Wise words from George Washington on government spending

Just moments ago I finished reading George Washington’s Farewell Address (1796), and I’m glad I did. While its language may be steeped in 18th century formality, it remains a sobering speech in its prescient wisdom. Had Congress over the years heeded our first president’s wise admonitions, we’d have avoided the divisive partisan rancor that imperils our financial solvency and our future. Make no mistake about it: We haven’t solved our financial dilemma in raising the debt ceiling. The truth is we spend too much while wanting more. If you spend, you must have revenue, today’s euphemism for taxes. To avoid raising taxes, you must cut your spending. Unfortunately, we’ve gotten ourselves into such a corner that we need to balance the equation, spending less and increasing revenue. The words below are Washington’s; the underlined passages, my own:

1. On political factions:

All obstructions to the execution of the laws, all combinations and associations, under whatever plausible character, with the real design to direct, control, counteract, or awe the regular deliberation and action of the constituted authorities, are destructive of this fundamental principle, and of fatal tendency. They serve to organize faction, to give it an artificial and extraordinary force; to put, in the place of the delegated will of the nation the will of a party, often a small but artful and enterprising minority of the community; and, according to the alternate triumphs of different parties, to make the public administration the mirror of the ill-concerted and incongruous projects of faction, rather than the organ of consistent and wholesome plans digested by common counsels and modified by mutual interests.

I have already intimated to you the danger of parties in the State, with particular reference to the founding of them on geographical discriminations. Let me now take a more comprehensive view, and warn you in the most solemn manner against the baneful effects of the spirit of party generally. Without looking forward to an extremity of this kind (which nevertheless ought not to be entirely out of sight), the common and continual mischiefs of the spirit of party are sufficient to make it the interest and duty of a wise people to discourage and restrain it.

It [party faction] serves always to distract the public councils and enfeeble the public administration. It agitates the community with ill-founded jealousies and false alarms, kindles the animosity of one part against another, foments occasionally riot and insurrection. It opens the door to foreign influence and corruption, which finds a facilitated access to the government itself through the channels of party passions.

2. On Federal deficits:

As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible, avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it, avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertion in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear. The execution of these maxims belongs to your representatives, but it is necessary that public opinion should co-operate. To facilitate to them the performance of their duty, it is essential that you should practically bear in mind that towards the payment of debts there must be revenue; that to have revenue there must be taxes; that no taxes can be devised which are not more or less inconvenient and unpleasant; that the intrinsic embarrassment, inseparable from the selection of the proper objects (which is always a choice of difficulties), ought to be a decisive motive for a candid construction of the conduct of the government in making it, and for a spirit of acquiescence in the measures for obtaining revenue, which the public exigencies may at any time dictate.

The kidnapping of a nation

Many are doubtless giving a sigh of relief at the apparent compromise in DC, resulting in the lifting of the deficit ceiling and avoidance of the first-time ever debacle of a U. S. unable to honor its debts. The terms of this deal, however, may turn out worse than insolvency, the cure worse than the disease.

1. Who are the winners?

Clearly this is a victory for the Tea Party wing of the Republican party, with its insistence on a balanced budget, meaning spending cuts, and no increase in taxes. While they had also resisted raising the deficit ceiling, it represents their only instance of compromise.

2. Who are the losers?

President Obama: Americans may not perceive it this way, but it’s the President, who blinked, despite initially insisting on a package that would raise taxes for those earning more than $250,000 a year. We should have gotten wind of this pattern when at the end of 2010 he caved in to Tea Party demands of not raising tax revenue in exchange for extending unemployment compensation.

Democrats: This agreement curtails the New Deal/Great Society mandates foundational to the Party’s outreach to the indigent, working poor, and middle class. Medicaid, Medicare, and Social Security, social mainstays for many, will see cuts, even as inflation increases and medical costs escalate. Cuts will affect our National Parks, environmental safeguards, education, etc. The costs in lost revenue to the States is yet to be reckoned in. As Steven Cohen, Director of Columbia University’s Earth Institute, has it: “All of President Obama’s brainpower, charisma and speaking skills have not translated into clear, crisp, leadership. Instead, I see just another calculating, poll-driven politico. His re-election campaign dominates his Presidency.” Huffington Post Politics, Aug.1, 2011.

