Garcia Media Life

Lucy Nobbe from Kirkwood, Missouri decided to take matters into her own hands. She rented a plane and a banner and flew over Standard & Poor’s Manhattan offices Tuesday with this message: “Thanks for the downgrade- you should all be fired.”

Representing the outrage felt by tens of millions of Americans over S&P’s downgrade of the United States to AA+ status last Friday, Lucy had enough. She says she initially planned to fly over the Capitol building with the same message for our nation’s gridlocked lawmakers, but realized airspace restrictions over Washington, D.C. would have resulted in an escort from F16 jet fighters and an interview with the Secret Service so she did the next best thing.

To many, many people, S&P’s actions last week smacks them as deeply unpatriotic. The symbolic downgrade has helped send the nation’s and the world’s stock markets into turmoil and caused millions of people sleepless nights as they watch their 401K’s sink into oblivion. S&P then promptly downgraded Freddie Mac and Fannie Mae, which should now make it more expensive for people to get home loans in an already depressed housing market. And they’re not done yet as S&P has now embarked on a downgrading spree; targeting states, counties and municipalities across the nation.

And even if S&P’s message about a dysfunctional American political system was painfully true- their mission is supposed to be grading companies and countries on their credit-worthiness. As their actions helped cause the markets to tank, their own case for the downgrade was belied by the fact the entire world went to the safest haven they could find- the very U.S. Treasuries S&P had just said were unreliable.

As it was there were two parts to S&P’s downgrade message; one economic and one about the political gridlock in DC. As they got the math wrong and overstated the size of the debt by $2 trillion, they admitted their error, dropped the economic argument and presented only the political one.

We don’t need to get into the fact S&P had given Enron a AAA rating until just about the day they went bankrupt, gave sterling ratings to companies who held worthless subprime mortgage loans four years ago, and missed the European debt crisis until it was well underway. It’s more primal than all that. They downgraded America.

And Lucy Nobbe, a single mom and broker who knows a thing or two about finance ended up spending $900 to rent the plane and the banner and make her voice heard over the offices of Standard & Poor’s, speaking for millions of others who continue to scratch their heads at the gridlock and the insanity of it all.

S&P may have questionable moral authority in downgrading the U.S. from its AAA rating but they have pointed out that if Republicans don’t back down from their anti-tax fervor and Democrats continue to maintain entitlement programs without significant reform- the gridlock will continue to kill us.

There are two other ratings agencies who still give the U.S. a AAA rating, Moody’s and Fitch. Both warn that may change but have also said they put less weight than S&P does on the politics of gridlock. But ironically, the political reaction to the S&P downgrade may change their minds on that. Instead of taking the downgrade as a warning shot across the bow, both sides have come out swinging against one another in response, making the very point S&P highlighted that these intractable political positions make us a riskier investment.

There are indications that the “Super” congressional committee of a dozen lawmakers representing the House and Senate will be every bit as deadlocked as the larger bodies were just last week. Standard and Poor’s and their fellow ratings agencies may have played a significant hand in our current crisis by handing out completely undeserved sterling ratings to the instigators of the subprime lending catastrophe four years ago, but they’re right to express serious concern about the state of our “take no prisoners” political climate.

But a downgrade may be taking it all a step too far. The U.S. economy, anemic as it is, is still way better off than it was, say in 2008 in the midst of the banking crisis and we didn’t get downgraded then. Downgrading the U.S. now carries the risk that interest rates will rise and make paying off debt an even more expensive task, not to mention the ripple effect on an already struggling economy as rates potentially rise for everything from small business lending to auto, credit card, and student loans.

It happened, though, and here we are. If the Congressional “Super” committee finds a spine and a sudden spirit of compromise, we’ll be alright. Given the toxic political environment of the moment, I wouldn’t exactly give that likelihood a sterling, risk-free AAA rating

Can we be realistic here? The debt ceiling “compromise” signed into law Tuesday fixes nothing and ensures continuing uncertainty in financial markets and more ideological warfare in the months ahead. But congratulations Washington for putting the matches away and not burning the house down.

As all sides hold their noses while they get a good look at this really ugly baby, here’s what has not been accomplished.

Deficit Reduction: A little bit- but not much. $2.4 trillion over ten years against a $14 trillion debt with most of the cuts still to be determined by a “Super” committee of 12 angry, feuding lawmakers who start meeting around Thanksgiving. This ought to give us that much more to be grateful for.

