What Now?

By Joe Firestone

Today, John Boehner bowed to the inevitable logic of the impending political season and placed a “clean” debt ceiling increase bill on the floor of the House. At this writing, the bill passed with 28 Republican and 193 Democratic votes. Now it moves on to the Senate, where it is expected to pass in time to allow the Treasury to keep issuing debt instruments.

So, now we have had agreement on a budget partially rolling back the sequester, and the Republican leadership appears to have decided not to have another debt ceiling crisis. I wrote a post called “What Happens Now?” just after the Government shutdown ended last October. There I analyzed the political situation and made a number of predictions about the short-term future. Here’s how I answered the question: “Growth and Jobs or Shutdowns and Debt Ceiling Crises?”

I think the answer is neither. We may have shutdown and debt ceiling threats before the 2014 elections; but we will not have either of these types of crises, because the cost in public opinion, if it keeps trending the way it has been, will be too heavy for many Republican candidates, except for those in the reddest gerrymandered districts, to bear in 2014. I believe they know this, and that many of them are increasingly willing to chance getting primaried by tea party candidates in order to avoid probable defeat from Democrats, if they toe the tea party line and then try to run.

So, I think the shutdowns and debt ceiling scares are over until after the elections. That means there will have to be an agreement on a CR for the first part of FY 2015 by next October 1. That will happen because there’s no way the Republicans will chance another hostage-taking taking a month before the next elections.

That’s the good news. The bad news is that there will be very little growth and very few new jobs. If the sequester remains in place for the rest of FY 2014, unemployment is likely to increase, not decrease, because Government will continue to be a fiscal drag on the economy, and the private sector is likely to avoid expansion without increased demand. That demand could be manufactured by a credit bubble; but it doesn’t look like that is in the offing for 2014. So, the shortfall in demand produced by the Government will not be made up from private sector spending.

On the other hand, if the sequester is lifted, then this will make some difference. We will probably see declining unemployment if that happens, but since the deficit was much too small to sustain a vigorous expansion, even before the sequester, the decline in unemployment, increased job creation, and economic growth, will all happen only slowly, and by election time we will still see an unhappy public, but maybe one that is a little more hopeful about the future than we are now seeing.

I don’t know yet whether the falloff in economic activity due to Government austerity or near austerity, will be enough to produce another recession in the middle of this long stagnation period, Richard Eskow has aptly named “the long depression.” But there is some chance that this will happen before the fall elections. If it does, then we will see a messaging war on who bears the blame for the downturn, and the outcome of the elections will hang on the outcome of that war.

So, we are now through or nearly through the most likely crisis points until after the election and most likely until January 2015. Reality has played out as I thought it would in October, with the exception that the sequester was neither repealed nor continued as before, but rather partly repealed, and partly continued.

This leaves us with a situation where there is still substantial fiscal drag from a lack of government spending and what are likely to be much too small deficits to accommodate savings and import desires of people. This has been leading to curtailed consumption, visible in lower than expected sales in retail, housing, and other sectors, which, in turn, is likely to lead to either higher unemployment or more people dropping out of the labor force or both, as we move through the Spring, Summer, and Fall, and as we approach the elections. (Please see Warren Mosler’s recent posts on how the economy is trending for the past quarter, for example, this one.)

This will be more bad news for many Americans, but good news for the Republican Party, since lacking something dramatic like another shutdown they get blamed for, the blame will probably shift to the President and the Democrats for failing to do anything about the down economy and jobs. The Democrats will counter, of course, by trying to pin the economy on the Republicans, but this will be like a mud fight in which the Republicans will have more mud to sling supplied by big money than the Democrats have.

And the end result will be that the public will be very angry at both parties, and their plague on both your houses attitude will probably manifest in the Republicans retaining control of the House by a narrow margin, and perhaps gaining control of the Senate, because the Democrats have the opportunity to lose so many more seats than the Republicans this year. So, what can change this picture?

Well, the Democrats could get lucky if the FIRE sector blows another credit bubble to boost demand and accelerate GDP growth again. Also, the Republicans could get so ham-handed with their attacks on women, minorities, hispanics, undocumented immigrants, voting rights, and all their other tea party targets that these overshadow the economy as an issue.

However, these are unlikely scenarios for saving the Democrats in 2014 and for ensuring that the President will avoid the likely fate of being impeached and perhaps even convicted. There is, however, a way in which the President can both save himself and work with the Democrats to get them a substantial victory in the coming elections.

To see what that way is, imagine the campaign the Republicans will run nationally. They’ll try the jobs appeal again, saying that President Obama’s high taxes, and deficit spending have exacerbated our national debt problem, and also created uncertainty in the business community, which is the reason why the economy can’t fully recover and supply the jobs people need. They’ll also say that the Dodd-Frank Act, government regulations, and Obamacare are causing economic stagnation and killing jobs. They’ll say that the cure for this is to unleash the “job creators” by providing tax incentives, freedom from regulation, and to reduce the uncertainty that comes from deficit spending and increasing public debts by balancing the budget and beginning to pay down the debt.