Republicans: The GOP will be the primary recipient of public rage in the 2012 elections for their subservience to their Tea Party wing. Ironically, the GOP faces a high probability of the Tea Party running as a third party in 2012, should Republicans nominate a more moderate conservative such as Romney.

The average American: Ironically, our down economy, now into its third year, requires more cash infusion, not less, as a temporary means to stimulating the market place. Had the present legislation been in effect at the outset of the Great Recession in 2008, a hand-cuffed president would not have been able to bail out Chrysler and General Motors, for example. Three years later, these companies have paid back their loans and added 150,000 workers. Making spending cuts are likely to put out whatever blue embers there are, plunging us this time into world depression on a scale paralleling the 1930s.

3. Are there other consequences?

The worst is yet to come. As you’re probably aware, this agreement calls for a Super Committee composed of six Republicans and six Democrats to suggest further budget areas for cutting. If the Committee stalemates or the Congress balks, automatic cuts will ensue. Not only will entitlement programs be targeted as major areas for cutting, but the Defense Department as well, potentially hazarding our national security. What we lose is our flexibility to respond to crisis, whether economic or military.

This imbroglio hasn’t really been about cutting spending. It’s been ideological, a small core of die-hard conservatives operating as an insurgency to overthrow big government. Holding our country hostage, they have been quite willing to shove Americans over the cliff unless their ransom gets paid.

The Constitution option?

As I write, we face an unbelievable, yet possible deadlock scenario in reaching compromise on lifting the debt ceiling as both political parties hunker down, unable to reach compromise on spending cuts. At this point, you’re hearing a lot about the Constitution option by which the President would simply raise the debt ceiling on his own. Former President Clinton said this is what he’d do and let the courts sort it out later. Many Democrats now concur. At the moment, the President has said he doesn’t think it applicable. Nor do I. Besides, it’s a very bad idea.

1. What is the Constitution option?

We’re talking about the 14th Amendment, Article 4, adopted in 1868. It says,

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any state shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.

2. Why it doesn’t apply to our present debt crisis:

The Article is part of the 14th Amendment pushed by radical Republicans in the post-Civil War era to extend their political power by ensuring the citizenship and voting rights of Negroes. One might think of the Amendment as the beginning of the Reconstruction era, since it sanctioned the dividing of the South into five military districts. Article 4 ironically disallows Southern, or Confederacy debt (e.g., reimbursement for the loss of slaves, etc.), while allowing for the legitimacy of the Federal debt. The Article became law in 1868 after its ratification by the States. At best, it recognizes the legitimacy of the national debt. The post-war government needed revenue sources after fighting an expensive conflict. It wanted to be paid. The Article doesn’t allot the right to increase that debt. I have yet to find any proponents of implementing this Article quoting beyond its first sentence. Reading the Article in its entirety clearly establishes its post-Civil War context and limitations.

3. Why it would be bad policy to invoke Article 4 of the 14th Amendment:

Resorting to this solution would set dangerous precedent, giving future presidents a blank check on spending without Congressional approval. The Constitution is clear on its mandate for a check-and-balance system of the Congressional, Judicial, and Executive branches of government. Besides, we want a solution to our overspending, and not its perpetuation.

In the short run, it would likely incite an impeachment attempt even though it would fail in the Senate, where Democrats hold a slight majority. At the very least, it would add to the fractiousness between the two parties and heat the political temperature still further as we head into an election year.

It’s sound policy, whether at the personal or government level, to always weigh the possible consequences of any decision. Decisions are like stones cast into the water. They make ripples.

A letter to Congress

The other night, President Obama asked Americans to contact their reps in Congress and urge them to pass a responsible deficit cutting bill. Many of you did that, resulting in a mammoth switchboard overload. My wife resorted to email, writing the following message:

Senator McConnell,

Please, please, please use your unparalleled power to limit cuts to Social Security, Medicare, Medicaid, etc., in the proposed budget. It is utter nonsense that we of the middle class get trampled on every time there is a financial crisis in this country.

My husband (retired) and I (close to retirement) have worked hard and, as millions of others in our tax bracket, deserve some consideration here. The GOP, mainly that damned Tea Party faction, is more than likely forcing us to look outside this once great nation for more comfortable living. Funny–I love my country; it’s getting so I just can’t afford it.

Please help put a stop to this foolishness. If our government fails in this crisis, we will have lost all hope.

More baloney

Last night, the President finally appealed to Americans to support deficit reduction, urging them to contact their representatives in Congress. Problem is that it’s not going to get the job done, as even Americans are divided as to the best approach.

