wanted to repeat the exercise over the budget, and again in February over extending the debt limit, is acknowledgement that so long as they play fast and loose with the nation’s credit rating and threaten the jobs of federal employees, Republicans will lose public sympathy.

Boehner finds himself trapped like Aron Ralston, the hapless climber who had to hack his own arm off to free himself from being pinned between two boulders in a Utah canyon. Being pushed into the failed shutdown ruse — what George W. Bush’s chief strategist Karl Rove called “an ill-conceived tactic” that Republicans should reject — Boehner finally snapped.

Paul Ryan, too, who once boasted of his devotion to Hayek and Ayn Rand, has crossed over to the sensible wing of what has become known as The Stupid Party and in successfully negotiating the budget has committed what the anarcho-conservatives hate even more than Obamacare: compromise.

With the Republican leaders now at last displaying leadership, any chance of another shutdown has been written out of the script. And as the threat of shutdown is the only gambit left to a party that holds only a single house of Congress, debt talks are off the table.

The debt hounds have won some small victories: the 2011 Budget Control Act reduces the projected deficit by $2.5 trillion in the next 10 years and last year’s “fiscal cliff” bargain promises to reduce it by $600 billion over the same period. Ryan’s budget deal will only reduce the federal deficit by $23 billion over the next decade in an overall federal budget of over $3 trillion a year.

Yet over the past few months the federal deficit has been shrinking fast. Some of this has to do with the wretched sequester, the imposition of rash, arbitrary and painfully deep cuts to welfare and the military that was never intended to be implemented yet which the Tea Party insisted upon triggering and Ryan’s negotiations have tempered somewhat.

Some of the reduction has to do with the slow recovery, which is steadily putting people back to work, allowing them to buy goods from fellow Americans, take themselves off the welfare rolls and pay their dues through taxes. As time passes and the economy continues to improve, even more will be employed, the deficit will further reduce and debt will become less potent as a political issue.

So long as there is no shutdown, Republicans can concentrate on the issue they believe will work like a dream in the November midterms: the spectacularly incompetent rollout of Obamacare. The president has not only been let down by his own lieutenants who failed to see the disaster looming, then stood back and gaped as the process ground to a full stop, he has also been betrayed by his notional supporters.

For instance, Governor Andrew Cuomo’s New York State has a poorly designed, clunky website peddling private healthcare options, but the phone line is chronically short of staff, the waits for assistance are endless, the gizmo to load essential documents and the chatline is broken, and the whole shebang closed midday Saturday even though it was the last critical weekend to sign up. Little wonder that frustrated, angry independents are siding with Republicans.

So the GOP leadership has decided that, whatever the Tea Party absolutists may demand, tackling the federal debt can wait until later. The president’s decision in September to refuse to negotiate fiscal matters with those who wish him ill — “Let’s stop the threats. Let’s stop the political posturing. Let’s keep our government open. Let’s pay our bills on time. Let’s pass a budget,” he said in mid-September — has paid dividends.

For most of his presidency the president appeared to be under the illusion his personal charm could overcome the visceral hatred his extremist detractors have for him. He has now given up on being nice.

His resolution has exposed the intellectual paradox at the heart of the Republican party, exposing the fissure between the electable and the ideological, and driven a wedge between the GOP leadership backed by big business and the wild things of the Tea Party funded by dogmatically driven donors. It is an object lesson in what can be achieved if you stick up for what you believe in. 

Nicholas Wapshott is the author of  Keynes Hayek: The Clash That Defined Modern Economics. Read extracts here.

PHOTO: U.S. House Majority Leader Eric Cantor (R-VA) (L) and House Speaker John Boehner (R-OH) (R) stand together at a news conference at the Republican National Committee offices on Capitol Hill in Washington October 23, 2013. REUTERS/Jonathan Ernst 

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The 2008 Depression was not foreseen of prevented by any of the academics, media players or politicians who now claim to have solved all America’s economic problems. There is a good chance that the Federal Reserve has slipped permanently into the role of guarantor of the status quo. Will anyone hazard a guess as to when the Fed’s balance sheet will look as it did 10 years ago in 2004?

The establishment in America looks rather impotent and desperate these days as labor force participation rates sink year after year. In the United States as in socialist, Labor Party Britain, decades ago, long-term unemployment looks like the destiny of millions and our political class is running short of gimmicks.

John Maynard Keynes enjoys enormous prestige on the Left because he tells the comfortable rulers of free market societies who won’t do anything hard that there is no need to do anything hard–ever. Spend in good tmes because government can “invest” other people’s money better then they can. Take credit as visionaries. Spend money in bad times because the pump needs to be primed and government is more compassionate and wiser than anyone else. Shed a tear. Be sure the media records it. Head for a vacation in Hawaii after a hard day or two of managing the suffering of others–always, others–how convenient. Is this a great country?

The way the world “really spins” is that both parties must bleed people with no influence in order to buy-off people with big influence. People with big influence reciprocate, of course. Wapshott should be reading Machiavelli not Keynes.

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