Ages ago, at the dawn of politics, by which I mean in late 2008, our country had just finished an election cycle of historic significance. Collectively, we knew that we needed something or other that fell under the term “change,” and that’s what we voted for. Along came the 2010 mid-term elections, and we felt confused and anxious. Somehow the meal of change we had voted for last time didn’t taste as good as we were expecting it to. We sent the plate back to the kitchen and asked the chef to prepare us a fresh plate of some other kind of change. Now, as the 112th Congress takes office, we can ask ourselves, exactly what is the chef whipping up back there?

In our hearts, I think we know that our change needs to embrace a new kind of fiscal restraint at the federal level. It’s hard to define, but deep down we know that annual trillion dollar-plus deficits, with federal debt now exceeding $14 trillion, just cannot be sustained. In fact, we voted in great numbers for those candidates who promised such things as “balancing the budget” and “reducing the federal debt.” But that was in the campaign season. As someone (Nixon, I think?) once said, one campaigns in poetry and governs in prose.

What do we know so far about the governing reality? One, we know that our elected officials chose lameduckedly not to capitalize on an opportunity to reduce future deficits — foregoing an opportunity to reduce our federal debt over the next decade by $2.7 trillion. Not that there weren’t good reasons for doing so, but the action did display the stark tradeoff between tax cuts and deficits.

Two, we know that House Republicans intend to trim $100 billion in spending from the next budget. Well, if one is a deficit hawk, I suppose you can at least say that points in the right direction. The federal government spent $6,412.7 billion in FY 2010. So the Republican idea is, apparently, to move us to the $6,312.7 billion annual spending level, an overall reduction of about 1.6%. Personally, I find it hard to discern why spending $6,412.7 trillion (and incurring a deficit of $1,555.6 trillion) is catastrophic, while spending $6,312.7 trillion (and presumably incurring a deficit of $1,455.6 trillion) — each amount being $100 billion less than FY 2010 — is good policy. Seems kind of like saying, you can eat 20 donuts a day and not gain weight… but if that 20th donut has sprinkles on top, then you’re going to rush headlong into morbid obesity.

Three, Republicans are putting a lot of stock into Rep. Paul Ryan’s fiscal “Roadmap.” I like his roadmap, at least in concept; like any smart politician (campaigning in poetry, as I said), he leaves the details fuzzy. But we also must understand how greatly the Roadmap departs from the campaign rhetoric. Taken at face value, the Roadmap envisions non-stop federal deficits for the next 41 years. Those deficits will decline annually until 2017/2018, and then will start to increase again, and will do so through 2037.

Let’s state the fiscal reality out loud, my friends. The Republican plan does not balance the budget. It does not reduce federal debt. It contemplates nearly endless deficits and non-stop additional federal borrowing. That’s not me saying it, that is what is in Rep. Ryan’s Roadmap. If anyone still thinks that deficits and debt accumulation are a function of recent Democratic policies, they are wildly information-averse. These deficits are structural to the core. They are the result of decades of entitlement spending growth and tax cutting.

If there is any remaining doubt that governing reality will fail to match the political rhetoric, let’s all watch today as the new House Republican leadership has the U. S. Constitution read on the floor of the chamber. There’s another bit of powerful campaign poetry: “Restore the government to its constitutional boundaries!!!” Really? Keep a list in the weeks to come of federal programs the Republicans deem unconstitutional and therefore targets for elimination. Then ask yourself, if those programs fail to pass constitutional muster, on what basis do these programs pass: Social Security? Medicare? Medicaid? Food inspections? NASA? National Parks? DEA approvals of prescription drugs? The EPA? Nursing home oversight? Financial market regulation? Are Republicans really going to propose elimination of all these federal programs? Or they are somehow constitutional, but “Obamacare” is not? Where is the line???

In other words, if the Republicans sincerely believe in strict constitutionalism, then go after them all. But if they only target a select few programs, then we will know that their actions are driven by political calculations, and not by true constitutional principles. Another plate of “change” served up to us that ends up being inedible.

