Monday, August 12, 2013

Why I Forecast a Shutdown

Have gotten some feedback suggesting that my Shutdown post may be grounded more in my visceral preferences than objective analysis. To be objective, in this context, would seem to mean being indifferent to the outcome, and that if we have a preference, particularly a strong one, our judgment is slanted, and we will only find what we are looking for - and that most likely will not be the truth. I find this sort of critique entirely valid: if you know I consistently discredit one side of an argument (the GOP), then you should ask whether I am objective about predicting a shutdown that might disable the GOP, or whether I am only seeing what I want to find.

I really do want to see a shutdown this Fall, since I do believe a shutdown would greatly enhance, and quite possibly ensure a Democratic takeover of the House in the November 2014 midterms; and despite the risks of one party governance, I do want one party control for a period, long enough for the GOP to redevelop its center-right core, and to separate from its intolerant right wing. I want the No Government wing to be split off from the Small Government wing, since the former group, I believe, contains the bulk of the current GOP's intolerance, nativism, lack of compassion, lack of personal accountability, and the seemingly endless stream of fact-free analysis.

So if I have a strong preference for a shutdown, do I also have a good fact set to support my prediction. Let's see what I can present as supporting evidence for my prediction that there is an 80% chance of a shutdown this Fall:

My rationale for predicting a shutdown is based on five estimations:
  1. The Senate will not approve a Continuing Resolution on the Budget that defunds Obamacare, though the House will. This will take most of September, and will end in a short term fix, i.e., a 60 day CR extension (from September 30 through the end of November).
  2. We no longer have a deficit or medium-term debt problem. Democrats know this. Most Republicans do not.
  3. Obama will not negotiate further spending cuts, unless part of a package replacing the sequester and including new revenues. Since most in the GOP do not believe the deficit/debt picture is now stabilized (#2), they will be sure he is bluffing when he says this. And they will be wrong. This will lead to the shutdown.
  4. Some time in September or October, a bipartisan plan will clear the Senate, replacing the sequester with roughly $600 billion in cuts and a similar amount in loophole-closing revenue increases. The House will ignore this, but it will form the basis of the deal to end the Shutdown.
  5. Obama will not negotiate on the debt ceiling, though the GOP will think he is bluffing until it is almost too late. At the last minute, a debt ceiling increase will be rushed through.

The core of Obama's strategy will be based on his knowledge that the budget caps mandated by the 2011 Budget Control Act, the new revenues gained from ending the Bush tax cuts for the wealthy in the January, 2013 Fiscal Cliff deal, and the April kickoff of the sequester cuts - all taken together these have stabilized the country's deficit/debt situation. Consider Wall Street Journal Editorial Board Member Stephen Moore's op-ed in the WSJ this morning "The Budget Sequester Has Worked":

The biggest underreported story out of Washington this year is that the federal budget is shrinking and much more than anyone in either party expected.

Consider the numbers: According to the Congressional Budget Office, annual outlays peaked at $3.598 trillion in fiscal 2011. After President Obama's first two years in office, many in Washington expected that number to hit $4 trillion by 2014. Instead, spending fell to $3.537 trillion in fiscal 2012, and is on pace to fall below $3.45 trillion by the end of this fiscal year (Sept. 30). The $150 billion budget decline of 4% is the first time federal expenditures have fallen for two consecutive years since the end of the Korean War.

 Already the deficit has fallen from its Mount Everest peak of 10.2% of gross domestic product in 2009, to about 4% this year. That's a bullish six percentage points less of the GDP of new federal debt each year.  ... by the end of this fiscal year, outlays as a share of GDP could fall to as low as 21.5%. At least for now, the great Washington spending blitz of the Obama first term is over.

... the fiscal progress reported here is no excuse for complacency. But it does call into question the wisdom of a government-shutdown confrontation over the budget this fall or a debt-default showdown that runs the risk of suspending the spending caps and sequester and revitalizing an increasingly irrelevant president.

And here is the cover page of the CBO 2013-2023 Budget Forecast, delivered in May:

From the President's perspective, the Budget Wars are over. In the last two years (since mid-2011) about $3.4 trillion has been taken out of spending over the 10 year period and $600 billion has been put into revenues, leading to a fairly stable debt/GDP projection (the curve bends up after 2015 only because interest rates are expected to move back up to the 4-5% range, from under 2%).

The President knew back in late 2010, when the Bowles-Simpson Commission reported in, that the country needed about $4 trillion in cuts/revenue increases to get us to this place. He tried to get there in 2011 in his attempted Grand Bargain with Speaker Boehner, but it didn't work. But he has known this was the goal he needed to reach in order to push back hard against a relentless GOP arguing for more cuts. He knew he needed $4 trillion to flatten the debt/GDP curve, and when the sequester kicked in during April, he had it. Now the GOP will NOT get more cuts, other than replacing the sequester with an equivalent combination of cuts and revenues. We're there. This Far, And No Further!

The GOP, in their almost infinite inability to recognize who Obama is, do not, will not understand or believe this. And therefore the shutdown.

And they will cave within 30 days, most likely giving the President new revenues and a revamping of the sequester. This will be a staggering, and completely self-inflicted defeat. Know your enemies, Machiavelli and all great generals have counseled. If you cannot see who your enemy is, you are likely to get your ass kicked.

Take your seats, ladies and gentlemen. The play is about to begin.

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