Republicans in Congress were just barely able to extend for 90 days funding of nationally important transportation projects.  The only conclusion is that the GOP has become, collectively, a fifth column traitor against our future economic health.

From the Economist:

The Treasury has just published a white paper full of reasons to favour additional investment. Even if you are sceptical of the utility of fiscal stimulus qua stimulus, now seems like a very good time to undertake much more investment than normal. As the Treasury paper points out, very low interest rates and high unemployment mean that the odds of crowding out private spending and investment are much lower than normal. Cheaper than normal capital and labour also imply that taxpayers will receive a better deal on spending than would typically be the case. The cost-benefit calculus on infrastructure investment has shifted toward doing more of it, or at least squeezing more expected investment into the present period. Other research, like the new Brookings paper by Brad DeLong and Larry Summers, also indicates that the bar for greater investment should be lower. Given the potential that unemployment will become increasingly persistent as time goes on, the value of government spending that reduces joblessness—even temporarily—is higher than may be appreciated. Any projects that seemed like good ideas in general, and there are a lot of them, look like really, really good ideas now.

And yet Congress has struggled mightily to keep even existing spending going. The nation’s primary transportation-funding law expired in 2009. Normally a wholesale replacement or reauthorisation would follow that expiration; Congress has instead repeatedly extended the old law while bickering over how to come up with money to replace the increasingly meagre take from the nation’s petrol tax. The latest extension is set to expire, and legislators are arguing over what to do next. They might extend the measure again—for 60 to 90 days. Or they might stonewall themselves into a temporary shutdown of all federally funded projects.

Inaction is absurd and embarrassing, especially since funding is the primary (though not the only) source of disagreement and the costs of borrowing and unemployment (and the likelihood of a decent return on infrastructure investment) indicate that just borrowing the money to spend on new roads and rails would be a reasonable course of action. If ever there should have been a policy so obviously sensible as to attract bipartisan support, more money for infrastructure was it. Right now, when it comes to partisan politics, sensibility’s got nothing to do with it.

Beezer here.  How else to figure it?  Big oligopolies in Banking, Fossil Energy, Agriculture and Health Insurance are funding Super PACs which daily bombard us with propaganda about how they still need subsidies and protections against competition.  Tea Partiers and Libertarians are so disgusted with our government’s inability to help ‘We the People,’ they’ve paradoxically joined forces with the oligopolies–the very forces that bribe our government to insure our government serves the wealthy oligopolies instead of the general population.   

Jeff Madrick, former economics journalist for the New York Times,  in a recent post published at a blog entitled Triple Crisis argues today’s political gridlock is caused by a loss of faith in our government.

Contrary to what we hear from Republicans, America did not lose its way in the past few years. It lost its way a generation ago when it abandoned its faith in government.

Madrick notes that the anti-government movement began in earnest with the state tax-revolts of the 1970s while this latest wave is being created by evangelicals, the Tea Party and Grover Norquist anti-taxers.  From Madrick’s perspective this newest incarnation may be changing things in a way that will disappoint most Americans.

Anti-government crusaders play on exaggerated fears about the deficit to justify their plans for deep cuts in America’s two basic entitlement programs, Social Security and Medicare. They’re against using government to address the nation’s growing inadequacies in infrastructure, energy technologies and education. They regard record-high income inequality and long-term economic stagnation as acceptable byproducts of the free market. They say the broken jobs machine will fix itself if business and the well-off can get tax breaks. They would repeal the new, though inadequate, Dodd-Frank financial regulations intended to stop Wall Street recklessness. And they would jeopardize longstanding social guarantees, from affirmative action to women’s healthcare, through Congress and the courts.

Persuading Americans to believe in government again may be an uphill battle, however. Conservatives have successfully demonized it as “they the bureaucrats” rather than “we the people.” As a result, nearly half of those who receive Social Security deny that they benefit from any federal programs. States where citizens get the most federal dollars are the most conservative.

Republicans routinely cite record deficits as proof of government failure. In a supposed show of principle, they were willing to shut down the government last spring rather than extend debt limits. Many insist that government must deprive women of a right to choose and must allow prayer in school, even if many parents and schoolchildren do not practice a religion.

Beezer here.  All this may end up boiling down to the old warning “Be careful what you wish for.”  If this new version of America becomes reality, the vast majority of Americans will suffer in many obvious ways.  One can’t help fearing that because we’re three generations removed from the Great Depression our collective memory has faded too much,  and thus we no longer appreciate what the economic landscape looks like when the government is indifferent to the needs of its citizens.

Pulitzer prize winning journalist, Steven Pearlstein (started his newspaper career at Foster’s Daily Democrat in Dover back in the early 1970s) of the Washington Post takes on the top executive suits for creating an out of control Republican Party.