Tune out the rhetoric. It is meant only to deceive and pacify you. Observe the actions, and assess the results.

My close friend Todd and I have a running political debate about the legacy-in-the-making of Pres. Obama. This debate dates back to a wee hours of the morning dinner in Vegas after a full day of watching the Mosley – Mayweather fight and playing countless hours of poker, but please overlook its dubious origins, as I do.

Todd is fond of ticking off the legislative accomplishments of the past two years. Stimulus, healthcare reform, financial regulation reform, and here of late, the tax cut extensions, START treaty and repeal of Don’t Ask, Don’t Tell. Personally, I have strong disagreements with some of these accomplishments. I think the healthcare reform that finally passed is a bizarre amalgamation of ideas that somehow collectively fails to address either imperative facing us: the imperative of universal coverage and the imperative of cost containment. Todd would say that presidents have tried and failed (or not even tried) for decades to address this issue, and Obama should be lauded for getting this done. True, but ultimately there is something not at all satisfying about the result. I also rather dislike the recent tax cut extension legislation, for its devastating impact on current deficits.

But I do give Todd his due. Obama’s legislative accomplishments have been astonishing. Where Todd and I begin to part company is the long view. It is Obama’s failure to capture the zeitgeist of America these days, or, perhaps better said, having briefly captured it, his failure to keep hold of it and shape it. There was a window, roughly from the time that he vanquished Hillary Clinton in the primaries until the Republicans seized control of the healthcare debate narrative, during which Obama was perfectly aligned with America’s mood. His particular brand of political freshness and intellectual candor felt just right.

Since the end of that period, America’s mood has shifted rapidly while Obama’s pitch has not. This puts Obama’s legacy in peril. Already, a Republican-majority House of Representatives prepares to thunder into town with the very specific intent of clipping the wings of Obama’s healthcare program, his energy program, his budget vision, his financial reforms. Count me among those who believe Obama will win reelection, probably even handily. This is based on two core ideas: that the economy will continue to improve over the next two years, and that Obama remains by far the most popular policial brand in the country.

Even assuming his relection, though, I think the question is completely valid: What will remain of Obama’s legislative legacy after six more years? After 20? This is what I have been trying to express to Todd. Is it good enough if a president leads Washington through an amazing legislative agenda, only to find that the country hasn’t deeply embraced the political values needed to sustain that work? For example, Pres. Bush led us through a dizzying recalibration of the national security/personal liberty tradeoff in the wake of 9-11, telling us — correctly, in my opinion — that this required a multigenerational commitment to defeating the forces of radical Islam. Yet less than a decade later, our personal liberty values are once again overtaking our national security concerns, as support is dissipating for everything from military action in Afghanistan to aggressive TSA screening procedures. It seems to me that Bush was more successul at getting the policy implemented than he was at forging an enduring national consensus around those policies.

That sounds like Obama. I contrast both Bush and Obama with two presidents who I think transcended these political boundaries. The first was Franklin Roosevelt. Of course he sheparded a staggering remaking of the legislative map in the 1930s, but he went far beyond that. He ushered in five decades during which his progressive vision dominated the political landscape. Through presidencies Democrat and Republican, the nation consistently reflected that progressive mentality, with a willingness to employ the powers of government to shape our economic and cultural lives. The result was the creation of the broadest, strongest middle class in history of the planet.

Similarly, Ronald Reagan came along, and his message of the danger of overextended government has remained the single most dominant theme in American politics for three decades now. Even with mostly Democratic control of Congress during those years, and the presidency of Bill Clinton, Americans have remained solidly committed to this defining principle. Voters proved this in 2006 and 2008, brusquely shoving aside even Republicans, usually reliable partners of the limited government ethic, for their failure to adhere to the creed.

This brings us to the Obama question. Is he merely the next in a succession of elected leaders consigned to operate within the Reagan framework, or is he the first in line to set the nation on a new political course for the decades? Obama’s curse may be that his unmatched rhetorical skills during the campaign gave us a tantalizing whiff of being the next FDR or Reagan. He felt transcendent. But so far, despite his towering legislative achievements, he has not transcended. That’s not a horrible indictment. Lyndon Johnson and Bill Clinton would be listed among such competent presidents who rode their respective existing waves to considerable policy advancement.

