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Democratic politics relies on deception. Without deception of the voters on a comprehensive scale, there could be no politics above the local level, where people know the deceivers personally and are therefore less easy to fool.

Basic to deception are symbols. Symbols serve politicians in much the same way as a red cape serves a matador.

Every year, Congress goes through the equivalent of a Punch and Judy puppet show. This is the debate over whether or not to raise the Federal government’s debt ceiling.

The Federal debt-ceiling is always raised. There are no exceptions. As surely as night follows day, so does the national debt-ceiling get raised. Everyone in Congress knows this. Everyone in the media knows this. Those few voters who pay any attention suspect this.

But there is always that long-shot possibility: a stalemate in Congress that lasts until the deadline runs out. Then there might be a showdown.

Everyone in Washington knows that the ceiling will be raised. The proponents of flat-lining the ceiling would wind up with their careers flat-lined if they were ever successful. But if there is a fight, it will make great copy for pundits. The evening new shows will feature the story: “The nation faces a shut-down of the Federal government!”

Suuuuure it does.

The last time there was one of these battles was in 1995. The Republicans had taken control of the House in the election of 1994. The Contract With America was the rallying document: one of the really great campaign slogans in Republican Party history. It did not quite match “Had Enough?” in 1946, but it was close.

So, the new Republican majority was ready to flex its muscles. The young Turks were ready to hold the line.

It took a year for the showdown to come. The battle began to heat up in the summer of 1995. The rhetoric intensified. The battle was over what is called a continuing resolution. When Congress and the President cannot agree on a budget, which is normal, Congress passes a series of continuing resolutions to keep the government’s doors open. This can take place monthly.

On October 1, 1995, the new fiscal year began. There was no budget. Congress passed a continuing resolution that lasted until November 13. On November 14, the government technically had to stop spending on nonessentials. That stand-off lasted five days. The House then passed another CR, but the next vote was scheduled for early January. The crisis was merely deferred.

In January, 1996, the final showdown could no longer be postponed. The House refused to increase the debt ceiling or pass a new CR. The government officially had to stop all spending over the debt ceiling. Certain checks stopped being printed. Clinton’s popularity rose. The stand-off lasted only a few days. Clinton did not capitulate. The House Republicans did.

That was a Presidential election year, just as 2012 will be. It was clear to the Republicans that the voters favored Clinton. Voters wanted their checks. The Republican majority in the House folded. There has not been any trace of a fight over the debt ceiling ever since.

PUNCH AND JUDY

The size of the Federal deficit is numerically horrendous. But nobody in power really cares.

The economists are quiet, as they always are. They always believe that, at the margin, there is another rabbit for the government to pull out of its hat. Their criticisms are limited to the perennial statements about the bad effects one of these days, by which they mean decades from now. “Nothing to worry about now.”

The Republicans are saying that they want $50 billion to $100 billion in spending cuts. They don’t say out of which departments’ budgets, meaning out of which voting blocs’ hides.

This is political showmanship. The Federal government is spending $3.8 trillion this year. It will borrow $1.5 trillion, in nice round numbers. In 2010, the spending was $3.6 trillion. In 2009, it was $3.1 trillion. It is clear where spending is headed.

Into this escalating disaster ride the newly energized Republican Don Quixotes, calling for at least $50 billion in spending cuts. In percentage terms, that is a little over 1%. The rhetorical sound and thunder signifies nothing.

Will the Republicans be willing to shut down the government over cuts in this range? If so, they are counting on the willingness of voters to see the government paralyzed for the sake of a symbol.

The Treasury can defer any crisis until Labor Day. The accounting gimmicks available to it are discussed in an article by a pair of Morgan Stanley economists. Will this battle accomplish anything? No.

Will Congressional opposition to a debt ceiling hike lead to meaningful fiscal reform? Of course, anything’s possible, but it seems unlikely that a major shift in the direction of fiscal policy will occur any time soon. A return to FY 2008 levels of appropriations for non-defense discretionary spending probably amounts to no more than $50 billion of cuts relative to the Continuing Resolution baseline. And, as Treasury Secretary Geithner indicates in his recent letter to Congress formally requesting a debt ceiling hike, even if these spending cuts were adopted, “the need to increase the debt limit would be delayed by no more than two weeks.”

In other words, it’s showtime!

What is needed? The two economists stick their toes into the freezing political waters and quickly draw them out.

What’s really needed from the standpoint of fiscal reform are long-term measures to rein in the deficit. The Bowles-Simpson deficit commission offered some bold initiatives that, from our standpoint, would move fiscal policy in the right direction over the long run. However, although the overall Commission voted 11 to 7 in favor of the final package of recommendations, the vote among those members who are returning to Congress was 6 to 4 against. While some components of the Commission’s recommendations may come up for a vote in Congress, support appears lukewarm at best. In other words, it’s very hard for elected representatives to agree on the tough choices that are needed to achieve significant fiscal reform. At the end of the day, we’re likely to experience a tough political battle that will disrupt markets somewhat but achieve little in terms of meaningful policy change.

Everyone has a role to play in the show.