Reduction in Entitlement Programs: They’re responsible for most of the debt but even the draconian cuts that automatically take place if our angry, feuding lawmakers can’t come to an agreement- don’t address Social Security, Medicaid or Medicare recipients. Some think this a good thing with a reeling economy causing so much misery but for a so-called attempt to bring spending in line, not a smart move to ignore consideration of the major contributors to the national debt.

Revenue: Two major commissions that set about to solve deficit-spending in the past year both came to identical conclusions. It cannot be accomplished by cutting alone. This is not about partisanship- it’s about math. There were plenty of Republicans on both these panels who endorsed the concept of raising revenue as a part of balancing budgets. See this column in the Washington Post that discusses these commissions and their discoveries. Alan Greenspan, one of the last human beings on the planet you would expect to favor tax increases is now in favor of exactly that. Blogged about it a few months ago.

Rational Process: We will forever more be holding future extensions of the nation’s debt ceiling hostage to the ideological flavors and fights of the day. This has nothing to do with party. Other than whichever party is out of the White House will, from now on, be pushing the nation’s economy to the brink in order to extract whatever it can from perpetually horrified future Presidents, Democrats and Republicans alike.

The Current Economic Mess: The 1,000 point Dow Jones meltdown that would have been expected had the debt ceiling not been passed was replaced instead by a 265 point meltdown out of fears stoked by today’s weak and struggling economy that the debt ceiling agreement does little to address.

But in the end, was it a good thing the debt ceiling bill passed? Well, as Alan Greenspan put it so eloquently in September of 2010, “Our choice is not between good and bad but between terrible and worse.”

Ok, I’m beginning to panic. The political system is broken but these people are gambling with our money- our retirement savings. Do I sit here like a moron, do nothing and just watch Wall Street collapse next week? Can we change to a Parliamentary system?

I’ve never seen anything like this. Congress is supposed to pass increases in the debt ceiling automatically. There’s been hardly a peep about this from lawmakers in the past. Oh, there have been a few symbolic votes against raising the debt ceiling by a handful of lawmakers including Barack Obama when he was a junior Senator. But the outcome was never in doubt and that’s why some took the liberty to make political points by voting nay.

But this time…is different. There are two proposals being floated right now; one by Democratic Senate Majority Leader, Harry Reid. No one thinks it has the votes to pass the House. Republican House Speaker, John Boehner, has a plan that can’t pass the Senate and has been rebuked by the Tea Party folks in his own party.

There is currently no plan that can pass. Yet- since 1962, the debt limit has been increased 74 times. It’s been raised ten times over the past ten years. Routine votes. Not even a news story.

Now, Pandora’s box has been opened. Attaching conditions to something as important as raising the debt ceiling means either party not holding the White House will be using this tactic for their respective causes every time the nation needs to increase the limit on the national credit card. Why didn’t this President insist on clean passage with no strings, like every President has before him? Why did he allow this to become a political football? Maybe he didn’t have a choice- I don’t know.

But you can’t run a country this way. Much less a country whose currency and economy have been the underpinning of the world economy for the past 70 years or so. This is a recipe for economic catastrophe. Even if they burn the midnight oil all weekend as they’re expected to do and maybe solve it this time…what about next time? Is this going to become an annual event? Or maybe we’ll be flirting with economic ruin every six months. Or we could make it weekly and turn it into a TV reality show.

A New Form of Government?

Could our Founding Fathers have messed up with this system of government? Were their assumptions that lawmakers would eventually reach compromise a silly, altruistic notion? Did they not foresee a time when divided government might utterly fail the people?

With a parliamentary system- you cannot have such deeply divided government. A party wins a majority and its legislative leader becomes Prime Minister. That person stays in power until the day comes they can’t preserve their majority on one issue or another then there’s a vote of no confidence and it’s off to new elections. Or if a party can’t reach a majority, the plurality party cuts a deal with a minority party and they form a coalition government. They only stay in power if they work together.

And under a Parliamentary system, you generally have fewer national elections too. The way our system works, the presidential campaign season is basically every two years- and now lasts for two years. Most true legislative progress occurs between a Presidential election and the mid-term election because everyone knows that once the calendar turns on the two year-mark- the day after mid-term elections-it’s political silly season; all posturing, no substance.

And we can Americanize it. We can call the Prime Minister “President,” keep the Supreme Court and do away with the House of Lords.

So based on the current tea leaves that point to economic calamity next week, I am poised to liquidate my mutual funds and stocks then write my Congressman and beg him to introduce a Constitutional amendment to change the American form of government which is not working so well at the moment.

