Expect Nothing From the Government in 2014

Chances are the federal government won't do much of anything in 2014.  Neither party has control of the government, and neither has a coherent program in any event.  Republicans are at war with each other, with the mainstream and Tea Partiers wrestling for dominance.  Right now, the Republicans couldn't put together a coherent set of policies if they wanted to.

The President is playing defense, trying to get the federal health insurance exchange out of the ICU, contain the NSA surveillance scandal, deal with the Iranian nuclear program without another major American military commitment in the Middle East, pivot toward Asia, and bring the troops back from Afghanistan, all while avoiding a government shutdown from yet another lousy rerun of the debt ceiling crisis in early February.   The Democrats on the Hill are angling to keep their majority in the Senate and perhaps gain some seats in the House, but the administrative debacle with the sign-up process for the federal health insurance exchange has left Democrats facing re-election scrambling for cover.  That means distancing themselves from the President.  And that makes the formulation of a coherent set of Democratic policies pretty unlikely.

The mid-term elections this fall will drive doings in Washington.  That will mostly mean doing nothing.  In today's politics, everyone wants to be a critic, and no one wants to be a doer.  Critics get a lot of press coverage.  Doers are targeted by critics.  When you do something in Washington, you may benefit some people.  But you'll also damage the interests of others.  And they will dispense political contributions with a view to getting even.  It's safer to be a critic, verbally heave donkey dung at one's adversaries, and avoid actually doing anything.  You may not help anyone, but you also won't make a lot of enemies.  Voters gravitate toward those who tell them what they want to hear.  With today's grossly gerrymandered districts, critics have an easier time getting elected and staying that way. 

So expect little from the government this year.  Far right-wingers and hard-core libertarians may think this is a good thing.  But everyone who realizes that essentially the entire country--from the top 1% to those below the poverty line, from the big banks to the small businesses scrambling for an SBA loan, from parents who want safe toys for their kids to those who prefer not to eat tainted food to home buyers looking for a mortgage loan to anyone who is potentially exposed to communicable disease (and that excludes very few of us)--needs a functioning government must hope against hope for something more.

Upsides of the Shutdown

The federal government shutdown isn't all bad.  Some of the good things that resulted include:

White supremacists had to cancel their rally at Gettysburg National Park, because National Parks have been closed.  Poor knuckleheads.

Federal spy agencies have been cut back 70%.  We now have a lot more privacy than we had just a day ago.

Spying on pandas halted, as the National Zoo's panda cam has been cut off.  A lot of people are disappointed, but consider the pandas' point of view.  Wouldn't it be creepy to have a camera focused on you for hour after hour after endless hour?  Aren't pandas entitled to some privacy and dignity?

School lunches and breakfast still being served.  Or maybe, from the kids' point of view, this isn't so good.  Many of them might have been hoping for an excuse to binge on junk food.

Free and discounted food and drinks are being offered to feds and sometimes non-feds by many Washington, DC area bars and restaurants.  Theaters, museums, gyms and other businesses are also advertising free or discounted admissions, goods or services.  Close the government and what do you get?  Party central.

Stock market up.  The S&P 500 rose about 0.8%.  If this is what a shutdown does, there are probably a lot of market players rooting for more government dysfunction.

All That Noise, All Those Robocalls, and Nothing Changed

We had the elections, and nothing changed.  Barack Obama was re-elected President.  The Democrats kept control of the Senate.  The Republicans kept control of the House.  After all the accusations, attack ads, junk mail, robocalls, soaring campaign rhetoric, and lies, we can look forward to . . . more gridlock.

This election was the comeuppance of all the money bag men who nonymously or anonymously tried to buy their way into political power.  Hiding behind secretive nonprofits, monied interests barraged users of every type of media with relentless harangues and unending fear mongering.  While Democratic war chests were very large, Republican funding was Brobdingnagian.  But all that spending, and counter-spending, produced very little change.

That's a great result.  It shows that the American voter isn't a dumbo who can be cynically manipulated by unnamed puppet masters with zillions to spend behind the scenes to instill subliminal fears.  Politicians and political parties must, however difficult it may be, offer something that is in the public interest.  They need to demonstrate that they have something positive to say and do.  The political process remains a means for societal concerns to be debated and resolved.  The rich may not get richer.  The poor may not get poorer. 

Many problems lay ahead.  The fiscal cliff approaches anon.  The economy remains in first gear, and unemployment levels feel like the real bad hangover that comes from drinking the worm as well as the tequila.  The federal deficit must be dealt with.  As difficult as these problems may seem, the defeat of the monied interests is a sign of hope--hope that politicians may try doing something constructive for a change, rather than cater to those that offer to hand over the biggest checks.

