The Debt Limit Kabuki

NOGA_001(edit1)By George Noga


Don’t be fooled by all the hullaballoo about raising the federal debt limit. As in Shakespeare’s MacbethIt is but a walking shadow, a poor player that struts and frets his hour upon the stage and then is heard no more. It is a tale . . . full of sound and fury, signifying nothing”. It resembles even more closely a Kabuki, a highly stylized Japanese saga with the ending preordained and known in advance to all.

The palaver, media hype, political theatre and public consciousness focused on this narrative are misplaced. We are being conned by both Republicans and Democrats because:

1. The conclusion already is known to the players. Sure, they will create some drama, but in the end both parties get what they want;

    2. Even the bandied about budget cut target of $2+ trillion over 10 years is but a walking shadow; and

      3. We the people are beguiled into believing something meaningful happened while our attention is focused on foofaraw or bushwah if you will, but away from substance.

        “We the people are beguiled into believing something meaningful
        has happened; it is nothing more than foofaraw and bushwah.”

        The ending is written; the fix is in; there are but few details in flux. The debt ceiling will be increased by enough to get everyone comfortably past the 2012 election. Yes, there may be $2+ trillion in cuts; however, they mostly will be: (1) funds that were not likely to be spent: (2) phantom reductions from projected increases; (3) one-time gimmicks; (4) defense related; and (5) back-end loaded. The Dems will wrangle at least one salving, purely symbolic revenue-enhancement concession such as taxing private jets or oil companies. There will be a kerfuffle purely for high theatre, but in the cloakrooms comity will prevail. They are pulling yet another one over on us poor rubes.

        Two trillion sounds like a big number but it is chump change. The real spending cut in the first year (from a goosed-up baseline) will be no more than $100 billion; all this does is reduce the FY2012 deficit from say $1.4 trillion to $1.3 trillion; it is but 15% of what is needed merely to stabilize the Debt/GDP ratio temporarily at 75%. Meanwhile, even putative cuts of $2+ trillion are dwarfed by the demographic time bombs of Medicare and Medicaid, ObamaCare, tepid economic growth and skyrocketing interest on the debt. Consider the following:

        1. Rising interest costs (to service the debt) could add $4 to $5 trillion to the 10-year deficit thereby negating all savings from any debt limit deal twice over. Lawrence Lindsay, former Federal Reserve Governor, calculates interest costs will increase by $5 trillion merely if interest rates revert to their historic norm.

          2. Automatic increases in Medicare and Medicaid, if left as off-budget entitlements, also will, by themselves, devour all the budget cuts.

            3. ObamaCare, according to a recent McKinsey survey, will cost an average of $75 billion more per year than originally estimated. Again, this single item offsets nearly all the projected savings from a debt limit deal.

            4. As the capstone, congress and the president are projecting based on wildly optimistic and unattainable assumptions about future economic growth rates. The president’s own budget estimates the cost of missing the GDP growth estimate by just 1% for one year to be $750 billion over 10 years (due to compounding). If our economy grows at normal rates instead of the government’s riotously outrageous conjecture, the economy will be at least 5 percentage points below baseline – at a cost of $4 trillion.

              “The four risks described above result in over $10 trillion of higher
              deficits. Even if only half materialize, they will gobble up the
              savings from a debt limit deal two to three times over.”

              Bottom line: a $2+ trillion debt limit deal of the type described supra is all sound and fury signifying nothing. Adding the possible (read, likely) shortfalls noted above from: (1) higher interest; (2) Medicare and Medicaid; (3) ObamaCare; and (4) slower economic growth results in over $10 trillion of higher deficits. Even if only half the potential risks materialize, they will gobble up the ballyhooed savings from a debt limit deal two to three times over.

              Tea party patriots are being fed bushwah and are in grave danger of being lulled into believing a $2+ trillion debt limit deal is a victory when, in fact, it is nothing more than a Kabuki. Taking on entitlements is ineluctable; any budget deal that leaves them as is must, ipso facto, be a failure. To truly accomplish something there must be immediate and substantial cuts to entitlements such as block granting Medicare and Medicaid to the states with a 30% to 40% haircut. A balanced budget amendment may be a good idea; however, it is not a substitute for immediate, real and substantial cuts.

              “Folks elected with tea party support are at risk
              of being hornswoggled into a Faustian Bargain.”

              It looks increasingly as though there is no realistic way out of the government debt crisis; there will be more about this in future posts. Even the folks elected to Congress with tea party support are at risk of being hornswoggled into falling for a mirage that is all sizzle and no sirloin. If they agree to a Faustian Bargain, they will be nothing more than poor players that strut and fret their hour upon the stage and then are heard no more.

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