Federal spending and debt: A coming storm or clear sailing forever?

Political self-interest before public service

There are just a few political themes that California Moderates (CM) focuses on. How political self-interest influences politics and policy is one. As pointed out before, many (nearly all?) politicians act out of self-interest and that trait manifests itself in various ways. Sometimes people in politics vote to protect their office and later regret the vote. Sometimes, usually after they are out of office, they acknowledge that powerful special interests dictate political policies and politicians go along to simply avoid offending special interests. Many people concede that politics is mostly paralyzed in election years, especially in presidential election years - incumbents don't want to do anything controversial or risk losing an election. Those are all cases of putting political self-interest before the public interest.

Fruits or nuts?

A storm is on the horizon?

If CM isn't misreading the signs, a nasty storm is closer than previously assumed. The signs aren't dramatic, but they seem to be pretty clear. Congress has trouble closing money-losing post offices. Congress has trouble deciding how to pay for continuing low interest rates for college loans. Some senators (John McCain et al.) urgently call for passage of legislation to call off the $1.2 trillion sequester deal allegedly because it will damage the U.S. military and national security. They assert that waiting for a lame duck session to fix the sequester "problem" would be a disaster because lame duck sessions just are disasters.

In each of those cases, some voters would be irate depending on what is done or not done, its an election year, politics is polarized and there is no powerful voice of reason defending the public interest. There are multiple factors, but political self-interest is a significant part of the messy situation.

So what's the problem? Messy is just politics as usual

What impending storm could there be based only on reading incoherent tea leaves like that? Despite their faintness, the signals are consistent that our politics is dysfunctional and driven by, among a few other things, self-interest. That could lead people, institutions and countries that buy U.S. debt to lose faith that we can deal with our problems. That could lead to increases in interest rates. People and entities that buy U.S. debt are intelligent but driven by the two powerful emotions - greed and fear. They act to protect their own interests, not to protect any public interest. Their motives are not grounded in patriotism - they are grounded in the human trait of self-interest.

Buyers of U.S. debt are also acutely aware of U.S. politics because they have to be to protect their interests (money). Buyers of debt know how well or poorly things are going in terms of the U.S. getting a grip on its debt. They see the same tea leaves, but probably with much more acuity due to their inside presence and access to inside information. They see the same human self-interest flaw in politics. When they conclude its time to draw back, America could lose control of its financial independence. No one knows what will trigger the pull-back because its partly a fear-driven psychological phenomenon.

Until the last few months, that possibility seemed to be at least five years in the future. But given the obvious dysfunction, it may be the case that the storm could come a year or two sooner. Our elected officials are bad at delivering bad news, e.g., really big tax hikes and spending cuts are necessary. That could make some voters irate in an election year, so they are not going to get the full story. The year 2016 will be another presidential election, so it is reasonable to assume that politics at least that whole year will be broken. 2012 is obviously dysfunctional. 2014 will be broken. When politicians do politically unpleasant things, they do them in odd years, e.g., deficit-reduction deals in 1991, 1993, 1995 and 1997. Buyers of U.S. debt, like most everyone else, know all of this. When they lose faith, it could happen quickly.

No safe place to go

Fortunately, there don't seem to be many good choices for investing trillions of dollars at present, so that mitigates for stability. Even the Chinese have recently returned to buying U.S. debt despite their unease. On top of that, some analysts argue that there is basically no debt problem at all. That line of reasoning says that the problem will just go away (i) if we do nothing or (ii) our politicians act intelligently. Since self-interest is a major driver of U.S. politics, expecting intelligent action is dubious. Maybe doing nothing is the best way to deal with the debt issue, but maybe it isn't.

Calm before the storm?

A few politicians argue that something is amiss and that intelligent action is urgently needed. Some budget projections suggest that the U.S. debt will continue to rise for at least the next 10 years or so. We will need that stability to maintain business as usual. With any luck, the CM's (and the few alarmist politicians like senator Coburn) reading of the tea leaves misses the mark and business as usual can continue for the indefinite future while the problem just goes away. However, it just doesn't seem that way any longer - not to CM at least. Time seems to be running out. The psychological storm may be closer than we think. Reliance on luck and inaction seems to be such a dumb way to do things, but it may be the best we can do. One can only wonder how much better things would be if American politics wasn't so dysfunctional.