I recently completed Bob Woodward‘s The Price of Politics. The book chronicles the debt showdown of 2011 and the lead up to it. I wouldn’t recommend this to anyone who wants to have a positive feeling about the direction of the country or the federal budget, but I would recommend it to anyone who wants a good understanding of where our politics unfortunately rest today.
For those lucky people who don’t remember, in 2011 the United States approached the debt ceiling. The debt ceiling is a limit set in law placing a dollar limit on the total amount that the United States can borrow. Raising the debt ceiling is typically passed as a matter of procedure and occurs without much of a fuss. 2011 was different. To understand why, Woodward recaps the rise of Obama and the Republican controlled Congress.
Obama was elected during the financial crisis. My own view is that the efforts of the Federal Reserve along with TARP prevented a full-scale Depression. In 2008, we faced the exact same situation that the United States faced in 1929, but we avoided a full scale Depression because we didn’t repeat the mistakes that the Federal Reserve made in 1929. We increased the money supply and saved the banks. In the early 1930s, the Fed enabled a decrease in the supply of money and let banks fail. Milton Friedman explains in this video.
Anyway, I am getting off track. While we avoided a Depression, we still had a horrific Recession. The recession greatly limited revenues to the Federal Government. Spending rose in the form of 2009’s $787 billion stimulus bill. As a result, the deficit exploded. Contrary to popular belief, TARP wasn’t the primary cause of the increase in the deficit. In fact, TARP was paid back and the government made a profit from it.
By 2011, the deficit increased from less than 60% of GDP to over 90% of GDP.
With the exploding deficit, the unpopularity of the Affordable Care Act and high unemployment due to the lingering effects of the recession, the Republicans were swept into power in Congress in the 2010 midterm elections.
Once Republicans entered power, a showdown was inevitable. The Republican’s primary goal was to use their Congressional power to address federal spending and the deficit. Their approach to the debt ceiling was rather straightforward: put together a bill that decreases the deficit by the amount that the debt ceiling would be increased.
Throughout the book all of the personalities clash with each other and their own party. Woodward’s book chronicles every wonky detail of the debate. To sum it up: they never really reached a compromise and the US nearly defaulted. The debate was so ugly that it led to a downgrade of US debt.
Woodward details the efforts of the White House and Congress to hammer out a deficit reduction deal to occur alongside the increase in the debt ceiling. A deficit reduction deal was sorely needed (and still is), despite temporary improvements due to an improving economy. There was a constant back and forth between the White House and Congress.
Particularly striking was how disjointed the process was. Obama and Boehner were negotiating separately from Joe Biden and Eric Cantor. All of the top people were out of touch with their own political bases, who would howl wildly at any talk of a deal and spook their leadership. Anger from the bases (Democrats mad about cuts to entitlements, Republicans mad about increased taxes) often spooked the leadership if they were on the brink of a deal. There were a few opportunities for a Grand Bargain which would have significantly reduced the debt. Obama and Boehner point the finger at each other for the failure of the Grand Bargain, but after reading the book I’m convinced that both of them blew it. They both backed away from provisions of the bargain once their base started complaining about it.
The failure of a Grand Bargain is a major lost opportunity of the Obama administration. Only Nixon could go to China and only a Democrat could have reformed our entitlement mess. If Obama were able to sign entitlement reform, the budget outlook of the United States would have been greatly improved for decades.
In a normal political climate, the Democrats would have agreed to some spending cuts that made them uncomfortable and the Republicans would have agreed to some tax increases that made them uncomfortable. In a divided government, neither side can get everything they want. Neither party had complete control of government, but they both acted like they did.
I thought at the time that both sides were simply engaged in political posturing. I figured they would reach a deal because they always reach a deal. However, after reading the book, I came away with the feeling that we really dodged a bullet. Many in each party were actually willing to risk a default because they thought a default would hurt the other side more. There were Democrats who thought that a default would be blamed on the Republicans and there were Republicans who thought it would do more damage to the Obama administration. In other words, elements of both parties toyed with blowing up the US economy in an attempt to do political harm to the other side.
The effects of a default would have been truly horrific. Even though bondholders would still be paid, Tim Geithner lays out the effects of a technical default to the President in one chilling segment. A default on obligations would have permanently rattled markets and bond investors would then demand much higher interest rates on US government debt for decades. A double dip recession would have likely resulted as well. Another recession at this time would have been devastating. In 2011 we had barely recovered from the last Great Recession. The unemployment rate in 2011 was 9% and another recession would have probably pushed this above 15%. Both parties were well aware of this potential catastrophe and yet they both almost let it happen.
Hardcore partisans blame the showdown on the other side. Republicans will point to Obama’s handling of Republicans prior to the 2010 election and his incompetence as commander-in-chief during the negotiation. He even outsourced it to Joe Biden for a period of time. Democrats will say that Republicans were unwavering in their resistance to tax increases and too intimidated by the newly minted Tea Party movement. This approach amounts to two toddlers wrecking a living room and then pointing at each other and saying simultaneously “he started it!”
It’s hard to come away from the book without feeling that our political system is completely and utterly broken. Today’s Democrats look at Republicans as the reincarnation of the Third Reich. Republicans look at Democrats as the reincarnation of the Soviet Union. A simple budget debate that would have been resolved rapidly 30 years ago is now an ideological showdown against the forces of “evil”, depending on your perspective.
My own view is that it’s the fault of baby boomers. The debt showdown was about simple math in which everyone needs to sacrifice some of their position to hammer out a simple deal. Unfortunately, Washignton is dominated by baby boomers and they are more apt to view the showdown as an ideological showdown between the forces of good and evil.
The roots of baby boomer extremism is in the incredibly intense ideological showdown of the 1960s. It’s shocking to me how much hardcore conservatives and liberals share resemblances to the radical student movements of the 1960s. Unwilling to compromise, convinced that entire institutions are filled with evil and willing to use any means necessary to achieve their ends. It’s not a coincidence that as soon as baby boomers ascended to a majority of Congress in the early 1990s that our politics became increasingly divisive, reaching its apogee of dysfunction during the 2011 debt showdown. Partisanship so extreme that government was almost unable to fulfill the basic function of paying its bills.
There is a reason that the most famous baby boomers have nothing to do with governing or managing. They are interested in tearing things down and building a new. They are wildly creative – giving us people like Stephen Spielberg and Steve Jobs – but the downside to that creativity is that they’re not interested in basic management and maintenance of existing institutions, to the point where our existing institutions become completely dysfunctional. The budget showdown is about simple math and that’s probably how prior generations would have ultimately looked at it. To boomers, the budget showdown is about moral priorities and those who object to their view aren’t just wrong, they’re immoral and possibly evil.
My views on this are fueled by my reading of another book that I’ll have to review at some point on this site, The Fourth Turning by Neil Howe and William Strauss. Ever since I read the book, I find myself looking at current events through a generational perspective and nowhere is this more apparent than in politics.
The good news is that the baby boomers are getting old. Members of Generation X and Millennials are far less ideological than their parents, with roughly double the number of political independents. As the baby boomers leave politics, my expectation and hope is that sanity will return to our politics and showdowns of this magnitude won’t happen again. Our debt problems aren’t going away, but that doesn’t mean they can’t be resolved through arithmetic and rational thinking. It may take a new generation to tackle these problems. It’s too bad that Republicans and Democrats weren’t able to act like adults and take advantage of the unique opportunity that they had in 2011 to resolve this problem.
PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings. Read the full disclaimer.