Five years from now, or ten, or twenty, the nation will face challenges that demand courageous, thoughtful, far-sighted action by our government. Today’s political reality is that, shaped by the Reagan legacy, we are not disposed to trusting our government to do so. If Obama is able to transform the landscape, give back to us a willingness to invest our government with confidence and optimism, then he will have transcended the political conventions of his time and ushered in a new era. Otherwise, we will face these challenges with the underpowered armature of a Reagan-era viewpoint.

I hope he succeeds. I haven’t seen it yet. Lots of important legislation, Todd, but not that.

It has been four  five six days since the mid-term elections, and during that time I have started and abandoned four six seven different posts on that topic. So many different emotions have filled me. I may have needed at least little space to make better sense of them. A fable (kind of) to start off…

Once, there was a group of three Mexicans who set out on a fishing boat to catch sharks.  However, their boat soon experienced adverse winds and mechanical difficulties, and they were lost at sea. The fishermen existing on nothing but raw fish, rain water and the tiny amounts of additional fresh water they could condense and trap. Finally, after nine months and nine days, they were picked up by another fishing vessel, some 5500 miles from where they had started. (True story)
Of course, the Mexican fisherman were malnourished and emaciated. The captain of the ship that rescued them, a Democrat, immediately ordered that a sumptuous feast be brought forth for the starving men. They ate and ate until they had had their fill, gorging themselves on rich roast meats and delectable baked goods and every manner of decadent indulgence.
The First Mate of the rescue boat, himself a Republican, thought ill of the captain’s plan, however. He immediately dashed off a wire to the corporate office, complaining that the feast had ruined the food budget for the vessel’s entire trip. What is more, he strenuously objected to the eating habits of the rescued men. “They ate with reckless abandon,” he reported. “Plate after plate of rich, fatty food. To eat like that only will lead to grave ill health — obesity and heart disease and diabetes and worse. This must be stopped immediately,” he concluded.
The corporate managers summoned the boat back to the harbor, and launched an inquiry into the captain’s actions. They heard evidence from nutritionists and health experts, who confirmed the First Mate’s fears. No one could remain healthy on such a diet as this, they concluded. The captain was reprimanded for his poor judgment, and ordered not to pick up any more lost fisherman for the remainder of his commission. The next day, he apologized to the corporate managers, although many, including the First Mate, felt that he still didn’t really ‘get’ it. They vowed to watch his every move with great vigilance, lest his insidious plan come to pass, and every fisherman on the sea become obese and unhealthy.

And that is where I find myself after the elections. I am not disheartened that the electorate has focused its attention on putting America on a healthy diet. I am disheartened that the electorate seems not to have distinguished between the necessary government actions to turn back a catastrophic recession — a spending “feast” fed to starving fishermen, if you will — and the long-term fiscal realities that we must face.

Somewhere, somehow, successful candidates managed to turn the government’s response to the recent economic crisis upside down. Not only did they portray the government’s response as ineffective, they managed to sell it as the cause of the crisis. That is absurd. Without the Bush/Obama TARP and stimulus interventions, today unemployment would be much higher, and economic growth would be much weaker (perhaps even the economy still contracting), and bankruptcies and mortage defaults would be at even higher levels, and government spending (on safety net programs) would be considerably higher, and government receipts would be much lower (on a smaller economy; all capital losses, no gains), and federal deficits would be much higher, and federal debt would be growing much faster.

But that’s not what seemed to be in people’s minds last Tuesday. Voters seemed to think that runaway spending and an expansionist view of government had created the economic crisis, had created the huge deficits and growing federal debt.  They seemed to be oblivious to the reality that the campaign promises of many of the newly elected — to move immediately toward cutting spending and balancing the budget — likely would push the fragile economy right back into recession, economic contraction, job losses and all the woes that derive from that.