Final Historical Footnote

I pointed out the day after the mid-term elections last November that the last two occasions in American history that the U.S. Senate was controlled by Democrats and the House of Representatives was controlled by Republicans, the following happened; the American Civil War and the Great Depression. Go ahead, look it up.

Looks like we’re sort of getting both. No bloodshed, but a deeply divided nation and a potential economic calamity.

As Democrats and Republicans go hurtling toward draconian deficit reduction with their hair on fire- new polling suggests they do so at their own risk. Solid majorities don’t want anyone messing with the grand social safety net.

Here are the major findings according to Andrew Kohut, President of the Pew Research Center:

On the broad question of whether it is more important to reduce the budget deficit or to maintain current Medicare and Social Security benefits, the public decisively supports maintaining the status quo. Six-in-ten (60%) say it is more important to keep Social Security and Medicare benefits as they are; only about half as many (32%) say it is more important to take steps to reduce the budget deficit.

Most Americans also oppose making Medicare recipients more responsible for their health care costs and allowing states to limit Medicaid eligibility. About six-in-ten (61%) say people on Medicare already pay enough of their own health care costs, while only 31% think recipients need to be responsible for more of the costs of their health care in order to make the system financially secure.

So where is this great clamoring for deficit reduction that both parties seem convinced is rampant? And where is the anti-government fever that is also seen as a given?

Republicans face far more serious internal divisions over entitlement reforms than do Democrats. Lower income Republicans are consistently more likely to oppose reductions in benefits – from Medicare, Social Security or Medicaid – than are more affluent Republicans.

Overwhelming numbers of Americans agree that, over the years, Social Security, Medicare and Medicaid have been good for the country. But these programs receive negative marks for current performance, and their finances are widely viewed as troubled.

The negative marks for current performance, by the way, come from those who haven’t actually been using these programs much. Those who do- the elderly- think they work just fine:

People ages 65 and older are the only age group in which majorities say the three major entitlement programs work well; seniors also overwhelmingly say it is more important to maintain Social Security and Medicare benefits than to reduce the budget deficit. Those 50 to 64 also broadly favor keeping benefits as they are. Younger Americans support maintaining Social Security and Medicare benefits, but by smaller margins than older age groups.

It’s ironic that most lawmakers seem to fear the wrath of the public if they don’t cut these entitlement programs. Based on these polling numbers anyway, what they may need to fear are the political consequences of creating gaping holes in the public safety net at a time of genuine economic uncertainty.

Surprise, surprise.  A new survey finds Americans don’t like most of the remedies being proposed to deal with the nation’s $14.2 trillion deficit.  They strongly oppose any major changes to Medicare and don’t like big cuts in defense spending.  The only thing they do approve of in large numbers is increased taxes on rich folks.

The poll by the Washington Post and ABC News  seems to support the notion that Americans say they don’t like government all that much- until you start taking away the government goodies they like. 

So leading up to the high drama of the vote expected in July on raising the national debt ceiling, polls like these underscore the high risks politicians are facing- especially those on the cutting side of the equation.  As for higher taxes, the strong support for higher rates for those making over $250,000 a year is one thing.  Higher taxes across the board are very unpopular.

So how do you deal with a public that finds the deficit troubling but isn’t enamored with most of the proposed solutions?   Seems to me politicians are either going to pander which always seems to be their initial instinct- or you could split the differences- but that might involve both sides giving up their sacred cows.  In other words, they may have to act like adults.

But is the situation as dire as most are now painting?  Let’s put it this way, where was Standard and Poor’s in the late 1940’s when the percentage of the national debt compared to the Gross Domestic Product was around 40%?  Because right now, huge as it is, that $14.2 trillion represents only 11% of the GDP.  Standard and Poor’s says that’s enough to earn a “negative” rating on America’s future prospects as an investment.  But it’s been way worse.

History finds that deficits…not balanced budgets are the norm.  Posted on this couple of months ago.  According to NPR’s Planet Money team- the last time the United States actually paid off all its debt was during the administration of Andrew Jackson.  This would have been in the 1830’s.

Fact is, as much as the President and his political adversaries both pontificate about how government needs to balance its budget just as American families do- it’s a total crock.  Governments are not families.  Some argue a certain amount of deficit spending can actually be helpful.  Banks make money.  Government spending tends to keep the economic machine well greased.  Societal needs like spending on highways and infrastructure and even health care- get met.   Besides, even American families that balance their budgets think nothing of holding hundreds of thousands in debt on 50-year home mortgages.

The trick…as in just about everything in life…is doing things in moderation.  Don’t expect any politician to make that case.

