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Morning Jay: There's a Bad Moon On the Rise

6:00 AM, May 27, 2011 • By JAY COST
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Looks like we're in for nasty weather.
One eye is taken for an eye...
There's a bad moon on the rise.

-Creedence Clearwater Revival

Have you noticed that the economy is slowing down once again? The data of late has been pretty unequivocal on that front. In the last few weeks, we've seen monthly reports from Fed regional banks that show local economic growth stalling. Industrial production for April was flat. The housing market is in a double dip, despite the fact that mortgage rates are at bargain basement levels. Weekly jobless claims have bounced back up. And while the top-line number of April's unemployment report showed somewhat good news, though it also revealed clear signs that wages are not keeping pace with inflation, which is bad news, considering how dependent the economy of today is on consumer spending. Looking ahead, the major firms are already starting to cut their growth forecasts for Q2. Japan's economy slowed more than expected last quarter, and the sovereign debt crisis of Europe is back with a vengeance. Belarus just devalued its currency, Greece remains in very real danger, and China's now thinking of bailing out Portugal.

The economy is relevant to the political discourse in so many ways, and I've reviewed its impact on this page regularly over the last few months. One element that I have touched on just briefly is the fact that slower growth could have significant, deleterious effects on the nation's budget deficit. Over the previous decade (2001-2010), economic growth averaged just 1.7 percent per year, yet the CBO projects an average growth rate over the next decade (2011-2020) of 2.9 percent. If we come in closer to the last decade rather than CBO's projections, federal revenue collections will inevitably be hampered, as the tax code is highly progressive and a lower rate of growth will keep people out of the higher income brackets. Meanwhile, federal spending would not fall at a corresponding rate, as appropriations are set by the political cycle and not the business cycle.

All told, weak growth -- the kind that we've been stuck with since 2001 -- could produce a 10-year budget deficit that is trillions more than what CBO currently projects as the baseline. And that baseline is already at about $7.5 trillion, plus it assumes away many important spending/revenue adjustments like the Medicare "doc fix," the unlikelihood of Democrats getting their tax hike (they call it, "repealing the Bush tax cuts," but there is no real difference from an economic standpoint), the extreme unlikelihood that Obamacare will reduce the deficit, and more.

In other words, when we take a sober, fair-minded look at what the baseline budget would be under realistic political and economic conditions, we are faced with a terrifying truth: the status quo in American fiscal policy is no longer sustainable.

The bulk of political commentators, and the political class in general, have yet to wrap their minds around this fact, although there are several notable exceptions to the general tendency. These farsighted few now see the bad moon rising over the nation's capitol, and they know it portends a dramatic, painful change in the way things work in D.C.

Since the end of World War Two, the political class has basically had to manage the country's rapid economic growth. That hasn't been a cakewalk, but managing growth has been relatively easy: you can spend billions on guns or butter, without taking too much from the average middle class American taxpayer. Yet these days are over. Now, our political leaders have to manage decline -- for even if the economy continues to grow, it likely will not grow fast enough to pay for all the financial obligations the elites made when they foolishly assumed that the days of 4 percent growth would last forever.

The great political scientist Harold Lasswell once famously defined politics as, who gets what, when, and how? In the postwar age of perpetual growth, we've long thought of that in terms of who is going to get the extra revenues that our ever-growing economy is producing for us. But now, with our huge budget deficit and weak economy, it'd be better to classify our current politics as: who loses what, when, and how?

Any partisan who thinks their side has an inherent advantage in the battle of assigning losers is deluding himself. The Democrats have long argued for increased taxation to distribute more income to the lower classes. The Republicans have long argued for decreased taxation to spur business, coupled with free-market mechanisms to make social welfare more efficient. The response of the American public over the last thirty year? Regularly divided government, so that one side inevitably checks the grand ideological ambitions of the other, and nothing really changes. In other words, the public has consistently voted for the status quo over the Democratic plan and the Republican plan.

Sooner rather than later, this status quo must give way. No more guns, butter, and low taxes. At least one of them has got to go, and millions of Americans are going to lose something on the deal. How will that play out politically? Honestly, I do not know. But I can say two things for sure:

One, the political process, which has been ugly for some time, is going to get a whole lot uglier. You thought the Republicans and Democrats were vicious when they were fighting over a growing pie? Just wait until they finally catch on that the pie has to start shrinking.

Two, anybody who tells you what is likely to happen in 2012 is fooling themself. One way or the other, the country has voted for the status quo in just about every election for the last thirty years. What do they do when they realize that they can't vote for the same thing anymore? The tiresome pundits don't know, the statistical "gurus" don't know, and the wonky poseurs don't know. If they say otherwise, it's simply proof that they don't really get it.

Make no mistake: there's a bad moon rising on Washington, and it's foreshadowing a politics of decline that is going to dominate the election of 2012, and beyond.

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