Polls indicate that what Americans fear even more than the government defaulting on its loans are cuts in Medicare funding, and with good reason. It’s no secret Obama has been touting slicing some $600 billion dollars out of Medicare, largely by cutting back 30% on payments to doctors and hospitals. Finally, the AARP, usually in lock step with the Obama administration, is vociferously protesting and running spirited ads.

I just don’t see how it’s going to fly. Yesterday I had to visit my ophthalmologist. In the course of office banter, the deficit crisis came up, and I mentioned the proposal being kicked around in DC to cut back 30% on Medicare outlays. He shared that he didn’t know how he could absorb it. He might have to refuse Medicare clients. His current expenses were running so high it was possible that he couldn’t retire. This from a doctor!

Curiously, when I walked into the doctor’s office, virtually all of us were gray panthers, or getting there in a hurry. It’s reassuring that there are some 50 million of us and we do vote.

I’m not sure Americans remember that one of the President’s carrots for getting his Health Reform Bill passed was a promise to cut some $500 billion from Medicare by eliminating waste. Yeah some waste, but $500 billion’s worth? Hey, am I missing something here? Do the Dodgers still play in Brooklyn?

To play fair, I’m equally chagrined at the Republicans, intimidated by their purist Tea Party colleagues, resisting an increase in tax revenue. As I’ve pointed out in an earlier blog, it would solve our budget deficit problems in short order over a space of several years. You just can’t have your cake and eat it, too. We need a mix of cutting spending and raising revenue.

By the way, where are the cuts in benefit outlays for members of Congress? Oh, I forgot–they’re not under Medicare!

The psychology behind Obama’s decision making

It’s Monday and a new day begins for troubled markets as party chiefs once again try to resolve the deficit impasse that threatens a financial meltdown with global implications. Nevertheless, I remain optimistic that cooler heads will prevail and a deal will be struck, though perhaps to no one’s liking. Whatever we do, it’s probable our credit rating will drop from triple to double A, resulting in higher borrowing interest for everybody.

In this post, however, my focus is on the psychological dynamics at work in our President’s seeming inability to provide firm, creative, leadership across the board. Quite frankly, he lacks leadership spunk, the resourcefulness of occasionally putting up his dukes, or more bluntly, becoming a just plain son-of-a-bitch, Harry Truman style if you will. Mind you, we’re in a war, economically speaking, with high stakes. We can’t afford taking the wrong options. As on a real battlefield, leaders must develop a strategy and prove decisive in its execution. Our president, however, a kind man, lacks the killing instinct to get the job done. It’s never a straight path for him. He’d rather waddle. In my previous post, I spoke loud and clear on the President’s tendency to put up the white flag prematurely, undermining his promises, and in the process, giving strength to the opposition, who increasingly perceive him as vulnerable.

Why is he this way? With the increasing advances in neurobiology comes a possible answer. Medical researchers can now map and measure the brain’s capacity to respond to our emotions. Frankly, some of us are wired to be hot, or emotionally sensitive; conversely, there are the cold types, or those said to have “ice in their veins.” I suspect good relief pitchers in baseball belong to this tribe. The worst of the cold types, of course, are the sociopaths, who can shoot 76 teens in a Norwegian camp and argue afterwards how it was necessary. Neurology has grown so advanced that we can even detect who the sociopaths are.

In the realm of finance, an offshoot of neurology has been the development of neuroeconomics, or the study of the cognitive processes at work behind financial decision-making. Let’s take a case scenario: Investors in Wall Street who consistently earn little tend to be markedly conservative, with little appetite for risk. A few losses and they quickly panic. Often they’ll opt for investing in bonds rather than equities, even though over a sustained period, and despite market downturns, the latter out perform bonds. This conservatism, rampant among the hot types, has given rise to what’s known as “myopic loss aversion.” As British psychologist Kevin Dutton remarks, “Emotion, it would seem, is so oriented toward risk aversion that even when the benefits outweigh the losses it henpecks our brains into erring on the side of caution” (Split Second Persuasion, 20011, p. 208).

Our president, surely one of the more cautious and feeling presidents we’ve known, unfortunately mirrors the hot-wired grouping of those undermined by an excessive capacity for empathy. He can see, or better, feel both sides. The result: consensus or compromise, whittling down previous commitment.