How Gridlock in Washington Endangers the Economic Recovery

The political gridlock that just was elected to office could make things worse. By definition, gridlock means the status quo is preserved, because nothing can be done to change it. The status quo is a mess, and preserving it is exactly what we don't need. Let's look at some of the key economic issues.

Real estate. The real estate market and its associated mortgage crisis were the origins of the Great Recession. When the credit carousel stopped turning in 2008, trillions of dollars of losses cascaded on banks, investors, homeowners and ultimately taxpayers. Financial crises such as this work themselves out through the allocation and realization of those losses. Losses must be taken by someone or they will continue to hover over the economy, discouraging consumption and investment, and hindering recovery. Over the past two years, some of the losses have been taken, by banks writing down loans and other assets, investors seeing lower prices on mortgage-backed investments, homeowners suffering falling home values, and taxpayers subsidizing all of the foregoing. But there remain tons of unbooked losses, and also the painful problem of what to do with Fannie Mae and Freddie Mac (i.e., to what extent will taxpayers provide future subsidies to the housing market). Liberals can't envision a U.S. housing market without federal support, and conservatives can't stomach perpetuation of such massive subsidies and bailouts. The current chaos and confusion in the real estate market, amplified by the burgeoning foreclosure mess, will continue. The process of loss allocation and realization will continue, but in the haphazard, ad hoc, unfair and lunatic way it now operates. Consequently, real estate and housing will stay sick puppies, dragging on economic recovery.

Fiscal Policy. The Bush tax cuts will be extended for almost everyone. If the Republicans have their way, they'll be extended for everyone. But doing so will conflict with a cherished Republican goal of shrinking federal deficits. In theory, deficits could be reduced by cutting spending. In fact, the newly elected coalition government in the U.K. is taking this approach. But Britain's parliamentary system of government enables such decisive action. America's Constitutional limitation and division of authority acts in the opposite direction, permitting the electorate to choose a chief executive and chambers of the legislature from different parties. Gridlock will preclude major spending cuts. Fiscal policy will remain the mosh pit it is today and deficits will lurch on.

Even in situations where Congress can act, it won't have easy choices. Federally funded unemployment benefits for the long term unemployed will expire at the end of this month. Congress has three weeks to act. Extending benefits would help keep the economy muddling forward. Cutting off benefits would help reduce the deficit (although not by much, maybe a couple billion, which in context is peanuts). But it will also increase the doom and gloom among the electorate. Lengthening the line at the food bank won't spur consumer spending, even if passbook savings accounts pay 0.00001% per annum.

Monetary Policy. The Fed, being somewhat insulated from politics, will continue with monetary policy, and its recent announcement of $600 billion of quantitative easing reflects a clear, if not unanimous, choice to provide more stimulus. Congressman Ron Paul, cynosure of libertarians and Tea Partiers, and soon to be the chairman of the House Subcommittee for Domestic Monetary Policy and Technology, has already announced that he plans to scrutinize the Fed closely, questioning the fundamental premises of its policies and actions. Paul travels leagues farther than mainstream Republicans in challenging conventional monetary policy, subscribing to the gold standard and doubting the wisdom of central banking at all. Chairman Bernanke can look forward to providing the subcommittee with the pleasure of his testimonial company on a regular basis. The Fed's renewed program of quantitative easing will face head winds from the direction of Capitol Hill.

The last industrialized nation to suffer a financial crisis and recession like America's was Japan. The Japanese government reacted indecisively, often sinking into dysfunction because each of its options was painful and it was reluctant to impose the costs of washing the crisis' losses out of the economy. So it allowed the losses to linger, dampening economic recovery to this day. The gridlock soon to settle into Washington could easily lead to similar dysfunction, letting the economic recovery meander. The Japanese central bank lowered interest rates to essentially zero and also conducted quantitative easing. But, in a dark omen for the Fed, monetary policy in Japan wasn't enough.

If the government is capable at all of restoring prosperity, a question not without doubt, it will have to act with unity of purpose and decisive amounts of fiscal stimulus as well as monetary accommodation. That ain't gonna happen. Have an umbrella ready for the next two years because storm clouds are gathering. And recall that old timers who lived through the Depression would often carry a roll of hundreds of dollars in their pockets, simply because cash money felt good. When times are tough, cash talks and just about everything else walks.