StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Raise Your Hand If You See A Budget Stalemate/Gridlock/ Shutdown On The Horizon

05 Oct 2010
Posted by Stan Collender

You may want to have a strong cup of coffee -- or something stronger -- before you take a look at my column from this morning's Roll Call.  Honestly, I'm not sure who besides those of us who analyze, comment on, and prognosticate about federal budget doings is going to benefit from what's ahead next year.  Maybe I should raise my speaking fees.



Raise Your Hand if You See Stalemate Coming

Oct. 5, 2010
As someone who for more than three decades has watched, participated in and commented on the annual debate in Washington over spending, revenues and deficits, I have a hard time believing anything positive is in store for the federal budget next year.
I don’t just think a stalemate is in the offing; I see a stalemate that starts with hardened positions that get even more entrenched, bad feelings that get even more extreme, a debate that will be in worse shape when it’s over than it was at the start and one or more government shutdowns in our not-too-distant future.
There are many reasons why you might disagree. The Simpson-Bowles deficit reduction commission, which is supposed to issue its recommendations in December, could provide next year’s budget debate with some positive momentum that leads to an agreement. House Republicans’ new “Pledge to America” emphasizes spending cuts and could be a sign of things to come. As the economy continues to improve next year, there could well be the call that has been missing since 2008 from Wall Street for a shift in federal fiscal policy to deficit reduction.
The tea leaves tell me that none of this will occur or, if it does, that it won’t have much of an effect. There appear to be five primary reasons why a stalemate on the federal budget is much more likely than progress.
First, unless something very unexpected happens Nov. 2, there will be smaller majorities in the House and Senate than have existed the past two years. Small majorities generally make legislating difficult because a handful of Members can scuttle any deal, and the extreme emotions that already exist about federal spending and taxes will make work on the budget especially challenging. Given the hardened, inconsistent and sometimes incomprehensible starting positions on the budget, factions are likely to use this power on everything including the ground rules for deficit reduction negotiations, budget resolutions, individual spending and revenue bills. They will almost certainly be prepared to withhold their participation and votes if they don’t get what they want.
Second, it’s hard to imagine that the politics of obstruction that worked so well the past two years will be abandoned in 2011. Even if control of the House or Senate changes hands to the Republicans, it looks as if the strategy of using every possible political and procedural roadblock and then blaming the other side will still be in vogue.
Third, the Federal Reserve appears to be on the verge of taking additional actions to stimulate economic growth. If it does, and if those actions are successful, federal deficits and national debt will become relatively less important issues. As a result, it will be easier for Congress and the White House to avoid a deficit deal because voters will blame the budget less for the country’s economic ills.
Fourth, there has been a clear shift to a take-no-prisoners attitude in American politics in general and in budget policymaking in particular. Cooperation and compromise are now equated with collaborating with the enemy. For example, Sen. Jim DeMint (R-S.C.) has made it clear in recent weeks that he’d rather lose a debate next year than compromise to get a deal done. A number of candidates who are currently ahead in the polls are saying something similar or even more extreme. Federal spending and revenue have been the poster children for the no-compromise stance of this year’s election, and that attitude is likely to manifest itself as inaction during next year’s budget debate.
Fifth, the Simpson-Bowles deficit reduction commission appears nowhere close to an agreement that will be supported by 14 of its 18 members. The commission has shown in recent weeks that it suffers from the same partisan divisions over revenue and spending that stymie Congress, making a bipartisan deficit reduction blueprint much less of a possibility. As a result, any optimism that the commission will provide a preseason boost to action next year is quickly fading.
The results of this witch’s brew of bad budget ingredients are not hard to see. The fiscal 2012 budget debate will likely start next year with a quick rejection of the president’s budget (expect the retro phrase “dead on arrival” to make a comeback) by Congressional Republicans, but Congress will be limited in its ability to come up with a workable plan, let alone compromise with the White House. Indeed, it’s not clear that Republicans, if they are in the majority, will be able to agree among themselves on a plan. Lawmakers will then try to raise the stakes by attracting voters’ attention to the normally inside-the-Beltway budget process. That will require extreme tactics, like threatened or actual government shutdowns and angry bashing of the Federal Reserve.
It also means that, rather than legislative initiatives, the only changes in the federal budget outlook in 2011 will be the result of new estimates of previous actions, such as still-lower Troubled Asset Relief Program costs, and revised economic forecasts. That will mean that the projected deficit will be close to the baseline level of about $1 trillion and that a deal on the federal budget will be no closer than it is now.

