Will We Finally Put Our Fiscal House in Order? The Budget Debate Will Be Determinative

For weeks the discussion among talking heads and columnists has been about a “looming” government shutdown. Then, last week, our elected officials gave us, through yet another Continuing Resolution (CR), another two weeks to debate a budget for the year that is already half gone. Is it any wonder that Congress is held in such low esteem? Both parties correctly claim that a shutdown was never the objective and, in truth, it was not. A shutdown is simply the necessary consequence of a failure by Congress to authorize an appropriation of federal expenditures. In and of itself, a shutdown doesn’t save money . . . it simply postpones spending until the Congress finally agrees to a compromise plan and the President signs it into law.



The current spending stalemate is, in reality, the most important domestic congressional legislative battle in at least a half century because the different governing philosophies of the two major parties, as crystallized by the results of the 2010 Congressional elections, have come into sharp relief. After the Democratic sweep in 2008 and their control of both houses of Congress and the presidency, the new majority embarked on the most major federal spending binge in U.S. history and increased our annual budget deficit to $1.3 trillion and the accumulated national debt to $14 trillion with no discernable benefit to the nation. The Obama promise that the unemployment rate would fall was vastly wrong. As everyone now understands, it actually increased.

During 2010, the electorate’s focus shifted to the risks to this nation of continuing to incur unsustainable debt at the federal and local levels, (witness the threat of national bankruptcies throughout the Euro zone), the increased threat of inflation, and the consequences of the loss of international confidence in the U.S. dollar and U.S. debt obligations. Currently, a dollar will buy 1/1400thof one ounce of gold which means that gold (as good a measure as we have of how investors value our currency) has increased 60% in dollar terms since Mr. Obama took office. For the first time in a long time politicians focused the public’s attention on the need for austerity and a smaller and less intrusive role for government in our lives. The rise of a faction of fiscal conservatives loosely affiliated in what is called the Tea Party (albeit not really a party) provided much of the energy for a seismic congressional shift in November, providing the Republicans with a large majority in the House of Representatives. These freshman congressmen, of course, know they are serving on borrowed time, and that if they don’t deliver real progress on their promises to balance expenditures with income along with far less debt, their constituents will recall them faster than one can say “you’re outta here.”



Because the last Congress failed to present (let alone enact) a budget for the government’s fiscal year commencing October 1, 2010, and ending September 30, 2011, the Congress has until now been deferring a final budget (relying instead on so‑called Continuing Resolutions (CR’s) to permit spending to continue at the 2010 fiscal year level. The current CR was to expire on March 4, but was replaced with another two week CR after which it will be illegal to spend money without either an approved budget or yet another CR. This is how our government has functioned for the past year. You can’t make this sort of thing up.

Once the GOP controlled House of Representatives took office in January 2011, the new majority made it clear that any appropriations for the remaining portion of the current fiscal year would be based not on the 2010 fiscal year (estimated at $3.5 trillion), but on the 2008 fiscal year of $2.9 trillion. The Republicans are resolute on this point because spending at 2010 levels would “bake” into the budget the highest baseline in U.S. history. Basing budget cuts on the 2008 fiscal year baseline, they propose to cut $74 billion in the current fiscal year which is already five months old. Seventy specific cuts were identified including $58 billion in non‑security discretionary spending reductions.

This is where the proverbial rubber hits the road. Who will blink? We have written repeatedly about the danger the nation faces, perhaps in the not too distant future, of the dollar being supplanted as the mechanism for pricing commodities (which has given us substantial advantages since we don’t have to convert the under‑valued greenback to euros or yen or some combination of currencies). Loss of confidence in creditors’ willingness to be paid in our fiat money would result in major negative upheaval in our economic fortunes. Make no mistake. This is not just an ordinary political catfight. The outcome will determine whether America is serious about getting its fiscal house in order.

