Friday, February 21, 2014

A bad analogy can be dangerous, a purity test, deadly

I've written at rather great length about the debt ceiling, and the political idiocy surrounding it, several times, most recently during the LAST "debt ceiling showdown and government shutdown traveling vaudeville show" here:

"Defunding, Debt Limits, Shutdowns, Oh My!"

"A not so brief explanation and history of U.S. federal government debt"

As noted when the "fix" was passed last time, it wasn't actually a "fix", it just pushed the next "crisis" a few months down the road.

Welcome to a few months down the road... 

The debt ceiling increase was voted up last week (this time for 12 months instead of 3), as everyone knew it would be, as it absolutely had to be (see the posts above for more on why that is true).

The Republican leadership used a procedural trick to make it seem like they were actually opposing it... entirely for PR purposes, and entirely because of these geniuses who either don't understand; or rather  those who do, but take advantage of the ignorance and misunderstand of those who don't.

This time, the Republicans... or at least most of them... were slightly less stupid than the last couple times. MOST republicans seem to have finally come to understand that playing chicken with the debt ceiling is NOT a winning strategy.

...Well, it isn't a winning strategy for Republicans, but when they do, it IS a GREAT strategy for Democrats.

Of course, that hasn't stopped much of the self identified "conservative" public from going absolutely insane, again... sadly, quite predictably.

It seems they believe, with absolutely unshakable conviction, that somehow, attacking a supermajority of the house and senate for not doing the impossible, will make things better. That somehow, doing what absolutely must be done to avoid disaster, is "betrayal".

Really, all they are doing is highlighting their complete lack of understanding of both politics, and the mechanics of how our government functions; oh and that they completely failed to learn anything from the last few times they pulled this crap.

In fact, many of them are PROUDLY ignorant of reality. They will loudly proclaim that "it's a matter of principle dammit", and that anyone who actually understand what reality is, and understands the necessity to work within the bounds of reality is just "caught up in the system".

... and of course, there are always politicians in a position to use this sentiment. They have been doing so quite aggressively this past week.

This REALLY does not help

The only Republicans (or conservatives, or even libertarians) this sort of idiocy helps, are the ones who have no chance of losing to a Democrat (it helps them raise money), and the ones mounting a challenge to a safe Republican seat from the right.

Republicans being attacked from the right may make some "conservatives" feel better, but it doesn't actually make anything better, because rhetoric isn't legislation. It certainly doesn't do anything good for the Republican legislative agenda.

In the long run, this stupidity (and yes, it is emotionally indulgent stupidity, and attention seeking) weakens congressional Republicans, and doesn't actually HELP achieve the desires of the "conservatives" who like the IDEA of "fighting at all costs", "never compromising" etc... etc... (most of whom aren't actually conservative even if they think they are. Mostly, they're populists, or reactionaries, or both)

Simply put, you can't legislate if you don't win elections. The elections that are going to be won by senators and house members who are "real conservatives", as defined by these geniuses, are already in Republican hands. Maybe 1 or 2 seats can be won from the right, but that's it.

The geniuses forget two major things:

  1. You don't win majorities from the edges: The far right and the far left are only about 20% of the electorate on either side. 40% total. 60% of the electorate are somewhere "in the middle", and they will VOTE somewhere "in the middle".
  2. All politics is local: Senators, and particularly house members, are elected on LOCAL issues, or at least on LOCAL attitudes, ideas, preferences etc... "Real conservative" ideas may be vote winners where YOU live, but not for where the majority of voters live. Yes, they're "better" and "right" and all that, but it doesn't matter because most people don't agree with them.

To gain vetoproof legislative majorities in both houses, which is the only way they can legislate now, Republicans need to take seats away from "centrist" democrats.

Let's leave aside the entire issue of "centrists" (whether they actually exist, what the definition is etc...) and just accept there is an electoral reality here.

Republicans who are "real conservatives" are not going to win seats in the urban northeast. A republican who believes in small government, personal and economic liberty, low taxes etc, but who is also socially moderate or liberal (pro choice, pro gay marriage for example), just might (in fact, they have).

If you say that someone who believes those things isn't really conservative, or isn't a Republican, or is a RINO... YOU are part of the problem.

Shutting down the government may FEEL like a great "moral victory" to those on the right, but it will NEVER win elections in centrist districts. In fact, it will COST the Republicans seats they've already won in those districts.

These are seats that will NOT be made up by the phantom hoards of "real conservative" voters that will magically appear when "real conservative" candidates show up. Those seats are the ones that Republican already control.

