Don’t “Deal” me, Bro!

So all over the news today is the status of “The Deal”. Will we have “A Deal”? Has Obama got the strong hand for “The Deal”? Will the Democrats refuse “A Deal” with a Social Security CPI change in it? Can Harry Reid get “The Deal” done? Can the GOP do “The Deal” without a “Dance Partner”. Only 2 days (or 36 hours or…) to “Get A Deal Done”.

Dear Congress and Da Pres:

I am not “a deal”. I don’t want to be “dealt”. I am not a bargaining chip in a game, and I don’t want you to be playing games nor doing pawn shop “deals” with me, my life, my income, or the economy.

I want you to see reality in front of you, recognize it, smell it. Then do what is best, moral, and sound for the country. In short, do your job, and without a “deal”.

OK, the Democrats are playing a much better “Scare Game” than the Republicans. I don’t know if the Republicans are just stupid, or complicit. (Don’t you throw me in that there Briar Patch…) What are “the scares”?

1) There will be a recession if we go off the cliff!!!

2) Voters will despise you if you don’t “fix it now”!!!

3) We (democrats) won, so you better do what we want or…

4) The Cliff will damage the Military (and your constituency)!!

5) It’s what the Economists say will work, don’t screw it up!!!

6) You can have a tax hike for everyone, or only the 1% (who’s vote doesn’t matter…)

And more…

The #5 is a variation on #1, as an ‘appeal to authority’ enhancement. So it might not justify a line of its own, but I think the implications of it matter enough to put it in.

So lets look at a few of these.

I’ll be taking them in semi-random order, but with a ‘small issues first’ bias. So first up, is #2.

Number 2 is just a variation on the “Bums Rush”. It’s no different from what the used car salesman says or what is seen in bad commercials on TV. “So pick up that phone and order now! Time is running out!”. I have a general principle that has served me very well: NEVER EVER under any circumstance accept the “Bums Rush”. If pushed too much ( if they don’t accept the tossing of the Bums Rush into the trash can) Walk away. Just walk away. THE only thing you can do that matters with the Bums Rush is to chuck it in the trash can. There will not be a damn bit of real difference if this is “fixed” now (in a rushed bad way) or a month from now. Some markets (stocks / bonds) might have a couple of up or down days, but they will do that anyway, no matter what you do, or don’t do.

Number 3 is just “The Threat”. It is no different from what any bully does. “Do what I want (because I’m bigger, prettier, the winner, meaner, whatever) Or Else. There are two things can work here. One poorly, one a bit better. First off, you just walk away from The Bully. They are nothing without someone to bully. Make them follow, never ever let them dictate terms. Now, best is to just walk away and never come back, if you can. But usually The Bully hates the idea that their Shmooo is getting away and comes after you, usually with an escalated threat. At that point, fear is your only enemy. If you just “take it”, it is over. You lose. Doesn’t matter if it’s a school yard bully or a thug on the street. You are going down. The only thing you can do is a full on, all out, Berserker Class counter attack. You are no longer “playing to win” this round (especially if The Bully actually does hold the stronger hand and is going to beat you to a pulp in the end). You are simply making sure that everyone calls him “One Eyed Fool” from then on out. No holds barred, you want to rip off body parts and stomp on them. Most delicate, sensitive, and vulnerable first. Often, at the point where they realize you are about to take them down or die trying, The Bully suddenly decides on a different target. ( I speak from personal experience here.) You can ‘grade into it’ by ‘tipping your hand’ at various stages. So saying “I’m leaving now” before leaving can be helpful. As can be “If you push me, you will regret it.” But that must be delivered in such a way that they understand this is “two tigers fighting”, even if one of them is smaller.

(From Shotokan: “When two Tigers fight, one of them dies; and the other is seriously wounded…”)

Also, do not forget that Republicans won in The House.