For the Democrats, everything is at stake. This is the fiscal equivalent of the battle of Waterloo and to lose it could, indeed, be their Waterloo, and signal a reversal of their 80 year effort to have government further intrude into every nook and cranny of the economy and our private lives. Today’s Democratic statists do not seem to understand that this country was built and prospered on a philosophy of individual enterprise, individual decision-making, and the consequent risks and rewards of that system. The people are angry and will not be pacified by Democrats pointing to Wall Street greed and Republicans inveighing against government incompetence. The people want common sense action. Spendthrifts are out of fashion either on Main Street, Wall Street or Capitol Hill. That is why such a political battle is being waged at the state level as well as in Washington (see last week’s essay). Wisconsin is seen all over the country as a microcosm of the nation.

The Republicans have no easy task ahead. They cannot rely on the 2010 election results as proof that the public will support austerity. There is a major difference between voting on a somewhat abstract concept and being faced with reductions to one’s own favorite program. Iowa farmers will fight bitterly to maintain corn subsidies for ethanol despite the unchallengeable proof that the ethanol program hasn’t made any real dent in America’s reliance on imported oil, is wasteful of energy, is causing a terrible misallocation of resources, and, in fact, is largely responsible for the substantial increase in the price of food. Clean coal advocates, and green zealots will scream bloody murder if a single dollar is diverted from their pet wind and solar agendas. The list goes on and on.

That is why the GOP must lead carefully and frame both the budget debate and the budget itself to everyone’s economic well being. The people understand, perhaps as never before, that progress,toward a balanced budget is also progress toward the long‑term growth, job production and prosperity for which everyone yearns. Framing the debate around bean counting will not work. In our view, Wisconsin Governor Scott Walker failed to make that case during his recent appearance on Meet the Press. He simply allowed union busting charges to go unanswered instead of carefully showing the difference between public and private sector unions. He missed an opportunity to point out that federal workers have no right to bargain over benefit and pension programs.

That same day however, New Jersey Governor, Chris Christie, made a far better explanation on Face the Nation when he noted that the issue isn’t about laying off teachers, but rather whether teachers should be retained based on their quality rather than their tenure.

The left will try to frame the debate around anecdotal stories (e.g., “grandma” freezing in her unheated home or children not getting their school lunch during the period the government is shuttered). In short, the GOP cannot rely on an appeal to austerity. They must build their case as being necessary for the long‑term betterment of the country. In 2008, the GOP ‘s base year for their budget, America maintained a safety net for those in need, and no one is proposing it be stripped away.

As Fred Barnes put it in his op‑ed piece in the Wall Street Journal on February 27:

"Republicans will need to organize far more support for cuts high profile, high decibel support than they have. They must be persuasive in countering the Democratic argument that preserving individual programs is more critical to the well‑being of Americans than is rolling back overall spending to keep the country from decline. And like Reagan, they must sound positive and upbeat to offset the nation’s anxious mood . . . And their message is critical. Bragging about painful but necessary cuts to Medicare scares people. Stressing the goal of saving Medicare won’t. Talking about the need for austerity is a loser. The idea here is to produce prosperity. Pain isn’t the issue, relief is."

There is a precedent here. In 1995 the Congress and President Clinton reached a spending impasse and many government operations were shuttered for 20 days. The Democrats and many pundits claim that the shutdown was forced by then Speaker Gingrich who, by overplaying his hand, brought about Mr. Clinton’s reelection in 1996. It is also true, that Mr. Gingrich was perceived as arrogant and that shifted public opinion to the Democrats in 1996. Surely Speaker Boehner and the House Republican majority should take pains to keep the focus on the need to control spending to ensure our nation’s economic health and maintain our world leadership.

However, it is just as likely that Mr. Clinton’s reelection was the result of his political adroitness in moving to the center, something Mr. Obama seems not to appreciate. Mr. Clinton’s famous phrase in his 1996 State of the Union speech that “the era of big government is over” more likely resulted in his reelection than the 1995 government shutdown.

As these interesting days unfold, the focus of our attention should be less on whether some government services need to be suspended for a short period of time and more on whether Republicans can follow up their historic election victory in 2008 with a convincing case that sound governance and fiscal responsibility are necessary to rescue America’s economic fortunes. They can expect salvo after salvo of incoming fire from the big spending statists. Paraphrasing Harry Truman’s plainly spoken admonition, if they aren’t prepared for a hot fire fight, they should have stayed out of the kitchen.

By Hal Gershowitz and Stephen Porter

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