2011 – The Mother of All Games of Chicken

I’ve been accused on more than one occasion on this blog of being a “debt alarmist”.  The argument being that the debt will take care of itself and we just need to keep stimulating – or more accurately – borrowing ourselves out of this recession.

If there is anyone who still thinks that the national debt is not a critical make or break issue for our country in the next couple years, think about the words of the chairman of the White House Council of Economic Advisers, Austan Goolsbee. On ABC’s “This Week” on Sunday, Goolsbee said that refusing to raise the debt ceiling would push the country into default — and a far greater economic crisis than Americans saw in 2008.  For Goolsbee’s full comments see here.

Really?  The simple act of deciding that we are not going to take on more debt and live within our means will put the country into default?

That says to me that the US cannot pay its bills today.  So actually we are already in pretty much in default.  Sound familiar to the news from Europe all last year?  It should, because we are in the same boat.

Two predictions for 2011 that will continue to fuel the Tea Party movement and create actual progress against the debt.

  1. Moody’s and S&P will inform the federal government  (in private) that US government debt will be downgraded in 2012 if drastic actions are not taken.  These guys aren’t going to be the whipping boy for the financial crisis and not tell the feds that if they want more transparency in ratings its starts with uncovering the sham that is our country’s debt rating.  We’ll never know if this happens, but we will see signs in Congressional actions. BTW – “drastic” will mean something much more substantial than the debt commissions recommendations that were rejected as too draconian.
  2. Several states and 50 + cities will go belly up.  There will be no bailouts, and there will be hundreds of thousands of public sector layoffs unless in return the Republicans get things like
    1. Radical tax reform
    2. Complete overhaul of Obamacare
    3. Strict enforcement of “pay-go” rules
    4. Substantial cuts and reform for social security and Medicare

2011 will see the mother of all games of chicken played.  Next year will see both parties do things they vowed never to do.  Why? We are officially out of options.

Guest Blogger Jeff

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2 responses to “2011 – The Mother of All Games of Chicken

  1. We will probably see an heck of a game of chicken, or series of games of chicken.

    However, I am not sure that any “anti-deficit” sentiment can really be taken seriously – sounds too much like a replay of the rhetoric before Reagan, and not much happened on the domestic spending side there. I suspect some TEA party types are opportunists, some will find out they like Washington (but won’t advertize it) and some will remain true to their principles and get bypassed.

    I also don’t think raising taxes can be discounted, if one truly feels that debt and deficits represent a dire national predictament, especially considering we have two conflicts going on (As an aside, I never found self-proclaimed conservatives credible if they are unwilling to pay more taxes to support a war effort)

    Otherwise, the concern for jobs, and the fact that there are quite a few old people may 1) diminish concern about the deficit; 2) prove hostile to social security and medicare cuts (like well-off people who vote).

    As for Moody’s and S&P, considering they enabled some pretty interesting things when it came to rating companies and their securitized instruments in teh 1990s and 2000s. Just like with their corporate clients, I doubt they are going to bite the hand that ultimately allows them to exist unmolested.

  2. As for the US’ situation vis-a-vis Europe, it is a bit different I believe:

    Tax taken as a percentage of GDP is still relatively low for the US in comparison to other OECD countries (see intro to http://www.oecd.org/document/35/0,3746,en_2649_37427_46661795_1_1_1_3742…)

    More specifically, for “total tax to GDP ratios”, for 2008 the US was fourth to last place (only Turkey, Chile and Mexico had a lower take) below 30% of GDP.

    The OECD site claims total tax included:
    Taxes on income, profits and capital gains
    Social security contributions
    Taxes on payroll and workforce
    Taxes on property
    Taxes on goods and services

    Considering that nine or so countries were at 40% or higher, there seems to be room for the US to respond through tax policies if the deficit/debt becomes a dire national emergency.

    I think the economy may pick up sufficiently this year to raise some of the revenues that had been depressed by the impact of the Great Recession (the deficits resulted from a revenue issue as well as spending; and some spending represented one-offs, like the bailouts that ultimately benefitted foreigners – DB, SG and GS). Also, I think we could start cutting back in places for the next fiscal year without sinking the economy in an downward spiral like what happened with Ireland.

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