Shakespeare 's Comedy Plays Out in the US Government

On Sunday I watched CNN until I thought I was going to choke from excessive theatre. If Shakespeare was alive he would have applauded loudly at the farce we call Washington. I am not sure which play the current cast of characters would best fit – A Comedy of Errors or All’s Well that Ends Well? I won’t say a lot more about these plays since I read the Clift Notes versions at best as a freshman at George Tech in 1911 and don’t want to give away my total lack of understanding of the arts.

But you have to admit without actually being a Buddhist monk that these politicians are missing the big picture. No matter how you look at this thing what was once billed as a renewal of the Bush tax cuts is now the world’s most laden Christmas Tree. The unfolding legislation is a really bad deal for all of us. Yet the stage production repeated with excruciating analysis by the press and Internet conveys how and why it is of the utmost urgency. I don’t agree.

As many of the Ds and Rs and journalists hold hands and sing one more kumbaya we are lulled into a warm sensation that this compromise bill is going to stave off a double dip recession and be just what Dr. House ordered to reduce the unemployment rate.  But are we really holding their feet to the fire? Will the bill do what we hope? Here are some things to think about.

•      The bill, even with all the new ornaments they are adding, will amount to a very small stimulus. It mostly keeps tax rates the same in 2011 as they were in 2010? How is that a stimulus? How is that going to significantly reduce the unemployment rate?
•     The bill in any manifestation will definitely add to the government deficits in coming years. These additions to an already bloated government debt pile certainty leads to even more uncertainty about interest rates and the soundness of federal, state, and local governments. Of course, you can translate that business uncertainty into a virtual certainty that you, I, and Mr. Jones are going to pay higher taxes at some point in the future. 
•      This bill does absolutely nothing to reduce the explicit and implicit debt obligations coming from Social Security, Medicare, and Medicaid. And it does nothing to reduce or control healthcare costs for those who actually pay for their healthcare.
•      Have you heard of bond vigilantes? This terminology is a colorful description of the people and institutions that make their living trading bonds. Call them geeks or greedy they have the tools and rights to decide when bonds are no longer a good deal. Most of us buy bonds and hold them to maturity. But sometimes we decide to sell them before maturity and it is these bond dealers who form a market so we can do that. We like them when they buy the bonds we no longer want so that we can buy villas on the Croatian coast. Anyway, as the US debt gets a big as Roseanne Barr’s belly, we recognize that there are way too many bonds out there and this should lead to a fall in the price of bonds. Knowing that – a lot of us want to sell these bonds before they lose too much of their value and the bond vigilantes are leading the charge with their faithful dog, Rin Tin Tin. No offense to Lassie. As bonds become as cheap as kimche in Korea, the returns on the bonds soar. Another way of saying this – it takes a much higher interest rate return to get people to hold all this kimche. Viola (or to you unsophisticated people who cannot spell in European, Walah) – the higher interest rates then act as an impediment to people who want to buy new houses and firms who want to buy new equipment. It generally slows things down.

So let’s summarize the above. This new legislation will not be a big enough stimulus; it will make the US debt larger; it will create more uncertainty; it will raise interest rates; and it will reduce spending on housing and investment. Hmmm.

You might be fuming at this point and say, LARRY, IF WE DO NOT PASS THIS BILL WE WILL GO DIRECTLY INTO A DOUBLE DIP recession. The capital letters implies that you are yelling at me or that you hit the Caps Lock key by accident. It is taken for granted by EVERYONE that if we let tax rates rise in the coming year that we will go directly without collecting $200 dollars to the square titled “Recession”.  So I have two things to say about that. First, this is not 2007 and we are not in free fall. While the economy is not growing as fast as we would like right now, it is growing and we are not in the same kind of panic situation as we were a couple of years ago. We do not need desperate policies. There are plenty of green shoots showing that the US economy is improving and as I have said in many past posts – we need to heal the housing markets and financial problems before the economy really picks up. This recent legislation does nothing directly to heal housing or finance. As I said above, passage of this bill does very little while creating very large risks.

Second, I am not advocating doing nothing. In fact, I would go along with some well-placed stimulus as long as it was coupled with Angelina Jolie.  That’s not right. I mean so long as some stimulus was coupled with a plan for long-run fiscal balance. I don’t need the long-run plan to start impacting us today. Too much austerity right this minute might not be good. But I do need the Plan to be legislated tomorrow with its first real impacts starting a few years from now. By legislating a plan today with impacts starting tomorrow – means we all can start planning today. That longer-term plan could have some elements of very short-term stimulus within it. But the longer term plan must show how we are going to pay for it in the future.

A good friend of mine had knee replacement surgery last week. He needed some pain medicine to get through the first week of recovery but soon he can get by without it. He knows that he has ahead of him several weeks of lingering pain and tough rehabilitation. By any definition, that plan for rehabilitation is tough and nothing to look forward to. But he knows that it is the only way to a recovery that allows him full use of his knee and leg. We in the USA can pretend that we don’t need a rehab plan yet, but the truth is that our government is giving us pain pills and are afraid to have us think about the future. We are better and tougher than that. We need better leadership and we need to make sure they know that. It is easy for them to legislate another round of morphine. Let’s not let them do that without also being very clear about what we need to grow again.