The Tea Partiers Are Dead-Set on Driving the Deficit Through the Roof and They Don't Even Know It

The Tea Partiers are inflamed by budget deficits, so it's a tragic irony that they're doing everything in their power to send the deficit skyrocketing.

What they fail to understand is that the largest single contributor to today's budget deficit isn't “runaway spending,” the wars in Iraq and Afghanistan or even the Bush tax cuts – although all of those are big factors. The leading contributor to the deficit today is the recession that followed the burst of the housing bubble (over the next 10 years, it will be the Bush tax cuts). People lost trillions in wealth and millions of jobs, businesses were hurt bad, and all of those things led to a huge drop in tax revenues. Last year, the federal government collected the smallest share of the economy in taxes than in any year since 1950.

Here's a graphic telling the tale, courtesy of the Center for Budget and Policy Priorities:

Click for larger version

(click for larger version)

That brings us to the debt ceiling showdown. Last March, the Republican staffers on the Joint Economic Committee released a report, based on some shoddy analysis by the conservative Heritage Foundation, arguing that the best formula for reducing the deficit would be 85 percent spending cuts and 15 percent revenue increases. That was before the Tea Party freshman joined the party. Last week Republican leaders walked away from a deal that would have resulted in 83 percent cuts and 17 percent revenue increases – they walked away from their own proposal of a year earlier.

The Tea Partiers have forced the Republican leadership into an unyielding, maximalist position rejecting any revenue increases whatsoever. And here's the thing: that's not going to happen. Speaker John Boehner, R-Ohio, doesn't have the votes to pass a debt ceiling increase without some Democratic support, and if he brings a bill to the floor that has a chance of gaining Dem votes, he'll face a rebellion in his own caucus.

Meanwhile, senate Democrats are releasing their own budget blueprint that is far more balanced than the proposal the Republicans just rejected, with half of the deficit reduction coming from cuts and the other from revenue increases. And conservative Republicans like Rand Paul have been floating the idea of demanding an arbitrary spending cap – limiting public spending to levels below what Ronald Reagan averaged in his eight years – that is essentially a non-starter with a Democratic president and Senate. So the parties are moving further apart.

Unless Obama chooses to pursue the "Constitutional option” – arguing that the debt limit violates the Constitution and refusing to default – that leaves us with two options. The two parties may strike a last-minute deal with cuts deep enough for Boehner to present it to his caucus but sufficiently “balanced” for him to pick off enough Democrats to push it over the top (and for the Democratically controlled Senate to pass it). That would take money out of people's pockets, further depressing demand – lack of consumer spending is the core problem in the economy – and slowing the already anemic recovery.

This is probably the best-case scenario at this point. It's also the likeliest. As the drop-dead date approaches (either July 22 or August 3, depending on what you're reading) , the idea of defaulting is going to look less appealing to legislators.

But if the Tea Partiers have their way, there will be no deal – the debt ceiling won't be raised. What will happen if that should come to pass? It would drive up interest rates dramatically, making it harder for businesses to secure financing and individuals to get loans, and ultimately derailing this woefully inadequate “recovery.”

Moody's chief economist Mark Zand told reporters that his forecast of continued, steady growth this year would be “blown out of the water.” “Even if Congress and the administration reverses themselves days later I think the damage will have been serious and we'll probably be thrown into a recession,” he said.

A second recession in three years and a third in the span of a decade. Another recession that would hit before the “Main Street” economy had rebounded from the last one, with families tapped out and swimming in debt. They'd be forced to pay higher interest on all manner of loans and that would lead them to pull back further on spending.

So, we'd be looking at another serious decrease in demand – in an economy fueled by consumer spending -- and with it yet more unemployment and more people missing their mortgage payments. More public sector workers would be laid off. The number of people in desperate need of public services in order to get by would increase dramatically just as the cuts hit. State governments would be squeezed very hard – harder than they have been already – leading to yet more cuts. It would be an utter disaster.

And, what the Tea Party caucus misses: tax revenues would decline, significantly, once again. So, we would get cuts – forced, painful cuts – which might be more than offset by tanking revenues, which in turn would drive the deficit even higher. It's the worst of all worlds.

Washington – both parties to varying degrees – has embraced a fundamental misunderstanding of the root cause of our economic woes. As long as we have an excess of unused capacity and a slump in private sector demand, cutting spending is fighting fire with gasoline. The only question that remains is, how badly the American economy is going to get burned.


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