The Democrats will reply that after the initial stimulus bill, made necessary by the mess left Obama by Bush, the President has steadily reduced deficits to the point where are they now projected by CBO to fall to the 3% of GDP level in this fiscal year, and even lower than that in the next three fiscal years.

They’ll say that the down economy isn’t due to “uncertainty,” but to too little spending by Government creating demand and jobs for the unemployed, and to Republican threats of Government shutdowns, and resulting cuts in Government spending. They’ll add that this, in turn, is due to Republican obstructionism, and to their determination to make the President fail in his job, and to prove that his health care law is a failure. They’ll then say that the Affordable Care Act isn’t a job killer, but just gives people who want to retire a chance to do so without having to give up health insurance.

These Democratic replies are certainly reasonable and will probably prevent the kind of Republican wave election we saw in 2010. However, that doesn’t mean it will prevent the Republicans from taking over both Houses, and the carnage to safety nets, social spending, and the Executve branch under threat of impeachment which is likely to follow such a victory.

Only a Democratic victory can prevent that, and what stands in the way of such a victory is “teh debt.” By the end of this fiscal year CBO projects that the debt subject to the limit will have reached $17.7 Trillon. In the public mind that is an overwhelming number that people can’t grasp and that freezes rational thought. They have no notion of how it can be paid back, and they do think that since it is a debt, it has to be paid back sooner or later.

Democrats can try as they might to explain that the national debt is of little concern, or at least much less important than growing the economy, but they won’t be able to persuade a majority that this is true. So, the result will be that even if Democratic arguments that the Republicans are no good for jobs and the economy are successful, many people will still be bothered by “the debt” problem and will see the Democrats as unwilling to prescribe “the painful medicine” needed to cure this problem. The Republican advantage on the debt will prevent the Democrats from blocking the Republicans in their attempt to take over both Houses, and so the best hope for a Democratic victory is for the Democrats to begin to pay down large quantities of that debt themselves before the 2014 election. And, in the process, to take the debt issue away from the Republicans.

How the Democrats can take this issue away from the Republicans has been known for some time now. The solution is to use High Value Platinum Coin Seigniorage (HVPCS) to fill the public purse with enough reserves to repay the debt subject to the limit as it falls due, and also to implement all deficit spending appropriated by Congress for some time to come without issuing further Treasury Securities.

I’ve proposed that the President order the Treasury Secretary to have the US Mint create and deposit a $60 Trillion coin in its Public Enterprise Fund (PEF) account at the Fed. I’ve described the details of doing this here, along with extensive discussion of various issues related to my proposal, and to using Platinum Coin Seigniorage (PCS) more generally. But, in this post my point is that if the President uses HVPCS and mints that $60 T coin, then he can then pay down close to 40% of the debt subject to the limit by election time, keep score on his efforts, and report to the public on the gradual extinction of “teh debt” every two weeks from now to then.

Doing that is a winner because it’s the one thing that will take that issue away from the Republicans and also make clear to the voters that if they elect Democrats who campaign on jobs and full economic recovery in 2014, the money will be there to pay for the programs involved, without the deficit and the debt coming into play as a rationale for not following through on their promises. Doing that will also make plain to people that the trade-off between incurring less debt and creating more jobs which they are faced with when evaluating Republican campaign appeals isn’t a trade-off they have to take into account.

They can have both job creation by the Government and no national debt. They can also have true universal health care and no national debt. They can also have first class free education, and new infrastructure, and new climate-change and environment friendly new energy foundations, and much else with no debt subject to the limit. When they know these things and when they believe that Democrats, if elected, will provide them with these things, all without needing to raise taxes, then, and perhaps only then, will the Democrats be able to snatch victory from impending defeat.

Finally, yes, yes, I know. . . Both parties are now bought by corporate America, and the difference between the two seems to be that Republican appetites to punish the 99% for their existence and create a plutocracy in the process, are, apparently, much more determined and voracious than Democratic appetites to do this. So, why would I believe that it is any better for the rest of us that the Democrats win in 2014 rather than the Republicans? Isn’t it better to have a short-term disaster that will be so terrible that it finally motvates people to make real changes to our political order?

My answer is that I don’t believe that just any Democratic victory would necessarily be any better for either the short or the long run. However, I also think that if the President has that $60 T coin minted this month, and begins to pay down “teh debt” and the Democrats run on an aggressive job creation program, then there will be tremendous public pressure on them to deliver on their promise, and that pressure might well be irresistible.

Think about it. The three traditional excuses for inaction: the debt, the need for tax increases to fund the new programs, and their not having control of Congress will be gone. So, the Democrats will either have to deliver on their promises about jobs or their mask as the party of the people will be well and truly ripped off for good and all.

Either way, the rest of us are better off. If they deliver, we’ll have full employment, and if they don’t, then everyone will know that the 99% need a real people’s party. And the Greens will be waiting in the wings, with the best cast of characters this side of the New Deal.

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