I’m not about to weigh in on who’s right and who’s wrong but I am perfectly happy to point out that we appear to be on the verge of a government shutdown because our two major political parties cannot agree on budget cuts that will have virtually NO impact on the national debt.

The Optics

Here’s the national debt as of approximately 12:00 pm, Eastern time, Wednesday, April 6, 2011:

 $14,243,931,564,217 ($14.2 trillion)

Democrats have agreed to cuts in the amount of roughly $33,000,000,000 (33 billion).

Republicans are looking for cuts in the amount of roughly $40,000,000,000 (40 billion).

Now let’s put these numbers next to each other so you can see the difference:

14,243,931,564,217

       33,000,000,000

       40,000,000,000

That’s the visual reference that shows quite clearly how far either of these proposals is from the reality of erasing much of anything of the national debt.

The Math

Here’s the mathematical reality of the proposed cuts against the debt.

Republicans are talking about cutting the debt by the following percentage:

.28%

Democrats are talking about reducing the deficit by:

.23%

The difference the two parties are fighting over amounts to this much of the national debt:

.05%

Here’s how much of the national debt remains if Republicans get their way:

99.72%

Here’s how much of the national debt remains if Democrats get their way:

99.77%

The Big Fight

Let’s put it another way.  If someone owed you $14,243 and they offered to pay you back $33, I imagine you’d say that was a rather anemic effort, no?

If a second guy owes you $14,243 and they offer to pay you back $40, I imagine you’d think that was pretty much as ridiculous as the first guy, right?

Now imagine the 1^st guy saying to the second guy, “Hey, $33 is all I can afford right now.” The 2^nd guy gets his back up.   “Hey, I’m way more responsible than you, I’m paying more back.”    

Next thing you know, both of these guys are getting into a huge fight; fisticuffs break out, they tackle each other, tables and chairs get knocked over, there’s a huge scene and a cop comes to break it up.

“Alright,” says the police officer, “Stop it right now…what’s this all about anyway?”

The two combatants dust themselves off and mutter at the same time, “Seven bucks.”

The cop looks at both of them with disgust.  “So you each owe $14,243—and you just got into a fist fight because one of you wants to pay back $33 and the other $40?  Really?  Are you serious?  How old are you guys, 9?”

The answers are:

No, these people are not serious. 

And they’re 6.

The Bureau of Labor statistics reports unemployment dropped to 8.9% while nearly 200,000 jobs were added last month. It’s better than a sharp stick in the eye, but counting “discouraged workers,” the real unemployment rate is still a stubbornly high 15.9%.

Since December of 2007, 7.7 million jobs have been lost. At the rate of 200,000 jobs a month, it would take three years to get back to those levels. The New York Times explains all in this piece that pretty accurately forecast today’s figures.

What’s disconcerting is the disturbing trend over the past couple of years that with every sign of an improving economy, oil prices go up as speculators anticipate increased demand. Throw in the unrest in the Middle East and Northern Africa and dramatically higher gas prices over the spring and summer could threaten this modest recovery that appears to be underway. Just can’t buy as many goodies when it’s costing you $70 every time you gas up and consumer spending is a huge factor in our economy.

High gas prices also make everything more expensive because of increased transportation costs getting goods to market, so that raises the specter of inflation. Only way to combat that is to raise interest rates.

But it’s not all bad news. The real jobless rate of 15.9% reflects a drop from 16.1%. And a quarter of a million of us found jobs in February while 190,000 fewer people described themselves as wanting a job but unable to find one.

All the nice economic numbers in the world mean nothing, of course, if you find yourself on the unemployment line. But it is possible to take heart that chances seem to be improving for finding work out there. The job gains are in many different sectors including manufacturing, professional and business services and health care. The situation is still not bright in retail and very bad in the public sector- government jobs.

It is truly sobering how hard we have been hit over the past three years and how much longer it will take before we get back to anything resembling normalcy.

I’m a management guy.  Yes, I once belonged to a union but I’ve spent most of the last 20 years of my life sitting on the opposite side of the table from labor unions.  Sometimes I have disagreed vehemently with them.  But I’ve never wanted to do away with their collective bargaining rights.

This business in Wisconsin and 14 other states where attempts are being made to end collective bargaining for public employees is puzzling to me.   While I’ve had my share of disagreements with unions, I have to tell you, when difficult financial times have hit a news organization I’ve worked with, they’ve almost always been cooperative; been willing to give something up- for the greater good.  It’s just not in their interests to bite the hand that feeds them.

