Belmont Club


The battle over budget cuts has become, in its own way, the national Wisconsin. The administration and Congress have failed to reach an agreement over funding government spending over fundamental differences in budgetary policy. If the Democrat controlled Senate cannot accept the Republican-generated budget, it could lead to a government shutdown. The situation resembles a giant game of “chicken” in which two opposing players rush at each other at fatal speed. If neither side gives way, both crash into each other. If one side turns “chicken” and swerves from the road, the other gets the right of way.

The emphasis of media coverage has been on the shutdown. Democratic Senator Steny Hoyer says the root of the crisis is because the Republicans want to shut down the Government.

Hoyer said he was concerned of reports that a number of House Republicans applauded an announcement from party leadership that they were taking some initial steps to prepare for a potential shutdown. Such a response, Hoyer said, “is reflective of the sentiment of a large number of Republicans that they want to shut down the government.”

Republican House Speaker John Boehner also focuses on the shutdown aspect. He claims the Democrats are holding current government operations hostage in exchange for assurances that unaffordable spending will continue. But the emphasis is still on the tactical aspects. A meeting at the White House failed to produce a compromise agreement and Boehner was at pains to deflect the fallout from a failure to enact a budget.

“The Speaker told the president that the House will not be put in a box and forced to choose between two options that are bad for the country (accepting a bad deal that fails to make real spending cuts, or accepting a government shutdown due to Senate inaction),” according to the release from Boehner’s office.

The tactical situation is certainly important.  Both sides are trying to avoid the political blame for any public inconvenience over the budget clash. The Republican tack has been to allow the Administration to spend money, but only in exchange for tax cuts in programs they believe have little support. Thus they can disavow the shutdown. The Democrats have responded by opting for a surrender-or-die approach: either the Republicans capitulate and accept a comprehensive offer or the shutdown looms.

White House spokesman Jay Carney told reporters Tuesday that the president would prefer a long-term deal, rather than a week-by-week “toll booth” approach to the budget.

“It is counterproductive, we think, to assume that we have to negotiate a short-term CR when we have an agreement on the table that can be reached for the full fiscal year,” Carney said.

The Democrats  may believe a shutdown will be blamed on the Republicans because that approach served President Clinton well in his face-off against Newt Gingrich in the mid-1990s. But the times may have changed. With the country in troubled economic times and a widespread awareness of the dangers of the deficit, the threat of a government shutdown, especially when a short-term continuation is on the table for the taking, may no longer work to the Democrat advantage.

But while coverage has been all about the shutdown, the fight is about something far bigger. In the medium term, at potential political stake is the Senate, which Reuters reports the Democrats must struggle to hold. Twenty three of 33 Democrat seats are up for grabes in 2012. The Republicans only have to gain a net of four to control the upper house. At risk too are President Obama’s re-election chances. These prospects may be decisively determined by the budget battles of 2011.

But both the short and medium-term effects are secondary to the real clash. At issue is whether government will continue to expand or start to shrink. Fiscally, there is little doubt the deficit must be cut. The Congressional Budget Office painted an unequivocal picture of a deficit strangling the economy and literally delivering its assets to foreign creditors.

The rising debt would reduce the size of the domestic capital stock (businesses’ equipment and structures as well as housing) and decrease U.S. ownership of assets in other countries while increasing foreign ownership of assets in the United States. Those changes would slow the growth of gross national product (GNP) and, as the debt burden rose, could eventually lead to a decline in economic output. The effects would be most striking under the alternative fiscal scenario. In CBO’s estimation, the increase in debt under that scenario would reduce the capital stock by more than 20 percent and real GNP by 9 percent in 2035, compared with the levels that would occur if the debt remained roughly at its current size relative to the economy

The deficit would continue to rise, even if interest charges were suddenly to vanish by magic, principally because the government was spending more and more each year on Medicare and Medicaid. Obamacare would add $1.2 trillion to the deficit over 20 years. Everybody knows this, but taking on the real problem is so dangerous no one has seriously risked it until now.

Non-interest spending over time

The Republican budget proposal surprisingly takes the Medicare and Medicaid issues head on and transfers spending power to the states. It challenges the big-government basis of the Democratic Party and its emphasis on Federal government. That makes the budget fight not only about appropriations for this year but for the political and fiscal future of the country. That Ryan has tried this at all is testament to the desperation of the times. In previous decades the Congressman would have been struck down by electoral lightning and left shriveled on the ground. That he is still alive and talking is bad news for the Democrats, who according to the NYT, will fall on their swords rather than agree. To lose would be to abandon the very premise of Democrat ideology. Therefore they will fight. They have no choice.

Under the proposal, Medicaid would be transformed into a block grant, with a lump sum of federal money given to the states to care for low-income people. States would be given more discretion over use of the money than they have under the current federal-state partnership.

For future Medicare beneficiaries — people now under 55 — Mr. Ryan’s proposal calls for the federal government to contribute a specified amount of money toward the premium for private health coverage. Under the traditional Medicare program, the government reimburses doctors and hospitals directly….

Democrats signaled that they would fight the health proposals, and the clash could well become a defining issue for both parties in the 2012 elections. …

There is almost no chance the Democratic-controlled Senate would adopt a resolution along the lines Mr. Ryan is proposing, although his counterpart in the Senate, Kent Conrad, Democrat of North Dakota, the chairman of the Senate Budget Committee, is working on a bipartisan plan to address entitlement spending as part of a broader package to reduce the budget deficit.

Paul Ryan’s gambit is a bold but reactive. The proximate cause of the meeting engagement was the huge political wager placed by Barack Obama himself in the form of Obamacare. The President’s proposal was so huge it bid fair to transform the country permanently. The Republicans either had to call the bet or leave the game. Ryan is banking on a growing public perception that Obama’s change was really a catastrophic one. Like the game of chicken there is now no room for both vehicles to pass side by side. Either one keeps the road or both collide head on. Now both sides have made a political commitment so large that defeat over the issue will be decisive for either side. If Ryan’s ploy succeeds, big government will be seriously wounded. If it fails, then deficit-funded government is the future of America.

The administation’s advantage lies in the slow-acting but nevertheless fatal effect of the deficit poison. A government shutdown would produce immediate pain to which a Republican surrender would produce palliative relief. On the other hand, a reduction in the deficit would bring instant discomfort which only be offset by a gradual and sustainable improvement.  All the tactical advantages in the coming fight lie with the Democrats. There is therefore a political limit to which the Republicans can slash at the deficit without yielding. What they can achieve within those bounds is their chief problem.

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