Are you sure on point 2?

I largely agree with this analysis, except for one key point. Do you have any evidence that Democrats will do anything other than what they've done for decades, i.e. roll over to Republican demands? For various reasons, I can't see any members of the Democratic caucus who would be willing to engage in the level of obstruction we've seen over the past two years.

In short, I think we'll see more of the same if Democrats keep a majority, but if Republicans get the edge in Congress they'll send a raft of new legislation to the Executive.

Naming names

probably spot on, but while you named DeMint you give short shrift to the fact that ALL the problems you cite - incomprhensible positions, obstructionism,take no prisoners attitude, and the partisanship of the deficit comission - come from the republican/Right/Conservative side of the aisle.

It's even worse than that

IMHO. Assuming Republican control (or near control) of the House and Senate, how likely is it that they will want to give the president any credit for anything going into the next election? It seems more likely that the hardliners will not want to pass anything that Obama would sign for fear of allowing him to take credit for doing what they want, even if they could agree on what they want. That is to say, this isn't even about policy anymore, it's merely about talking points and name-calling.

I'm not sure there will be enough responsible adults left in Congress to pass anything in the next two years.

The government we deserve

We certainly get the government we deserve. Most people are too ignorant to understand the core problems of our country.

I think Bill Maher was right when he said that the Democrats, while disappoint, are just a disappoint friend. But the Republicans are a deadly enemy. Lunatics who can't solve problems.

Budget Fight Might Not Be the Worst of It

I agree with Stan Collender that the fight over the budget next year will be as acrimonious as ever. In addition to the endless budget posturing, the debt ceiling will have to be raised yet again in the spring or summer of 2011. Add this factor into the budget debate, and you get yet another roadblock to an agreement.

If Collender’s prediction of constituent attention to the budget process pans out, it will certainly add even more fuel to the fire. Because lest we forget, budgets are not about money alone. Government budgets express the fabric of civil commitments that citizens have made to each other over many decades. Those commitments -- public safety, education, good roads, freedom from government over-regulation, and reasonable taxes -- are built into local, state and federal budgets. People have organized their families and businesses around these commitments. When we talk about a budget crisis, it is a crisis not because there is not enough money. It is a crisis because the fabric of our society is being ripped apart, threatening families and businesses. When Americans become aware of these threats to their way of life, it will only add to political polarization and the evaporation of any remaining spirit of compromise.

But this proverbial fire extends to businesses as well. My firm has developed the fiscal adjustment cost (FAC) hypothesis, which posits that investors will soon realize that severe tax hikes and spending cuts will be required to balance the budget. Firms that have to pay higher taxes and use aging infrastructure will be less profitable. This will cause investors to sell corporate stocks and bonds, leading to a damaging negative wealth effect. This is just one example of how fiscal adjustments will echo through our economy in powerful, complex ways and impact every household and business in our society. If Collender is correct (and I believe he is), and lawmakers produce no clear roadmap for reducing our budget deficit, a government shutdown will be just the prelude to a fundamentally different America.

A credible deficit reduction roadmap is even harder

The budget was in reasonable shape in 2000 (short term projections very good, long term projections less rosy). Then the Republicans gained power, and we learned that Republicans like deficits. Of course Republicans aren't saying they will run up the deficit if they regain power, but they didn't say that during the 1990's either. Even if Republicans were to change their minds about deficit spending, I don't see how they could communicate that change in a credible manner.

Fiscal braking

It is already happening in my federal agency. Effective with the CR, we have frozen all hiring, training, and travel. Too bad since we were seeing very high quality candidates. We also can't hire from within. I anticipate our being in this state for at least the next twelve months.

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