Number 4 is, in some ways, a variation on number 3. It’s still The Threat, but now it’s delivered as “Friendly Adviser” not “The Bully”. The fundamentals don’t change. A threat is a threat is a threat. You either neutralize it, defeat it, avoid it, or accept it. In this case, though, I think there is a deeper point. WHO gets hurt, and why. First off, the Military. Look, they have been run ragged fighting wars of choice all over this planet for a decade plus now. ( Or is it two decades now?) We spend more on the military than the rest of the world combined. The “cut” they face is about 10% NOT including the extra-budget expenses for gratuitous wars. So first thing to realize is that the ‘hurt’ isn’t very much. Mostly it means we stop being so world dominating everywhere all the time and being in a constant state of war making. Frankly, that sounds more like a feature to me. The soldiers can have some added “home time”. The world can decide if it wants to stop poking at us, especially if we are not in their face. The defense industries and the Generals can think just a bit more about what new toys they really need. And all of us can take a well needed breather. As for the rest of the ‘middle class’ and ‘poor’ who will be ‘hurt’ by sequestration and reduction of spending: Almost 1/2 of them are Republicans and Independents who want you to cut spending. That is WHY Republicans hold the House. We know and want the spending cuts. Why? Because what the spending giveth, the taxes and borrowing / interest payments taketh away. So the “Big Scare” here is that those constituencies will be angry about their money bowl being taken away. That’s a bogus scare story. For every one worried about their money bowl, there’s another worried about their taxes and the debt burden. Don’t be afraid of a Scare Story. Ever. Even one with specifics in it.

Number 6 is “The False Choice”. This is a generational problem. We will be dealing with the Demographic Bomb as the Baby Boomers retire and there are not enough productive workers to support them for the next 20 years (or more…). We will be dealing with the $16 Trillion (or is it more than that now?…) Debt Bomb for the rest of our lives. There is nothing about the next week, month, or even year, that makes those go away. You will have a law expire. You will have a budget out of control. You will have entitlement spending that can not be covered, in any way, from taxes, growth, or borrowing. You will not get more revenues from a hike in tax rates. (You are on the wrong side of the Laffer curve for that to work). Not one of those things can be changed in the next day, month, or even year. There simply is no pressure at all to ‘do something now’ nor to “chose poison or the axe”. It does not matter what you do now, those problems will not be going away. So just set that whole question aside. Ask instead “What is the right thing to do?”. At most, tax rates go back to what they were pre-Bush (and perhaps even for only a little while). Folks who want things really fixed will not be holding that against you. They may not like it, but they will understand if it is due to you sticking to reality based principles. Do a “Dumb Deal” in a bums rush way? Vote FOR an Obama Win on More Taxes? Sorry, it’s flushing time… So feel free to let the present “deal” expire (tax rate rises and all) AND leave the debt ceiling in place (so the Democrats understand they have ‘skin in the game’ too…) At most, you are recognizing the reality that we just don’t have the money. So someone gives you a ‘false choice’, just respond with “That is a false choice. We are here to fix our massive deficit and debt and we don’t have the money for more taxes.” (Any money taken from the “rich” just means less investment, less economic growth, fewer jobs, and lower net tax revenue. Say hello to the “Marginal propensity to invest”.)

Number 1 and Number 5 are interwoven. One is an assertion of what will happen, the other is the appeal to authority to back up that appeal. I’m going to mix the two in the following discussion. First “The Assertion”. It just says that the economy is so ‘fragile’ that if you don’t prevent tax rises and spending cuts, it will break. A recession will surely follow. But will it? And will having a tax rate well below expenditures and spending like a drunken sailor on steroids make anything better? (And if it does, isn’t that just trading ‘roids and credit maxed out’ today for “aw shit” tomorrow in debtors prison?) That’s where the “appeal to authority” comes in…

Now realize that the “appeal to authority” is a logical fallacy. It is just a broken form of argument. But, with that in mind, what can we say about that authority? It is based on a Keynesian philosophy that “government stimulus” can hold off a recession and cause economic growth. That you can ‘borrow your way to prosperity’. The Austrian School of economics thinks that’s bogus, so your first thing to realize is that there isn’t just one authority here. So in reality this choice involved the implicit endorsement of one particular school of thought. Even that, though, is not the whole story. The model presented is just “more government spending is good”. But is that what Keynes said? Sadly, no.

What Keynes really is about is the “velocity of money” and that during short term downturns, the government can keep the velocity of money up (when the public pulls back) and prevent the sequelae from ramping down the economy. It does not say that the government can keep this up forever or that it does not come at a longer term cost. It does. Longer term, during times of excessively high growth, Keynes said to then spend LESS than tax receipts. The whole system depends on having the government behave “counter cyclically” on BOTH sides of the business cycle. We have not done that. Instead, we’ve simply headed down the path of Debtors Prison. Now we are at a stage where to get more government money to spend, we must either do it via taxes (which reduce the velocity of money in the private sector, so can not cause it to go higher) or via borrowing. As a ‘short term’ thing, borrowing can work. As a long term one, it can not. Why? Simply because in the longer term the cost of the borrowing shows up in the government costs. We are already at the point where “debt service” is a significant part of the budget. Once that happens, you are not spending ‘saved excess’ from good time counter cyclically, nor are you increasing the velocity of money via that borrowing. Instead, you are borrowing that stimulus money, and spending it on debt service. Worse, as folks in the private sector see the irresponsible debt level, they stop investing and spending. Simply put, when public debt is too high, it causes a reduction of the velocity of money in the private sector (or worse, money leaves the economy entirely and heads overseas or simply into ‘hard assets’ that are even less liquid and of even lower velocity).

