Years of the Locust

The looming debt limit deadline has spurred widespread speculation of some sort of grand bargain on taxes and spending.  I consider it likely that some deal will be announced and that the limit will be raised.  I consider it a near certainty that the bargain will be a farce.

Any such trade will involve the Republicans agreeing to tax increases, and Obama and the Senate Democrats making promises to reduce future spending, including perhaps entitlement spending.  The problem with any such deal is asynchronous performance.  Tax increases must be implemented by legislation, and remain in place until Congress explicitly votes to eliminate them (unless there is a provision for expiration written into the law).  In contrast, budgets are passed year to year–well, they are supposed to be, anyways–and it is virtually impossible to precommit future Congresses to adhere to promises to cut future spending.  Watch for any deal to have eye-popping spending cut numbers–all in out years.  Pie crust promises–easily made, even more easily broken.   As previous deals have shown, the tax increase parts get implemented, and the promised spending cuts fade into oblivion.

Even promises of changes to entitlement programs are usually evanescent.  The metronomic “doc fix” in Medicare is a classic example.

The only reason any of this matters is in their effects on  the 2012 election.  2011 and 2012 will be years that the locusts hath eaten–as were 2009 and 2010.  Years when we should have grasped the nettle of our debt and spending problems–but did not and will not.  The time we have to do so is shrinking, but a serious start in 2013 would give us a serious chance.  But if Obama is reelected, that will not happen.  2013-2016 would become locust years as well, because Obama is Obama, and because the last two years of a second term invariably dissolve into conflict, exhaustion and incoherence in which nothing of substance is accomplished.

A bargain would therefore likely be a bad thing.  It would not actually address the problem, but would perhaps create the perception that it has.  This would empower the incumbents who would bask in the false glow of pretend accomplishment.  And since the status quo embodied in the incumbents is fundamentally unsustainable, this would be a disaster of the first magnitude.

A fundamental change in the direction of government in the US is needed not just because spending is unsustainable.  The burden of debt is becoming unsustainable not only because spending is increasing, but because growth is anemic: debt burdens ease over time if growth outstrips the cost of servicing the debt.  But US economic performance in The Locust Years has been poor.  Yesterday’s dreary employment report makes it abundantly clear just how poor that performance has been.  In terms of employment, this “recovery”–such as it is–is the worst since the Great Depression.

And likely for the same reasons.  Hyperactive federal governments that heap massive regulatory burdens on the backs of businesses and households, and which generate vertigo-inducing uncertainty to boot.  Today, the looming specter of Obamacare and Frank-n-Dodd are huge drags.  But these are only the most visible things.  From the EPA to the NLRB to whatever government agency you can name, regulators are raising both costs and uncertainty.  Which is almost certainly why “Recovery Summers” are chimerical: why years that should have witnessed a sharp rebound in economic activity have instead been consumed by pests swarming out of the District of Columbia.

No, what happens between now and August 2 is important only in how it affects what happens in November, 2012.  Sadly, an Obama defeat then is not sufficient to ensure that the country can turn things around, but it is necessary.  Any dealing around the debt ceiling should be done with one objective in mind: ensuring that our future harvests do not fall to the sun-blotting clouds of spenders and regulators.

About Craig Pirrong 223 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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