There are a few senate seats in the south and west that the "real conservatives" might be able to win with their rhetoric... but honestly, if they were going to do so, why didn't they over the last three elections?

The people who don't understand this, have since 2012 been doing their best to turn the Republicans, into the democratic party circa 1968. They are the Republican equivalent of McGovern democrats.
Note: At the moment, there is a very strange dichotomy going on with presidential politics, largely as a function of the differences between local and national media and their influence in elections. 
Mitt Romney likely would have beaten Obama in 2012 if a large number of conservatives hadn't stayed home, because he wasn't conservative enough. He also likely would have won, if the media hadn't been so effective at portraying Romney as an ultra-right wing super-conservative. 
Both happened. Romney lost. 
Do you see the problem here? 
Anyone not left wing (or otherwise a media darling... which tends to last just until that person threatens a "progressive" with defeat) can reliably count on the media to portray them as insanely far right. Witness McCain in 2008. He went from being the anti-Bush media darling, to, you guessed it, "right wing lunatic who want to control womens bodies" etc... etc... 
The only way to combat that, is to DIRECTLY (with irrefutable evidence) show "centrists" that you are a "centrist", or at least someone they can vote for. 
2012 was a matter of purity tests screwing conservatives and Republicans. If the "McGovern Democrats" have their way, so will 2016.
So... why don't they understand?

Part of the problem here, is that most people (including most of the "conservatives" above) don't really understand the debt ceiling. They don't actually understand what it is, how it works, and why we can't just decide not to raise the limit once we've reached... or more often actually exceeded... it.

No, really, we can't do that. If we did, very bad things would happen.

They feel that refusing to raise the debt ceiling would mean the federal government would have to spend less.

That is an intuitive idea. It makes sense... 

... It's also dangerously wrong.

The problem, is that people intuitively think of the debt ceiling as analogous to the credit limit on a credit card. In fact, that is the rhetoric most politicians and much of the media use when they talk about the subject; and the rhetoric of much of the "conservative" commentariat.

With a credit card, when you hit your credit limit, you have to stop spending. Then, you have to pay down your debt before you can spend again.

Many people, probably most people, seem to think that government spending and debt work like this; or at least is should, and would if we didn't keep raising the debt ceiling.

It's an easy and relatable analogy. It feels correct, and it suggests a simple solution to a very difficult problem.

Unfortunately, feelings are not reality.

There are rarely simple solutions to complicated and difficult problems.

A friend wrote this:
"I think the problem with the debt ceiling comes mainly from the fact that people think it's a credit limit, when it's more like a kind of a line you set yourself when drawing up a budget for the year"
That analogy is better than what most people seem to have in their mind, but it's still not quite right. It's simple, and quick, but it's still misleading as an analogy.

There is really no one sentence explanation for how this works, unless you have a background in business or finance.

Trying to relate it to something that a lot of people are familiar with, though not as many as a credit card... hmmm...

Ok, this is one of those "I have to explain this thing, so I can explain this other thing" situations.

Here goes...

Say you run a company that only gets paid every three months, at the end of each quarter (this is more common than you might think).

In order to run the company, you need to pay all your suppliers and contractors. So, you get terms from them. Your suppliers and contractors will provide you goods and services, and you will pay them within 90 days of invoicing.

At the end of the 90 days, you HAVE to pay these bills.

Remember, you've already used the goods and services. If you don't pay the bills, your vendors sue you, put a lien on your business and property etc... If you want to try to keep running, you can't get anyone else to give you terms. Everything goes to prepay or COD.

You REALLY want to avoid that if at all possible.

Now... it's possible that your receivables won't come in until after your payables are due. It's possible that there will be delays in processing and funds clearance. It's possible your business might have a bad quarter, and your receivables won't be enough to pay your outstanding payables. Maybe most of your billables are paid quarterly, but there a couple big ones that are only paid yearly.

Oh and of course, you need to pay the day to day costs and expenses (which are two different things, and the difference is important, but would make this explanation even longer) of running your business. Weekly salaries, payables without credit terms, fees etc...

So, in order to operate, you get a line of credit from a commercial lender (hopefully at a favorable interest rate). That lets you pay your day to day costs and expenses, and pay your bills as they come due, without worrying about your receivables current account.

Then, as your revenues come in, you pay down your credit line. The amount of your credit line you use, is, reasonably, called your utilization.

The lender doesn't make you pay ALL of your utilization off every month, or every year, or for that matter EVER.