When it started out all you really wanted was to push back against a few meddlesome regulators or shave a point or two off your tax rate, but you were concerned it would look like special-interest rent-seeking. So when the Washington lobbyists came up with the clever idea of launching a campaign against over-regulation and over-taxation, you threw in some money, backed some candidates and financed a few lawsuits.

The more successful it was, however, the more you put in — hundreds of millions of the shareholders’ dollars, laundered through once-respected organizations such as the Chamber of Commerce and the National Association of Manufacturers, phoney front organizations with innocent-sounding names such as Americans for a Sound Economy, and a burgeoning network of Republican PACs and financing vehicles. And thanks to your clever lawyers and a Supreme Court majority that is intent on removing all checks to corporate power, it’s perfectly legal.

Somewhere along the way, however, this effort took on a life of its own. What started as a reasonable attempt at political rebalancing turned into a jihad against all regulation, all taxes and all government, waged by right-wing zealots who want to privatize the public schools that educate your workers, cut back on the basic research on which your products are based, shut down the regulatory agencies that protect you from unscrupulous competitors and privatize the public infrastructure that transports your supplies and your finished goods. For them, this isn’t just a tactic to brush back government. It’s a holy war to destroy it — and one that is now out of your control.

Beezer here.  Read the entire piece, it’s uncommonly direct.  Unfortunately we’re all stuck with this bizarre turn of political chicanery created by big corporate lobbyists.  Stuck until 2012, that is, when voters will extract their remedy.  The hope is by that time voters will finally understand who their real enemies are.

Rating agency Standard and Poors (S&P) downgraded the US credit rating from AAA to AA+ Friday.  We’ll see if it has any practical effect in the rates investors will demand from Treasuries due to the downgrade.  Our initial guess is it won’t have any effect because investors are not political they are practical and the simple fact is the US Treasury market is the only one big and liquid enough to trust.

As for the downgrade, S&P pointed out the debt ceiling bill didn’t include any revenue increases.  S&P knows revenue will have to be raised from  current levels, otherwise the goal of real deficit and debt reduction is not possible.  So it wasn’t just about cuts, the downgrade came after S&P made the common sense analysis that revenues are necessary as well.  Obama’s $4 trillion grand bargain with House Speaker John Boehner included $850 billion in revenue.  Boehner walked out when Obama moved the goal post higher, to $1.2 trillion in revenue over 10 years.  Obama did that because the ‘gang of six’ (3 Republicans, 3 Democrats)  in the Senate agreed to that number in their proposal. 

The truth is Boehner isn’t a real House Speaker and cannot control the  Tea Party controlled House Caucus.  He wasn’t going to get the caucus to agree to $850 billion in additional revenue much less $1.2 trillion.   So Obama unwittingly gave Boehner his ‘out’ and Boehner walked.   As a result the emboldened Tea Party demanded, and got, an all cutting no additional revenue bill.    A bill that didn’t satisfy S&P as it turned out.

The stock markets last week plunged more than 660 pts for the week as measured by the Dow index, a drop matched only by the weeks following the recession’s onset.   This was as we predicted here.   This drop had nothing to do with the debt ceiling fiasco, which was embarrassing but not significant economically because what short term cuts it included merely add to what is already a contractionary federal policy that ends stimulus. 

The reason for the equity market weakness is a growing fear that the summer softness may turn out to be something darker and more permanent.  Corporations reported very strong earnings, but executives warned analysts that future business may be weaker in the United States.  Europe still struggles with its economies, most conspicuously represented by debt issues in Greece and most recently Italy.   Add to that slowing growth rates in China and India and you have the rug getting pulled out from under equities.    

Cutting government spending is contractionary because it withdraws economic activity when the economy is already weak.   Raising the top marginal tax rates are not contractionary in our current situation, however.  The reason for this is fairly straightforward.  The country needs to produce millions of jobs and the private economy cannot do this right now, that’s why we have a huge output gap and millions of unemployed.    The country currently suffers from extreme income inequality as well.  The wealthy have never been as wealthy as they are today.  They possess more of the nation’s income than ever before.  But they aren’t investing and although they do consume a lot, they are simply too few in number to lift the economy by their consumption. 

Raising their taxes diverts some of those idle savings to government which can then hire people by the millions.    Government doesn’t need to show a profit in order to spend money, which overcomes the primary impediment private corporations face when there’s a recession–they can’t profitably create jobs.   In fact, they must fire people in order to stay profitable.   Thus, raising revenues in our current situation effectively forces idle savings to be invested in the economy, creating jobs in meaningful numbers–which is stimulative.

Tea Partiers don’t understand this, but instead apply businesses metrics to government spending:  A fundamental misunderstanding of how national economies function.  

