Friday, October 18, 2013

Ending the Shutdown and Next Steps

The WP seems to think Everything is Groovy as a result of the agreement that was hammered out on Wednesday and immediately signed by the President.

The deal did a couple of things - which I believe could have been done a couple of weeks ago.  First, it established a conference committee on the budget (which will report by mid-December) - that gives a chance to air the issues surrounding how much we are spending in the federal budget. It might also set up the possibility that some long term issues (like an alternative CPI for entitlement adjustments and tax reform) might be put on a more reliable path.   Second, it increases the rigor for needs assessment for subsidies under the ACA.  If the site is ever able to be fixed (calling the Federal process in building the website gross incompetence is being kind) that should reduce the cost curve.   The medical device tax and some of the other issue are still in the program but that could change in the budget conference committee.   Third, it moved the deadlines for the debt limit and the budget down the road a bit.

The WP was giddy.  Their defaultometer (above) uses the variables to the right.   The WP argues that the financial indicators are a reliable index of whether the markets believe that a default is likely.   Pardon me, but the indicators are baloney and temporal.   At the same time the directionality has no reliable scale.   If the VIX (the volatility index) moved by a larger number than the one in the table - would that be a more positive sign?   Is a move from 40-41 on the economic confidence index a significant move?   What utter nonsense.   But that is the way Washington "thinks" and the WP is merely a reflection of the pre-Copernican world of DC - where everything revolves around the political class.

So are the pundits right about the GOP taking a shellacking in this episode?   I think the answer is yes and no.  (Sounds like an economist doesn't it?)   One of the clear winners here was the Minority Leader of the Senate - McConnell was able, in spite of an increasingly bitter environment with the Majority Leader to figure out a way to bring us back from the brink.   I think the brink was a bit over rated.   The absurd estimates of the shutdown ($700 billion) are just that, absurd.   But from my perspective the shutdown accomplished very little.   Salon called the GOP experience their "Alamo."   But wiser heads have concluded that the seeming precipitous decline in GOP fortunes was not permanent.    One need only look at the right-wrong direction polling (where 13% of those polled think we are headed in the right direction) to believe that with proper attention the GOP could make some progress in 2014 on both key issues and on holding the House and increasing margins in the Senate.

The long term equation for the GOP is actually pretty simple (although not without perils).   Obamacare is unlikely to be loved by almost anyone in the next year.    Economic growth is not likely to move significantly in the right direction.   If the budget conference committee actually reduces the long term curve of spending then prospects should improve.  At the current time the differences between the Senate and House versions of the defense and non defense discretionary parts of the  budget are about $100 billion apart ($967 vs $1058).   That does not sound like a lot.  (We need to update Everett Dirksen's quip - "A hundred billion here and a hundred billion there and you soon have real money.")

But all is not glistery either for the GOP.   Parts of the GOP are doctrinaire they want all of their goals immediately.   That is true of the Dems (especially on the almost religious adherence to increasing taxes) also but since the media highlights the negatives in the GOP - that can become a problem.   There are some of the loons who are arguing that they should do a primary against several of the members in both houses who tried to work out a deal.  

Ultimately, the end result of this agreement is not as bad as it could have been.  At the same time the progress on the budget and reducing the negative effects of Obamacare were not as significant as it could have been.  If the far extreme budget hawks can look to the long game - conservatives could make some great progress in 2014 and possibly (if they can show some patience and get some thoughtful candidates through the nominations process) 2016.

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