I would love to have an honest debate in this country about the proper size and scope of government, about how we really do address structural over-spending; about how to use tax policy to most effectively promote economic growth. Unfortunately, the mid-term elections were not that debate. They were a debate between the cynical fantasy of the minority party (to cut taxes and cut spending so as to balance the budget, all to end the current recession) and the naive oblivion of the majority party (failing to put forth a necessary agenda to address the country’s long-term structural deficits).

Gahhh.

Do you consider yourself a limited government type of voter? Are you looking for a path to find the political solution to runaway government spending? I am here to provide a word of caution. Consider, please, these facts:

  • Ronald Reagan: Federal spending in 1981 (the oldest year I have comparable data for) = $697.8 billion. Federal spending in 1988 = $1,066.9 billion. Average annual increase: 6.3%.
  • George HW Bush: Federal spending in 1988 = $1,066.9 billion. Federal spending in 1992 = $1,427.8 billion. Average annual increase: 7.6%.
  • Bill Clinton (pre-Gingrich with Democrats in control of the House): Federal spending in 1992 = $1,427.8 billion. Federal spending in 1994 = $1,463.0 billion. Average annual increase: 1.2%.
  • Bill Clinton (with Gingrich & Republicans in control of the House): Federal spending in 1994 = $1,463.0 billion. Federal spending in 2000 = $1,788.6 billion. Average annual increase: 3.4%.
  • George W Bush (with Republican control of Congress): Federal spending in 2000 = $1,788.6 billion. Federal spending in 2006 = $2,659.2 billion. Average annual increase: 6.8%.
  • George W Bush (with Democratic control of Congress): Federal spending in 2006 = $2,659.2 billion. Federal spending in 2008 = $3,145.3 billion. Average annual increase: 8.8%.
  • Barack Obama First Year: Federal spending in 2008 = $3,145.3 billion. Federal spending in 2009 = $3,516.1 billion. Average annual increase: 11.8%.
  • Barack Obama Second Year (annualized): Federal spending in 2009 = $3,516.1 billion. Federal spending in 2010 = $3,445.6 billion (annualized using data through September). Average annual decrease: 2.0%.

All information sourced from http://www.fms.treas.gov/mts/mts.xls.

If the Democrats lose control of Congress in the November elections because Democrats have offered too little vision for how to address federal spending and long-term structural deficits, then that strikes me as a fair and reasonable outcome. The Democrats have not. Even if the election turns on competing visions of the role of government in addressing the needs of citizens — that is, if voters turn out Democrats because they somehow prefer the current healthcare system to that recently enacted, or they decide they’d rather hope for the best and take no action on global climate change — well, I disagree with those positions, but at least that would be a fair outcome of a fair debate.

If the Democrats retain control of Congress in the November elections because of their policies reversed the catastrophic recession conditions the country faced in 2007-08, then that also is fair and reasonable.

But if the Democrats lose control of Congress because voters blame them for the current lethargy in the economy, that is an unfair and unreasonable outcome. Yet that seems to be exactly where the electorate is right now. What exactly are the objectionable economic policy actions of the Democrats, anyway? That they enacted the biggest tax cut in history? That they put forth stimulus funds that created (or “saved”) an estimated 3 million jobs?

The accurate way to look at it is that a huge economic tsunami was coming at us, and Obama hastily built a levee that mitigated the damage. Was it a perfect levee? No. But we must remember that the tsunami was coming either way. If Republicans had controlled Congress in 2009, and had pursued policies akin to what they are campaigning on now, what would have been the result? No levee at all. Job losses, which had been running more than 700,000 per month at the time, would have continued longer and deeper. The economic contraction would have lasted longer and been more severe. Budget deficits, which are driven by the recession, would have been worse. We would have absorbed the full brunt of the tsunami.

So if the Democrats lose over their handling of the economy in the short run, that’s just wrong.

The economy sputters on. Meanwhile, our elected leaders debate what to do about it, in fact, much of the ongoing midterm campaign centers on it.