I understand Governors having to get tough with government employee unions during this time when state budgets are mostly in the red.  But when unions are willing to make the concessions you need to help balance your state budget, why is it necessary to keep insisting they give up their hard-won rights to collective bargaining- the right to simply sit at a table, representing the interests of workers? 

I’ve just never seen unions as a threat.  Can they be a pain in the ass?  You bet.  Do they get a little greedy from time to time?  Yeah- but you don’t get if you don’t ask.  I’ve certainly never been afraid to say “no- go away.”   I understand that in modern America, most unions are not fighting against things like a 60-hour week or deplorable, fatal working conditions, child labor or sweat shops.  So instead, they fight for salary increases, pension contributions- stuff that 100 years ago would have seemed like fringe benefits.

But a world of management and unions is not a horrible thing.  Sometimes, they actually work together as partners.  It’s the yin and yang of doing business.  Unions have played a significant role in our history in helping to raise the standard of living for regular working men and women. 

Yeah, union rules can get a little picky and can be a hindrance to flexibility and innovation.  But union members- they’re my people.  These are the good folks who work for me.  They’re the folks who are in the trenches and make things happen, whether it’s making newscasts or building widgets.  In negotiations I’ll fight ‘em all day long and into the night if I have to.  But once we’ve crossed our differences and signed the bottom line, we raise our hands in unison because now it’s time to get the job done.  

But ending the right to collective bargaining?  That’s like showing up to play a ball game and making sure the other team can’t make it to the park.  What fun is that, for crying out loud?

 

You would think with all the angst about government red ink, that this is, somehow, a new thing in the history of this country.  There’s nothing new about it.  For more than a century now, we have been in deficit 70% of the time.

I’ve referenced DaveManuel.com,  a reputable newsletter on financial and Wall Street issues and trends.  Here are their deficit stats .

Here’s the big chart that tells you our deficit history at a glance for the last 72 years, from 1940 through now:

 

That’s 60 years in the red and only 12 in the black.  We had a better record of balanced budgets from 1900 to 1940; 18 years with a deficit, 20 without and 2 in which we broke even.   Total record over 112 years:

78 years with a deficit

32 years in surplus

2 years in which we broke even

Now, I’m no economist and I’m sure my analysis is both amateurish and superficial.  But there are several striking things that pop out at you when you overlay historical events over these deficit charts. 

When did we have our longest periods of budget surpluses? 

Well, we did quite nicely from 1920 to 1930.  And we did well again from 1998 to 2001.  What do these periods have in common?  Boom times.  When the economy was cranking along and people were getting rich left and right and government coffers were getting filled to the brim.

What about our worst periods of budget deficits? 

The period of 1931 to 1946 was a bad 15-year stretch.   Following the roaring 20’s of course, we hit the Great Depression and government spending increased dramatically to combat raging unemployment. On top of that, we funded World War II.

We had a brief period of balanced budgets in the late 1950’s and then went back into debt in a big way in the 1960s.  History shows us Lyndon Johnson was leading the Great Society initiatives and funding the Vietnam War all at the same time.

In fact, from 1961 until 1997…there’s only been one year we had a balanced budget.

So we went through 4 years of surpluses in the late 90s/early 2000’s and then what happened? 

Two things, we were attacked on 9/11 and the Republican version of LBJ.   Instead of Great Society programs, it was across-the-board tax cuts and we funded two wars; Iraq and Afghanistan- all at the same time.  And the next big spike?  The financial collapse of 2007-2008. 

When does deficit spending happen? 

I see three basic circumstances at play that determine our national balance sheet.

1) When we’re in boom times we’re remarkably good at balancing budgets. 

2) When wars and economic adversity hit, we spend like there’s no tomorrow but these are largely external events that we are reacting to.

3) When we fight wars and press for highly ideological agendas- like Democrats with the Great Society programs and Republicans with massive tax cuts.  These are deficits (and some would argue wars- Vietnam and Iraq) of our choosing.

Are deficits dangerous?

They can be if they get past a critical percentage of the size of your total economy.  The deficits we ran in the World War II era represented the largest percentage of deficits against GDP (Gross Domestic Product) in  history; between 21% and 30%.  Our current deficits, as big as they are, represent about 10% of our GDP.

Are we handing a history of deficits and doom to the next generation?

Yes and no.  Lest you feel sorry for all the red ink we’re handing our children, history shows us they’ll be ok because they will spend what they have to on their unforeseen wars, economic calamities and favorite government programs and then hand off the ensuing debt to their offspring.