In essence, the “appeal to authority” is based on a “crib notes” version of Keynesian Economics and is not correct. (Though widely repeated, and even taught in schools, it is not what Keynes said in full. He very much said that borrowing to spend was only a short term tactic and that long term fiscal responsibility and lack of debt was important.)

But at this point, what will happen in the economy?

There are two paths. More borrowing and spending to “stimulate the economy”, or “fiscally responsible government”. We know where the first one leads. We’ve seen this movie a dozen times. Greece is the present example. Italy close behind. Japan has had a generation of stagnation from “easy money” and high debt levels. At MOST, you can “go Japanese” and stagnate. At worst, you end up at Greece. There is no ‘good times are here again’ down that road from our present status. The idea that another few $Trillion of “stimulus” on the Chinese Credit Card is going to “fix the economy” is just a triumph of hope over experience. “But hope is not a strategy. -E.M.Smith”

The “Fiscal responsible government” will hurt. No doubt about it. Keynsian money acts exactly like any addictive drug. Take a little bit of speed, for a very short period of time, to survive a dog fight as a fighter pilot, well, that actually works well (which is why we put speed in the cockpit starting in W.W.II). Do it every day for years? You slowly burn out and end up a wreck. More will just kill you. Drying out is not a ‘feel good’ time. So once already in debt to the sky (what limit?…) and already economically emaciated and wasted, taking a ‘hit’ for ‘withdrawal’ will not feel good. Yet it is the only thing that works, longer term. (And since we’ve run out of ‘short term’, only the ‘longer term’ matters.)

In a very real sense, “going off the cliff” (a broken metaphor, BTW) is nothing more than doing the right thing (though perhaps in a lousy way). We’re long past the point where more borrowing and spending will fix anything. We are well into the range where the debt burden is damaging. We’ve driven the economy into a ditch, shipped production to China and India, and there simply isn’t the money in private hands to have any increase in the ‘velocity of money’ from the private sector. We’re tapped out. Broke. Busted. Pockets empty. Selling Chinese goods to each other does NOT put net new wealth into the system. So raise tax rates, you will not get more revenue (as we’re already broke and any more in taxes means less in spending, so less in taxes from the commercial side). Borrow more money from China to have the government spend it (or put it in our pockets for us to spend … on Chinese stuff…) will do nothing to create more wealth or jobs here. (It will make more in China. I’m sure they will thank you with your next bill for interest payments…)

So that’s the problem in a nutshell. Keynesian spending now is going to stimulate China. Borrowing now is going to benefit China. Borrowing now and government deficit spending now will damage the US economy and reduce the money available to spend for every future year. We’re already strung out on the drug and more will just make us more strung out, not make us well. So yes, you need to take some pain and do the withdrawal process. That starts with LESS borrowing, not more. LESS deficit spending, not more. As soon as folks know that you will not be “buggering the money” nor stacking up more debt than God can pay, they will start to think maybe it’s OK to invest a bit, and spend some. Yes, it’s a pain in the ass to cut up the credit cards and live on beans and rice for year or two while looking for a second job. But that’s what works.

Get off the throat of the private economy. Let it breath. It will grow. Keep taxing it to the point of bleeding it dry and spending the money on non-productive things? It dies and you die. Wealth “redistribution” and most “entitlements” are non-productive. Sorry, they just are. Sucking more out of a moribund productive sector to feed more wealth consumption, while borrowing 40% of it is just being on a Meth Bender. It ends in the grave. The only question is “How fast?”. So it’s time to cut up the credit card, pay the bills, shut off the cable TV and take 1/2 the light bulbs out of the sockets; forget ‘dinner out’ and embrace home made chili beans and corn bread. Anything else is just Economic Reality Denial. Even Keynes knew that.

There will be pain. There will be screaming, sweating, and hollering. Maybe even some head banging and some folks will even pass out or become violent and break things. That’s the way drug withdrawal goes. Just “Don’t deal me, bro!”. We don’t need another good drug deal. We need some reality based responsibility.

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