So long as you don't use ALL of your credit (creditors consider that a bad sign), and you keep making your mandated payments (on time), your lenders will probably keep extending you credit (since they make money on it).

Pretty much every medium and large business (and a lot of small businesses) operate on this basis. Whether you know it or not, if they've got more than 20 employees, or they own or lease a building, it's almost certainly how your employer operates. It's how most of the businesses you interact with operate.

It's also how the federal government operates.

The government has day to day costs, and they consume goods and services (and transfer funds to other entities), as directed by legislation and regulation. They pay these costs from their current accounts, which are debt financed, and they pay on the debt out of their revenues.

So... that's the background and baseline.

Now, a business with a lot of revenue, can still have a year, even several years (in some cases even MANY years) where their expenditures exceed their revenues.

Maybe they had an off year, maybe a major customer went bankrupt and didn't pay them, maybe they expanded a lot, maybe they made a lot of investment; maybe their revenues were increasing, but their expenses increased faster...

There are plenty of reasons why a viable business might have their expenditures exceed their revenues. Many companies go on that way for many years in fact. Some businesses have more years with losses than profits.

This is where most peoples level of understanding becomes problematic. Most people know that a company can lose money and still continue operating, but they don't really understand the details of how or why.

So long as a company has substantial ongoing revenue, and a solid history of making their payments on time; even if the company isn't profitable, they will likely be able to obtain operating credit.

Major companies maintain lines of credit in the billions, so that they can manage manage their liquidity. When they need it, and presuming creditors have confidence in their ability to repay, they will get additional credit.

If a company would like to raise a fixed amount of capital, that they would like to repay over a longer (or at least a fixed) period of time, typically at a lower interest rate than cash/credit financing, they may elect to issue debt in the form of bonds.

The proceeds of the sale of bonds accrue directly to the issuer. The purchasers are then free to sell these bonds to others as they see fit.

So long as investors believe in the viability of the bond issuer, they will buy new bond issues.

Again, this is how the federal government operates.

The FedGov's 2013 accounts receivable (2.8 trillion) were lower than their 2013 expenditures (3.5 trillion). This 700 billion deficit was covered by issuing bonds, which were purchased by investors (primarily large institutional investors, foreign governments, and foreign banks).

However, this debt isn't issued in real time, to pay the governments bills. The government floats a balance at all times, paying it down with revenues and the proceeds of debt issuance.

The government can't just shut down in between tax payments and bond auctions. It has bills to pay and payments to make every day.

Depending on the time of year, and the particular year, the government spends about 90 days ahead of its revenues.

The debt ceiling isn't actually a credit limit, it's the terms of the debt we've already incurred.

An important difference between the government and private businesses of course, is that they don't have a choice about most of their spending, as their board of directors (congress) has incurred these obligations, and written them into law.

The federal government can't just stop spending, even if they don't have any money. They are not allowed to stop spending until congress tells them to.

Congress tells them to spend, and it tells them not to spend.

The problem isn't the debt ceiling... and the debt ceiling isn't actually a restraint on government spending.

The problem is congress.

You can't stop government spending by refusing to increase the debt limit. That just shuts the government down, and really, that isn't good for anyone...

...but in actuality it doesn't shut the government down, because the law doesn't allow it to.

It just shuts down the stuff that isn't explicitly required by law.

Even if the government is "shut down", they are still required to make payments on debt.

If they don't, the U.S. defaults on our sovereign debt.

If the U.S. Federal Government were to default on our sovereign debt, the entire world would be plunged into a massive depression. Pretty much every economy in the world would collapse.

That's really bad. We really don't want that.

But guess what, even that wouldn't stop the government from spending.

The many laws requiring government spending don't allow it to stop just because the bank accounts are empty. They do not contemplate the notion of an empty bank account.

When governments don't have enough money to pay their bills, they just print more.

So, what happens then, is hyperinflation. The government keeps spending dollars, by printing money... or rather electronically creating it out of nothing. This devalues the currency.

When the currency enters a devaluation cycle, people decide to stop taking it.

This of course makes the global depression a thousand times worse.

Repeat after me:


Ok, so then, how do we make them stop spending?

Win elections.

So long as the democrats have control of the presidency and one house of congress, they can keep spending nearly as much as they want.

AFTER you win elections, you have to pass legislation cutting spending. To do that, you need veto-proof majorities, and/or a Republican president.

Now... if the Republicans prove to be no better than democrats on spending (or worse, as Bush was), THEN you attack them from the right.