Win the Battle, Lose the War

About 40 days from now, our world will change, so say the pundits.  The last time 40 days caused so much havoc, Noah road the high seas.  Just like then, the [political] landscape on the 41^st day promises to be vastly different than day before.  Odds favor a good run for the Republicans as the voters act on their frustration with the current economic climate.  It seems the ole’ saying, “it’s the economy, stupid”, is bipartisan.

I find the Republican Party in a bit of a pickle.  And the possibility of running the table in November seems to be blurring their vision.   A massive win really puts the GOP in a precarious position because it will be forced to live up to it promises (or more succinctly, its complaints).  And I don’t think it’s possible for them to come through.

First, the Tea Party is splitting the party in many ways.  It expresses a discontent with the public with the politics of Washington – but is decidedly a mandate for more conservatism within the Republican Party.  It has little impact on the Democratic Party because both it, and the GOP, fight a common enemy in the liberal political arena.  As a result, the GOP begins to split – those in favor of the Tea Party and those that are labeled as RINOs.  A house divided cannot stand.

Second, it is impossible to fill its promises of bringing our debt under control.  The debt is about $14T today.   Let us say the GOP is going to be more fiscally conservative and run “smaller deficits” than we see today.  Although that is a promise made by the Democrats, we will assume that the Republicans will really do it because they stump it so often.  Boehner wishes to return to Bush-era budgets.  That era ran $900B deficits.  I hate to be an antagonist, but a $900 deficit still adds to the debt.  But I’ll run with it.  Under GOP control, 2011 will see a budget with a $900B deficit, and the debt rises to almost $15T.  In this case, less is more.  Less of a deficit still leaves more of a debt.  In order to reduce the national debt, mathematically you need to spend .01 less than you bring in.  The government pulls in receipts of approximately $2.4T.  We spend about $3.7T.  That means we need to eliminate 1.3T from the budget to even begin considering a reduction.  Here’s the hard part: 2/3 of our spending is entitlement spending (also called mandatory) – the money that is nondiscretionary and based on our stated rights and constitutional duties.  One third is discretionary.  1/3 of $3.7T is $1.25T.  Therefore, in order for one red penny to be paid against our debt, the entire amount of discretionary spending must be eliminated.  That, my dear friends, is NOT going to happen.

Third, the economy is the only way to get us out of this mess…at least to the point where we begin to stabilize our deficit spending and discuss meaningful methods of reducing discretionary spending.  The problem for the GOP is the economy however.  It is not recovering at a pace fast enough to make a meaningful impact on revenues, and I don’t believe it will for at least two years.  We are a consumer-based economy.  70% of our economy comes from the money you and I spend on houses, cars, dinner, etc.  We get our money to buy those items from three basic places: wages, savings, and debt.  Lately, the government has “stimulated” the economy to artificially supply a 4^th source of funds since the basic three are not working.  Let’s go through each of those, starting with wages.

You have heard the comment that “this is a jobless recovery”.  A self-explanatory term, the recovery is longer and deeper than most because there are few or no jobs for people to move into that will replace their prior salary.  We are running just under 10% unemployment and almost half of those unemployed have been so for over 6 months.  That has never happened before.  Recoveries are measured on many data points, including the number of months it takes for unemployment to recover to pre-recession levels.  The recession of 2008-9 is on pace to take almost four years to recover every job lost.  That is the longest in history.  Longer than the Great Depression.  Combine that problem with our issues of job exportation (NAFTA, GAAT, etc.), and we find ourselves with at least 30MM unemployed with no easy prospects.  So much for wages.  Strike one. 

How about savings?  Savings rates are rising, which by definition, means that folks are not spending it on consumer purchases.  Money goes to keeping the house paid, the car paid and the lights on.  What is left after those expenses is available to spend – unless it’s saved.  Before Ronald Reagan and the advent of the Home Equity Loan and stock market boom, we saved between 8-10% of our income.  From ’81-’08, that rate fell to just about 1%.  We spend everything we had.  After the crash, the worries of our families have returned us to a more appropriate rate of savings; 10%.  10% of our revenues approaches $1.4T that is no longer being pumped into the economy.  We would need to see this maintained for three years in order for consumers to reach pre ‘90s savings levels.  Ouch.  Strike two.

And, debt.  Consumer debt is declining for the 7^th straight quarter.  4.2% decline in 2009 and 6.2% decline through September 2010.  No one is borrowing.  Half of the banks are under scrutiny and find it hard to lend – it’s hard to be a doctor and the patient at the same time.  Houses have seen values fall an average of 30% so folks have less ability to borrow.  The foreclosure and unemployment issues have resulted in a degradation of credit scores and those folks cannot qualify to borrow.  To return to Reagan levels of consumer debt (as a % of GDP); we need to see this decline continue for four years.  Strike three.

Lastly, the fourth source of funds, the artificial stimulus.  Simply put, either the GOP was so naive to believe that we didnt have an issue in 2008 (and thus voted against the Stimulus), or it was too spineless to ask for a bigger stimulus.  No matter, the choice between naive or spineless is a Hobsons choice.  Neither gets you anywhere you want to be.  Like 'em, hate 'em, or leave 'em; at least the Dems did SOMETHING.  Strike one, strike two, strike three, YOU'RE OUT!

Back to the Grand ‘Ole Partiers.  It won’t be possible for the conservative right to reduce our deficit, and the economy drivers of wages, savings, and debt need 3-4 years to recover to pre-bust levels.  Therefore, the Republican Wonder Years of 2011 and 2012 will bring us to a presidential election where the promises of the 2009 and 2010 conservatives can’t be met.  The GOP will win the battle this November, but because they cannot walk their talk, the war will be lost in 2012. 

In order for conservatism to survive – be it with the old face of the GOP or the new face of the Tea Party – it must lose in November.  That way, and only that way, can it wait out the recovery and find blame with the Democrats.  Else, it is the end.

To be fair, that would be fine with me.  We are a two party system and the libertarians amongst us need a break.