Thursday, July 28, 2011

Possible Endings to the Debt Crisis

Here are the potential ways to solve the debt limit crisis, using animal names:
  1. Ostrich:  Ignore the problem, and hope it goes away.  Result:  US Credit ranking goes down (even if we pay our debt), our borrowing cost goes up, debt increases.  Oh, and the GOP loses a lot of congressional seats come next year, but the tea party is happy
  2. Fat Cat:  Obama gives in, allows GOP to bend the US over and take it like a manly country.    No tax increases at all, but massive spending cuts, mainly for things that effect the poor.   Result: Poor get poorer, Rich keep their money, GOP congressman are happy and keep their jobs.  Tea Party is happy. Upside for the Democrats is the outrage will almost certainly sweep the 2012 election. 
  3. Dog:  GOP "gives in" and accepts some kind of revenue enhancements on the rich.  Nobody is happy - GOP is upset about taxes that they will blame on Obama, while Dems are upset about cuts to Social Security which will be blamed on the GOP   Some members of the Tea Party would accept this, but not all.
  4. Mouse:  They raise the debt ceiling, but not enough to get us past the 2012 elections, ensuring that we do this whole thing again, this time in the middle of an election.   Tea Party might be accept this, but don't want it.   Wild card, no one knows what this does. 
  5. Chicken: They do what they used to do all the time and raise the debt ceiling without any real changes to taxes or spending.    Democrats and GOP both come away happy, Tea Party is unhappy.
There are some variations, for example you can change the amount of tax increases per spending cut.    But those are the basics.   You can for example mix Cat, Mouse Chicken by allowing the GOP to vote for temporary debt increases, but then in a series of later 'dis-approvals' to symbolically vote against them.  Not likely to happen, anymore than voters are likely to be fooled by this stupidity.   Why should the Democrats agree to let the GOP look good and make the Democrats look bad?  

Also, if we are not careful, we can get Ostrich with any of the other ones in that even with a solution, investors may start to worry about what happens next time.  Just because we pay our debt does not mean inflation won't happen anyway.


The country as a whole wants the budget balanced.   They have made it quite clear (multiple polls) they are  willing to pay more taxes, preferably taxes focused on the wealthy.  (Cat, Dog, Mouse, or Chicken)

The tea party wants a smaller government with less spending.   They claim not to care if the government defaults/can't pay for all the benefits.  (Ostrich or Cat)

The GOP insists on no new taxes and also want massive cuts on Social Security, Medicare and Medicaid.  They can't get both.  They can get either "no new taxes" or "massive cuts".  No way will the Democrats cave on both.  The Democrats have the Presidency AND a majority of the Senate.   The GOP is not in charge and can't have their way without Democrat agreement.  (Cat or Mouse)

The Democrats want no cuts on Social Security, Medicare, and Medicaid, and to raise taxes on the rich.  No way will the GOP give us both, but we have already stated we are willing to lose on one (but not both.).   (Dog, Chicken, or Mouse)

Obama wants an end to the debt crisis as well as everything the Democrats want. (Dog and Chicken)

The only people wanting the Ostrich are the Tea Party.  But the GOP is courting the Tea Party, so it might accept it.    The only people that don't wantt the Chicken are the Tea Party and the GOP.

Chicken looks likely, after all, Congress has been Chicken before it is their usual modus operandi.  They have done Ostrich before, but usually that results in major turnover.   Whoever is blamed loses seats.   I think the GOP is wise enough to know that they are being blamed for the debt gridlock (Source).  As such, Chicken looks more likely than Ostrich. 

A strong possibility is that you get a watered down version of Chicken-Dog or Chicken-Cat combo.  The idea there is you do mostly symbolic dog or cat type plan that doesn't really reduce the deficit all that much.

Finally, there is one more thing going on.   You see, Ostrich definitely hurts this country.   It is the weapon both sides are using to get the other to submit.   They are playing "chicken" with the economy.   If both people blinks, then we get the 'chicken' outcome, if neither do, Ostrich.  If only one side blinks, you get either Cat or Dog.  If they decided to stop for a while and play later, that's Mouse.   The problem is, playing the game means you value your own party's goals more than the country.  You are in effect willing to blackmail the country to do what you want -  or the "US credit rating gets it".

Both sides are doing it.   Neither side has tried to pass the "chicken" outcome (raise the debt limit with no attachments).   

Another part of the problem is there are ... people ... out there that think "Balanced Budget" = no new taxes.  No.  Balanced Budget means that taxes = spending.   You can do it two ways: 1) increase taxes or 2) reduce spending.   Anyone that refuses to admit that you can balance a budget by increasing taxes has no business talking about economics.    You may not LIKE that method of balancing the budget, but it works.  Given our current situation (with taxes covering only about 60% of the budget), budget cuts alone would be too massive - putting too many people out of work, etc.  A tax hike on the wealthy would allow us to balance the budget right away, and once the debt goes away, then we can talk about cutting taxes again.

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