In the business model, you may not like it, but the ruthless prove the most successful entrepreneurs, whether Bill Gates or Steve Jobs. In his now classic studies, Harvard’s Stanley Rachman studied bomb disposal experts with 10-years or more experience, specifically those decorated and undecorated. What separates the great ones from the merely good? Rachman made a startling find: the heart rate of the undecorated remained stable, even though subject to high stress. However, here’s the thumper, the heart rate of the decorated proved unstable. It went down!

Rachman discovered something else: not only did successful risk-taking have a physiological basis, but something additional was in the mix–confidence (Stanley Rachman, “Fear and Courage: A Psychological Perspective,” Social Research 71(1) (2004),14976).

Obama is fond of Abraham Lincoln, perhaps intuitively in seeking a mentor of what he would like in himself. While we obviously aren’t able to map Lincoln’s brain via an fMRI, we can presume he had the necessary prerequisite of confidence to make the crucial, hard decisions necessary to preserving the Union, whether in opposing the expansion of slavery, declaring war, changing generals, or issuing the Emancipation Proclamation. In the previous century, three presidents again demonstrated this confidence factor, the Roosevelts, and Ronald Reagan. Regardless of your politics, they inspired a nation with their own confidence and took us from the dark places into the light.

Unfortuately, Obama, a hot type, isn’t wired this way. In truth, he’s more Carteresque than vintage Lincoln. Compassion and equity surely have a place, but not when their offspring is paralysis.

Keeping the faith

In a recent riveting analysis of decision making by President Obama, Praising the Hostage Takers, liberal Paul Leob painfully laments the President’s overweening zeal for compromise.
Will Obama ever hold the Republicans accountable for their reckless and destructive actions? No matter how outrageous their demands, he keeps giving them legitimacy, first resisting, then compromising, then praising the result as bipartisanship. He’s forgotten the basic lesson of negotiation — you don’t hand everything over before you start, particularly to people who have utter contempt for your values and goals. He’s also forgotten the importance of fighting for your principles, so people have a reason to support you.

As I write, top brass from both parties are scrambling to come up with something feasible by Monday morning.  Ultimately, the parties will strike an agreement on easing the deficit crisis, though it’s likely to be bad news for most of us, with options for changing the cost-of living formula for social security, applying a means test to both, and eliminating the mortgage deduction among those on the table.  Meanwhile, no tax increase on incomes above $250, 000.  It’s no secret there’s been a massive transfer of wealth going on to the upper class for some time, ultimately creating something like what you have in South America: you’re basically poor or well off.  The upcoming scenario simply expedites that trend.

In my own case, a retired prof with a still working spouse, my own income from social security and a retirement annuity invested in over the years has been declining even as inflation heats up and Medicare premiums and deductibles soar.  Meanwhile, I’ve not received any cost-of-living payout in social security due to inflation in the last two years. That doesn’t stop the Feds from taxing my social security heavily, as they count my wife’s income as total family income.  It’s worse for others.

The scandal is that fifty percent of Americans pay no tax at all.  Family size, mortgage exemptions, low wages, etc., contribute to this scenario.  Unlike South America, in our country, the poor get attended to and the wealthy get their loopholes.  Wall Street and the banks get their bailouts.  You and I, the middle class, we’re the pack mules

But I want to get back to Obama.  In campaigning for the presidency, he posed as the people’s protector.  On the other hand, he hasn’t walked the talk since getting elected. Loeb, gives us a disturbing litany of what the President has “compromised” away:

Obama’s almost pathological devotion to compromise started early in his presidency. Republicans and a handful of corporate-funded Democrats used the Senate filibuster to block action on issue after critical issue. Instead of calling them to account and marshalling public pressure against them, Obama responded as if their intransigence was reasonable, giving them instant political cover. He did this on health care, financial regulation, and attempts to pass a sufficiently large economic stimulus. On climate change, he tried to prove his reasonableness by allowing offshore oil drilling (just before the BP oil disaster) while securing not a single vote in return. Republican Lindsay Graham was planning to offer precisely this enticement to convince borderline Senators to support at least some price on carbon, and said Obama effectively killed the bill by leaving him with nothing to offer people Obama similarly refused to take a firm stand on ending the Bush tax cuts, which he could have simply let expire. He’s now retreating on the debt ceiling battle, saying he might have to sign off on a deal that cuts spending now a the vague promise of reforming taxes later.

