Americans Don't Understand the Debt Limit Debate

The GOP have already bought into the idea that any default would have little consequence other than to force the US government to slash spending. As they have repeatedly said before, they will not agree to raise the debt limit unless there are drastic cuts that match those cited in the Paul Ryan plan. Well guess what, the difference in outlays to income would result in a 30~35% cut, and matches the level that Tea Party folks like Rand Paul have been advocating for (Sen. Paul just voted against the Paul Ryan plan on Thursday because he thought it didn't cut deep enough.)

The premise of the GOP dogma (and a cornerstone in the Paul Ryan plan), is that private spending is being crowded out by public; therefore once public spending is cut, private spending can increase and we will have tremendous GDP growth, we will throw parties, people will be happy, and so forth. If you read the Heritage Foundation's plan, the idea centers around well-educated federal workers, in the near-future shall be laid off in large numbers, providing competition for wages in the private sector. That downward wage pressure would then allow more people to be hired...or so their logic goes. In fact, the Heritage plan assumes these spending cuts will be so wildly successful, that the national unemployment rate will reach 2.8% by 2021 (no mention by Paul Ryan, why his budget doesn't project a budget surplus, even with that projected 2.8% unemployment rate).

Only problem with their version of logic, is that it fails to see that a. wage deflation can threaten to turn the US into a Japan with near-zero growth for over a decade to come; b. there already exists an ample supply of over-educated people that are unemployed (and under-employed), and if they weren't able to lower wages to push hiring, then it's not entirely certain adding more unemployed workers changes anything; c. the GOP plan relies on (low) wages to dictate hiring, not an increased demand for goods and services, which seems contrary to basic economics; d. in the final tally, it is presumed that there must be a psychological support for long-term debt reduction, that will show up in higher spending, which is a lot like playing with horoscopes...debt issue under control, you should spend now!...nevermind that consumer debt is part of the problem of what drove us over the 2008 credit bubble (call it a housing bubble, but it was a credit bubble at the banks that stopped all lending in 2008.)

So you see, it is quite clear that their strategy is to extract their spending cuts one way or the other. Republicans want to pin Democrats on their votes in the House, on a clean bill to increase the debt ceiling. I, on the other hand, think it gives Democrats a sterling opportunity to pin Republicans on their dogma.

gork of OR 5:28AM May 26, 2011