The House Republicans must demonstrate their commitment to fiscal responsibility. This is nonsense, of course. Minimal fiscal responsibility would require the politicians to run a budget surplus and steadily reduce the Federal debt to zero, as it was for the first and last time in fiscal 1836. Serious responsibility would require money invested in the capital markets as a reserve. Zero Federal debt is a goal for fiscal sissies.

So, the House Republicans will huff and puff and threaten to blow the fiscal house down.

The President will call for responsibility to the poor, the elderly, and the weak. He will insist that the threatened 1% to 2% cuts threaten the moral standing of the nation. This ruthless ploy of the rich shall not stand!

The Treasury will bump and grind its way across the stage, shedding bits of fiscal clothing but never getting to the full monty.

It will all have the significance of the McLaughlin Group.

LETTERMEN’S JACKETS

Half a century ago, I was on the student council of the smallest state university in the United States: under 2,000 students. It was a state university with no graduate school, other than in agricultural research. It was located 60 miles east of Los Angeles in what was then a city famous mainly for orange groves: Riverside, where there was no river.

The school had sports teams, which played small, expensive private colleges in the region. The city paid no attention. The media paid no attention. Most of the student body paid no attention.

There was a battle over spending that year. The sports program was supported at the margin by student fees. I remember the threat of the council’s main athletic program supporter. The sports program would be forced to stop paying for the lettermen’s jackets. The horror! With that, the council buckled.

Here was something visible: lettermen’s jackets. These were the great rewards for those hard-hitting specimens of teamwork. They were the sinews of the sports program.

Why the threat against jackets? Because they were visible. Because not funding them would be . . . unfair!

That confrontation alerted me to a tactic that probably goes back to Babel. A bureaucracy threatens to cut back on something both popular and highly visible, as if this were the only possible budget cut. If the legislature does not fork over the money, the bureaucracy will kill the hostage: the popular program.

The idea that there is lard in the budget never becomes a factor politically. Voters see only the threat of a great loss. “We dare not lose that!”

The legislators act on behalf of the bureaucrats, because large chunks of their PAC money come from the promise of the continuing distribution of lard.

The politicians then come before the voters. “We cannot shut down the government. We dare not do without these vital programs.” They then point to the equivalent of the lettermen’s jackets.

The allocation problem is that lard-seekers are well organized, while the voters do not pay attention. The pay-off for lard-seekers is high. The loss to the voters is widely distributed and therefore marginal. To mix metaphors, lard-seekers know who butters their bread. Politics becomes a series of greased skids.

THE FISCAL RATCHET

When anyone spends more, he becomes used to the benefits gained. What had been a luxury becomes a necessity. This is why people find it difficult to cut their household budgets in a crisis. Spending remains after income falls. People go into debt until they can adjust to the new level of income. This has a name in economic circles: the Duesenberry effect, named after James Duesenberry.

Think of Christmas feasts and January diets. It is so easy to put on ten pounds. Nothing to it! It is so hard to take them off.

The government always raises the debt ceiling. Since 1940, it has done this 80 times. But wait! It has been only 70 years since 1940. This gives some indication of the certainty of the next hike in the debt ceiling.

There will be lots of political hot air expended on a discussion of the debt ceiling. But the economists will not say much. A hike is marginal. No, the debt will never be paid off. It need not be paid off. It must just be kept within reasonable limits. What limits? The economics guild never says. It says this: “There is no immediate threat to the economy. Someday, of course. . . .”

Someday is not now. Politics is all about now, and how now relates to the next election

For those of us who have warned about the increase in the debt ceiling for the last 50 years, all of this is familiar. Nothing ever changes in this beloved play in political theater. It is America’s political equivalent of “It’s a Wonderful Life.” We see it every year.

It ought to be the equivalent of Night of the Living Dead. When it comes to the debt ceiling, George Romero is the qualified director, not Frank Capra.

The deficit is out of control. That is because the government is out of control. That is because the electorate is out of control.

For as long as there are buyers of government debt at low rates, there will be no fiscal crisis. For as long as investors hand their money over to banks and fund managers who load up on Treasury debt, the system will roll along. For as long as bond holders say to themselves, “I will sell before rates rise,” there will be no crisis.

The bond vigilantes are asleep, all over the world. The European crisis cannot be solved, but there are buyers of Greek bonds, Portuguese bonds, and Spanish bonds. Each crisis is papered over with more European Union debt and more European Central Bank fiat money. The same game is being played out all over the West.

Government spending never falls. That is the law of the fisc.

CONCLUSION

I hope that you will not be deceived by the battle over the symbol of the debt ceiling. The debt symbol is a reliable symbol. It testifies, year after year, to this truth: fiscal restraints are an illusion for as long as the words “full faith and credit of the United States” are taken seriously by investors.

The political strategy of kick the can relies on investors who continue to play kick the can with respect to cashing out. If they refuse to cash out, the game will go on.

At some point, at the margin, wise investors will start selling. That will be Ben Bernanke’s moment of truth.

My view is that the FED will begin to buy in earnest when the somnambulant bond vigilantes wake up and see that they are standing at the edge of a cliff. QE 2 is just the beginning.

As for the debt ceiling, think of it as an elevator. “Going up!” But this elevator never goes down.

At some point, bond investors are going to move toward the stairwell. You had better get there in front of them.

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North