Anything to get the deficit ceiling raised:  erosion of social security, betrayal of the environment, continuation of the Bush tax cuts, perpetuation of corporate loopholes, et cetera ad infinitem! Obama might take a lesson from Ronald Reagan, who raised the deficit several times during his presidency.  Up against it on several occasions, the Great Communicator would take his case to the American people.  And he always won.

Mr. President, call the Tea Party bluff.  No deficit agreement?  So be it! We’ll get through, but the Tea Party won’t.

Mr. President, if nothing else, exercise your Constitution option.  Raise the deficit!  Pay the bills!

We don’t need a Chamberlain buying peace for now, mindless of tomorrow. You don’t betray the American people to placate the opposition.

You want to be liked?  I tell you this: Keep your promises and to paraphrase Carole King, “they’ll come running.”

Do nothing Congress: let’s hope

 

While at the vet office this morning having our cat’s nails trimmed, l picked up the local paper and read the front page national news story:  “New report warns social security and Medicare could run out of money even earlier than feared.”  I’m of course, as you are, well aware of the media’s capacity for alarmist reporting.  Anyway, what a lousy way to start off a Saturday meant for more pleasant things like doing some gardening or watching the Red-Sox-Yankee volatile match-up. 

Still, this matter of our nation’s financial ills, how it all happened, and what we might do to preempt its becoming a contagion is serious business that we can’t simply ignore without putting ourselves at considerable risk for a precarious future of escalating expenses concurrent with diminishing income.  Today’s news story only underscores our economic cancer.  We may not be able to even sustain two enormously successful entitlement programs:  Social Security and Medicare, both of which are now projected to be depleted by 2036, or a year earlier than anticipated. 

As to Medicare, representative Paul Ryan (R-Wisconsin) has unleashed a storm of controversy, proposing to slash 5.8 trillion in federal spending over the next decade.  Presently, and this is real sticker shock, our federal deficit is 14.3 trillion!  Ryan’s linchpins focus on revamping Medicare and Social Security.  Medicare recipients would receive vouchers to help pay their medical costs.  It’s conceivable that Medicare patients might ultimately fork-out 68% of their costs, versus 25% at present.

Right now, cutting back on entitlements is a brave thing to do, fraught with controversy, and perhaps so frightening to public constituencies that Republicans may have assured Obama’s second term in a landslide.  Almost by way of hypocrisy,  even the Tea Party, whose focus is reducing government taxes through reduced spending, bristles at the idea of cutting back on Medicare and Social Security, a recent poll indicating that 70% of them are opposed to such measures.

As it stands right now, we have several unpleasant options:

  Increase payroll taxes for both programs and remove the current salary cap for Social Security, presently set at $106,900.  Republicans are adamantly opposed.  Democrats also are reluctant, except for the President’s proposal to levy a 2% increase on incomes above $250,000.  One problem here:  in running for his first term, Obama pledged he wouldn’t raise taxes on those making less than $250,000.

 Cut benefits.  In order to keep these programs solvent, some have said that cutbacks in Social Security, for example, need to be made in the 15% range.  This is doubtless DOA.

Ironically, the Republicans (and I write as an Independent) are responsible for a good deal of the budget debacle.  House Speaker John Boehner has recently said that “if the President begins the discussion by saying we must increase taxes on the American people–as his budget does–my response will be clear:  tax increases are unacceptable and are a nonstarter.”  (The President is actually proposing an increase on just 2% of wage earners.)

Laurence Mitchell of the Economic Policy Institute, hits the nail on the head, commenting that “In a way, all of this debate, all of this bravery is largely about paying for the Bush tax cuts.”  The facts are that keeping the George W. Bush cuts through 2018 will cost 4.4 trillion in revenue with its reduction of the top marginal rate from 39.6 to 35%. 

Of course if the Congress does nothing about revenue, the Bush cuts will expire at the end of 2012, resulting in 75% of the deficit problem being erased over the next five years, according to David Leonard (“Do-Nothing Congress as a Cure.”  New York Times, Apr. 13, 2011).  Hey, that’s not a bad thing!

I personally think we should all–not just the wealthy–pay a fair share in taxes, and I don’t like the Obama political game of playing one economic class against another.  As I pointed out in an earlier entry (April 18), 40% of Americans pay no federal tax at all, apart from  payroll taxes for Social Security and Medicare.

There’s no free lunch!  We all pay our share or we all sink together.

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