The Democrats, being in power, have already played their hand. The stimulus package of early 2009 was a grab bag of spending and tax cuts. [Not really the point of this post, but I’m so tired of the counterargument that “the stimulus failed, because they promised that unemployment would peak at 8%.” Any thinking person understands that the meaning of that presentation back in those days was that the stimulus package would lower the peak unemployment rate by about 1.5%. At the time, they estimated it would peak at 9.5% if no action was taken; hence, the stimulus would lower the peak rate to 8%. Instead, the recession proved to be much more severe, and so it peaked at 10%, versus 11.5%. Either way, every economic analysis supports the contention that about 3 million more Americans would be out of work today without it. Every counterargument I have ever seen is ideological, not economic.]

Republicans, being the minority party, have played the role of critic. As far as I can tell, the only policy prescription they have supported is the extension of the Bush tax cuts for the wealthy. There is also a lot of talk about “cutting spending” and “balancing the budget,” but I severely discount that talk. I discount it because: (1) cutting spending will weaken the economy in the short run. Spending discipline is a crucially necessary solution for the long term, but harmful in the short run — why, after all, do people think Congress never cuts spending? Because all the benefits are long term and all the short term impact is negative; and (2) I have watched the Republican party increase federal spending every time they have held power over the past 30 years, so, yeah, I don’t believe it. Anyway, that leaves the Republicans with tax cuts as their sole credible policy option.

Into this policy debate wades the intrepid CBO. They have analyzed 11 separate policy prescriptions. Of the eleven, extending the Bush tax cuts ranks dead last in terms of short term economic benefit. Why is this? Because tax cuts for the wealthy are a supply-side solution. The current weakness in the economy is based on low demand: people just ain’t buyin’ stuff. Tax cuts for the wealthy have little impact on consumption, because they tend to save the additional money, not spend it.

Think about it this way. The Republican argument is that economic growth depends on small business; that is where jobs are created. True enough. But why exactly does a small business owner hire the next employee? Because his tax rate is lower? No. Because he has more customers to serve. Period. I myself started a business in 2003, and now it has about 1000 employees. I can tell you that never once did we set our hiring plans around federal tax policy. “Hey, Bush cut my personal taxes… let’s go hire a few more people.” Nonsense. We hire whenever demand for our services outpaces the capacity of our current team to meet it. So, you fix the economy by creating more customers. Tax cuts for the wealthy fail to do that, so that is why it scores so dismally on the CBO analysis.

Back to the March 2009 stimulus package. Every Republican out there campaigning that the stimulus failed, and arguing instead for tax cutting policies, needs to explain why the $250 billion in tax cuts provided by the government in the stimulus package failed to work, and why more tax cuts would work the next time. Personally, my conviction is deep that the stimulus did exactly what it was supposed to do. Find me the maintstream economist who says otherwise.

My simple federal fiscal policy formula:

  1. Accept that these severe short-term federal deficits are an unavoidable consequence of many decades of spending growth, several decades of tax cutting, and the severe recession. It is unwise to sharply rein in these deficits until the economy is stably back on its feet. I define that as when job creation reaches the level needed to start making serious inroads into the unemployment rate — i.e., private sector job creation in the 250,000 per month range.
  2. Courageously attack long term deficits by starting to raise the Social Security/Medicare retirement age (but not for near-term retirees) and by tightening means-testing for Medicaid so that it is restored to its original purpose: a safety net for the indigent, not a middle class entitlement.
  3. In between, restore fiscal sanity by a formula of $2 of spending cuts matched to every $1 of tax increases. Real math, not Washington math.

Is that so hard? Apparently so, because I have not heard a single congressional candidate in this election cycle — not Republicans, not Democrats, not Tea Party folks, not libertarians — not one who espouses anything resembling a coherent fiscal message. This would be the time to do it, too, because for the first time in memory, the electorate seems to be ready to hear that entitlements need to be reformed. I don’t know about tax increases though. Most people still seem in denial about that stone-cold reality.