Debt Ceiling Madness

Negotiations over raising the United States's debt ceiling have reached a virtual standstill, as the Republicans remain intransigent over raising revenue. In particular, they oppose closing tax loopholes for rich people such as hedge fund managers. One major Tea Party leader, Sen. Jim DeMint of South Carolina, has expressed a willingness to cause major disruptions to the American economy rather than reach a compromise.

My Gut Reaction: Jim DeMint is not a real American. The Tea Party's stance as a patriotic force is a charade.

Analysis: It is time for Democrats to take a stand. Ideological fanatics like Senator DeMint and his followers are not loyal government officials. If they keep on their reckless course and America defaults on its debt, the consequences will include a massive drop in the United States credit rating, the inability to pay Social Security, and most disturbingly given the Republicans' stated concern for American soldiers, military payments.

What are the tax breaks that Republicans are trying to defend? Well, they include breaks for horse breeding and corporate jets, as well as the "carried interest loophole" for hedge fund managers. This carried interest loophole allows hedge fund managers to treat payments for their work as capital gains, resulting in their paying a far lower rate. If this loophole were ended, it could get the United States 4 billion a year, and cut the deficit by 44 billion dollars.

Even commentators who normally support the Republicans are crying foul on this. In a recent New York Times column, David Brooks argues that if the Republicans allow a default, they will show themselves unfit to govern, particularly in light of the Democrats' willingness to concede on government spending. Similarly, columnist George Will has said that it would be suicidal for Congressional Republicans to oppose raising the debt ceiling, even going so far as to question the proposition of the debt ceiling itself. (Video below)



Democrats must remain firm on the issue of tax loopholes. If the Republicans want to cut government spending, they must also be willing to give on tax loopholes.

Uh-Oh

According to NPR Planet Money podcast, the United States is or will be looking at a deficit of $1.2 trillion dollars due to the bail out and other expenses. Yes, that's trillion. With a T. Not good...

(Note: the above post is actually funny is you imagine it being delivered by Stewie from Family Guy.)

President Obama Speaks

President-elect Obama gave a weekly address yesterday highlighting the nation's economic difficulties, embedded above. It rings with his typical confidence, but also with a realization of the great challenges faced by the American economy.

As Juan Cole points out, we are still in the rough as long as President Bush is in office. There is always the possibility that he could further screw things up, creating a bank collapse as happened at the end of the Hoover Administration.

It is also worth noting that although President-elect Obama has a general idea of what needs to be done, he does not give much in the way of specifics. We will need to learn more before we can assess his economic plan in detail.

A Matter of Perception

Conservative New York Times columnist David Brooks had a surprisingly insightful column yesterday regarding the importance of perception to the economy. Although classical liberal economists such as those who blog at Cafe Hayek focus on the rational interest of businessmen and consumers as the best hope for a stable economy, behavioral economists such as Nassim Nicholas Taleb note that self-interest often leads people to see what they want to, often ignoring convincing evidence to the contrary.

For example, Taleb notes that modern risk-management models used by banks and other businesses are not effective in warning of major hazards. For instance, in his 2007 book The Black Swan, Taleb predicted the problems that would be posed by Fannie Mae, warning that it was sitting on "a barrel of dynamite." As Brooks concedes, the perceptions of Wall Street traders and others were influenced by their own biases and expectations, failing to perceive how a globalized economy created the possibility of widespread failure.

To be fair, one should note Brooks's observation that the same problems of perception could even more easily arise in a government controlled system. This is not a case for a communist or totally socialized system. Still, the views of Taleb and other behavioral economists should give pause to those who feel that self-interested businessmen are the solution to every financial problem.

Deja Vu?

As New York Times columnist Paul Krugman reports on his blog, Sen. John McCain has been repeatedly quoting President Herbert Hoover on the strength of the economy.

Gee, I wonder if quoting the guy who let us fall into the Great Depression will cause people to question Sen. McCain's capacity to guide us through economic chaos?

If Obama Doesn't Pick Up on This, He Needs His Head Examined

The McCain campaign recently handed Sen. Barack Obama two gifts on the economic front. First, just as Lehman Bros. was beginning to collapse, Sen. McCain's financial adviser Andrew Luskin claimed that "Things today just aren't that bad" economically in a Sunday Washington Post op-ed. (Thanks to Wonkette.)

To add to the McCain economic incompetence parade, Sen. McCain himself held a press conference this morning in which he claimed the "fundamentals" of our economy are strong, as reported by NPR's All Things Considered. Later, the Senator backtracked and claimed they are "at risk." If Sen. Obama doesn't use this for a campaign ad, he should fire his campaign manager.

There's a fundamental message that I think Sen. Obama and the Democrats haven't been hitting hard enough: are we better off than we were eight years ago? If not, it's time to vote for a Democrat.

Who's a Rich Elitist Now?

In this Obama ad, Sen. McCain learns that people who live in seven houses shouldn't throw the "rich elitist" stone.