Investors understand how national economies work.  They see Washington DC being held hostage by an ideology they know doesn’t work in the real world.  Particularly in a  real world that is in recession. 

Unless something unexpected happens to change this political problem the markets will probably have a difficult time making much headway.   Contracting will be the default path, in other words, and that’s bad for stocks.

Bloomberg news reports districts that voted in Tea Party candidates are some of the biggest recipients of government largesse. 

Sixty House members backed by the Tea Party, whose opposition to federal spending helped bring on an impasse over raising the U.S. debt ceiling, represent districts that last year received $43 billion in government contracts.

In 16 of those constituencies, spending exceeded $1 billion each — more than twice the median amount for all House districts, Bloomberg Government reported today.

“People don’t like federal spending in the aggregate, but when it’s back home where you’re spending the money, that’s a different story,” said Charles J. Finocchiaro, a political scientist at the University of South Carolina, in Columbia, in an interview. The state is home to two House Tea Party Caucus members and Republican Governor Nikki Haley, elected last November with the movement’s support.

The strictest Tea Party adherents had opposed House Speaker John Boehner’s plan for a debt-limit increase before the Aug. 2 deadline. The House passed the plan 218-210, about 24 hours after Boehner postponed an initial vote to line up more supporters. Twenty-two Republicans joined 188 Democrats in opposition.

Of the 60 Tea Party caucus members, nine voted no and 51 voted yes. Two of the 16 whose districts received more than $1 billion in U.S. contracts voted no; 14 voted to support Boehner’s plan.

Beezer here.  Probably a pretty good place to start cutting is in the districts that voted in Tea Party candidates.  Might as well be the first to find out how the new Raw Deal tastes. 

This was my comment at the end of my last post, a reprint of an article by John Greenstein, President of the Center on Budget and Policy Priorities.

Beezer here.  The real problem is that politically there’s a minority in Congress, the Tea Party wing of the Republican majority, that believes the government should only provide essential, basic services.  The public at large is now beginning to understand what this minority considers ‘essential’ services.  There is no real ‘debt’ problem that faces the United States.  The country is in a drawn out fight against the effects of a banking collapse three years ago.  Recovery is slow and unemployment stubbornly high.  But eventually the world’s largest economy will recover and the deficits will decline, along with debt if the country’s leadership allows modest marginal tax rates to rise.  The Affordable Care Act will also bend the health care inflation curve and that will help.  Our problems are transitory, in other words, with sound forward looking fiscal policies.  But the Tea Party isn’t really so much concerned about our current challenges as it’s determined to force upon all citizens their view of what government should or should not do.  And among the things government ‘should not’ do is provide health care or retirement benefits, according to this view of what are ‘essential’ government services.  This isn’t about changing SS for those now 55 or younger, it’s about changing SS immediately.  This isn’t about bending the inflation curve in health care, it’s about getting government out of this business entirely.  It’s amazing that the country finds itself facing a radical Congress, but that’s where we are.

This debate is writ large in Congress, but it’s being writ smaller at the state and municipal level.  Tea Partiers and their even more radical cousins, the Free Staters, have been well funded at the state and municipal level.  For every effort in Congress to starve government revenues, there is an equal effort being made at the local government level.   A principal method at these levels is the one aimed at public employee wages and, in particular, benefits. 

Because the private labor class is now effectively disorganized, unions now cover less than 6% of private labor today versus well over 25% a couple decades ago, private labor wages and benefits have not come anywhere near keeping pace with rising costs.   Even though the private economy is much more productive and efficient than it was 20-30 years ago, almost none of the benefits have gone to labor but instead almost all the benefits have gone to the top 25% of earners.

Tea Partiers and Free Staters understand this divide in fortunes and have seized upon it, not by arguing that private labor be paid more, but by arguing public labor be paid less.  In a very cynical fashion the Tea Partiers and Free Staters have turned against each other two labor constituences that should be allies. 

The truth is that, just as it is with Congressional Tea Partiers, the unstated goal is to shrink government down to providing ‘essential’ services as defined by the Tea Party and the Free Staters.   And the best way to force the public to accept these goals is to defund existing government.  At the state and municipal level this job is made easier because these government units have to balance their budgets annually, or bi-annually in some cases.   All reductions in revenues in effect force these units to reduce services dollar for dollar.   This is why state and local governments are firing hundreds of thousands of teachers, firefighters, policemen and slashing social programs like hospital payments to help hospitals pay for the free services they are ethically committed to provide the poor.

It goes without saying that some people understand these viewpoints and wholeheartedly support them.  But they are a minority.  It’s hard to believe that a majority of Americans, particularly those dependent upon Medicare and Social Security, would agree.

Beezer again.  Hat tip to Economist’s View for highlighting the CBPP analysis of the GOP budget proposals.