An unlikely plurality

A local banker forwarded a PDF of a presentation Bill Emmons conducted July 13. Emmons, an assistant vice president and economist with the Federal Reserve Bank of St. Louis, titled his lecture, “Beyond the Debt-Ceiling Showdown: Understanding the Implications of U.S. Fiscal Policy for the Long-Term Health of the Economy.”

Normally, the yawn factor on the above title would be so far off the charts as to come with a warning about not also operating machinery, sipping whiskey or watching “Arkansas Week.”

But with the debt ceiling being the latest issue on which politicians, cable news pundits and talk radio hosts selectively present their version of half-truths, I was hoping Emmons would be a good filter, and possibly worth our shared time.

He was. And is.

Please know I am not and do not pretend to be an expert on this issue. Further, my immediate, if not instinctual, appreciation for Emmons’ explanations and conclusions is based on an admittedly superficial assessment: Emmons’ presentation supports and refutes Democratic and Republican talking points. Which is to say I prefer in this case to subscribe to the truth-lies-in-the-middle approach. (Link here to the PDF.)

For example, some folks would have you believe them damned tax-and-spend liberal Democrats are to blame for our out-of-control deficits. Emmons reminds that the debt ceiling, enacted by Congress in 1917, has been raised 78 times since 1960, with 29 hikes during Democratic presidents and 49 during Republican administrations. That somewhat supports my belief that Democrats raise taxes and spend and Republicans cut taxes and spend. Both produce nefarious outcomes when consistently practiced. They have consistently practiced and here we are today.

Emmons also addresses myths of the ongoing debate. As to the belief that the Treasury would have enough money to make interest and principal payments without a debt ceiling increase, Emmons says not so fast.

“Failure to pay any of the U.S. Government’s legal obligations would be recognized as such by investors, ratings agencies, and other parties,” Emmons noted.

Continuing, Emmons explained: “As a practical matter, the variability of day-to-day Treasury cash inflows and outflows makes strict prioritization of payments impossible.”

Emmons says not raising the debt ceiling would likely result in a global financial crisis. He provides this quote for consideration: “The full consequences of a default – or even the serious prospect of default – by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and the value of the dollar.”

The quote belongs to President Ronald Reagan.

Using supporting data from the Congressional Budget Office and the National Bureau of Economic Research, Emmons says spending cuts and tax increases are vital to restoring fiscal sanity. However, Emmons suggests spending cuts are more necessary than tax increases.

Further, health care spending (Medicare, Medicaid), Social Security payments and other key entitlements must be brought under control if there is to be a long-term fix to the national debt.

And therein lies the rub. Emmons says members of both parties consistently refuse to make the hard decisions with respect to entitlement cuts. Now, after several decades of posturing for the next election, our entitlement programs are out of control.

Emmons essentially says Democrats and Republicans must do three things (and I paraphrase liberally):
• They must agree to a significant decrease in the size and scope of government.
• They must agree to raise tax revenue.
• They must agree to pragmatically address federal spending with long-term debt reduction goals instead of positioning for the next election.

Emmons added: “Prudent policy entails a credible lower trajectory for spending and a higher trajectory for revenues. A basic principle of economics is to spread any necessary adjustment across multiple margins , i.e., both spending and revenues.”

The banker who forwarded the Emmons info believes political leaders understand Emmons’ essential principles, “but are more worried about being reelected than telling people what they don’t want to hear and what must be done. … I suppose it should be expected that those who are the best at winning a popularity contest would be reluctant to do otherwise. Pragmatism has been lost to the political extremists.”

The banker did posit a few “slivers of positivity.” He is hopeful more voters will “realize from this impasse with the federal debt the importance of electing someone who can work with the other side, build consensus, and get something done.”

He also sees some “positivity” — albeit with a cutting caveat — in President Obama’s handling of the matter.

“For the first time in his Presidency, it appears Obama at least attempted to be pragmatic (although it appears he has failed, in my opinion due to his lack of credibility from past actions),” the banker said.

Being an unrepentant journalist, I often knee-jerk toward the negative when overt and obscene political posturing at the federal level is suggested to contain an element of “positivity.” Political satirist P.J. O’Rourke said it best: “Feeling good about government is like looking on the bright side of any catastrophe. When you quit looking on the bright side, the catastrophe is still there.”

Emmons and the local banker are right about what needs to be done, but right is often wrong in D.C. It will take several decades of substantial entitlement and other program cuts and moderate tax increases to get our financial house in order.

Y’all look for a plurality to support that simple political recipe, and I’ll look for Elvis eating at Denny’s with Ms. Earhart while drinking his coffee from the Holy Grail.