Government Trying to Solve the Debt Problem

This evening as I drove home from my softball game, I had the Sean Hannity Show playing on the car radio.  During that short drive, he interviewed John McCain about the current debt limit negotiations, and comparing the threat of government shutdown to the situation in 1995 when Clinton squared off with Congress.      

McCain was insistent that he would work as hard as he could to push for a balanced budget amendment to the Constitution, but when pressed by Hannity, he admitted that he didn’t want to see the government shut down, because of the political price that would be paid.

Hannity’s point was, at some point Republicans need to stand up for what is right, regardless of the political outcome.  There are core values that are much more important than winning elections, and the fate of the country could be at risk if Congress makes the wrong decision on this issue.

So I started thinking ... just how much of a political price was paid last time the government shut down?  The conventional wisdom was that it worked to Clinton’s benefit, because after all, he did get re-elected in 1996, and Republicans lost congressional seats.

I take exception to that conventional wisdom, and I think history will back me up.

First off, the statement that Social Security checks won’t go out is just plain false.  If Congress can’t come to a deal on the debt ceiling, this does not mean that all money stops flowing into the treasury.  While it is true that 40% of all of our spending is borrowed money, we can still pay a lot of our bills with the money that is there.   More than $200 billion in taxes during the month of August, enough to pay the interest on the debt, Social Security, Medicaid, defense and still have about $50 billion left over to spend on other stuff.

If there is not an agreement on the debt ceiling, many parts of the government will need to shut down, and we will have to take a long look at priorities. This shutting of the spigot of spending will have an immediate impact on the economy, and it could hurt the economy in the short term. 

This is not unlike the Depression of 1920, when government downsized when Woodrow Wilson left office - spending cuts combined with tax cuts by the Harding Administration.  The depression lasted 18 months - and as the government spending shrunk, private sector recovery was rapid.  Unemployment shot up from around 6 to 11% in 1921, but by 1923 was down to 2.4%.  Compare that to the history of the “Great Depression” where Roosevelt presided over massive increased spending, and an economic downturn that lasted a decade.

The moral of the story - less government spending, and the private sector took over. 

Earlier this month, Fareed Zakaria wrote in the Washington Post that America’s top 500 companies are right now sitting on $1.8 trillion in cash. He stated that there is a “2^nd stimulus that could have a dramatic effect on the economy - even more than government spending; and it won’t require adding to the deficit.” 

And that is just the 500 top companies. How many more are also sitting on reserves, afraid to expand?

So the question has to be asked. Why is business not spending the money?

The answer is pretty simple.  Business is unsure about what is going to happen next.  The new Health Care law, Cap and Trade, government regulation, all combine together to make business nervous about spending down their reserves. 

If only something decisive and bold would come out of Washington - something that could send a message to business that it is safe to start hiring again.  More people working = more taxes paid, less unemployment paid, and lower debt.

Something the Congress can do.  Pass a balanced budget Amendment.  Stop increasing the debt limit.  Lower business taxes, and back off on regulation.   Stop borrowing money!

Yes, the government will need to immediately cut back on spending.  At the same time, business would get a sure sign that now is the time to expand - and those government jobs could be replaced with private sector jobs.

So lets get back to my main point - what exactly did the Republicans lose in the government shutdown in 1995?   How did the electorate punish them in 1996?

They lost 4 house seats. 

They gained 2 senate seats.

Republicans lost the White House while running a week Bob Dole against an incumbent President who was still pretty popular (55% approval) and who moved drastically to the right when his campaign when Dick Morris took over the campaign.

Even so, Clinton only won by an 8% margin, and won 1 fewer state in 1996 than he did in 1992. 

This is not what I would call a huge repudiation of the Government shutdown.

The time is now for Congressional Republicans to take a stand. 

Do what is right for the long-term health of the economy, and have the backbone to be willing to risk their job for their country.  If they are not willing to take this risk, they have no business being in Washington in the first place.