Showdown on Capitol Hill

The budget battle for the second half of FY2011 is heading for a climax, but it is the battle over the 2012 budget that will be the key ideological battle of our generation. One side is convinced that the Federal government is simply out of control and is strangling the American economy. The other side is equally convinced that only government spending ( a government that can legally create money from thin air) will save the country from a depression and mass poverty.

With his budget plan for 2012 Rep. Paul Ryan (R-WI) has laid down the gauntlet for the progressives and the Democrats to cross. It remains to be seen if government austerity and tight budgets are the prescription for prosperity. It seems counter-intuitive in some aspects, but it seems rather obvious that unrestrained government spending with the attendant massive budget deficits are not a panacea either.

What is clear is that Paul Ryan will become an absolute lighting rod. He will be called every rotten thing in the book. I can already see the cartoons of him with the Hitler mustache. He will have to be portrayed as evil or at least totally self serving, because he can't be portrayed as stupid like all other Republicans are. He also seems to have a backbone made of something other than jelly (like all other Republicans have). He is a bright and articulate man and if he had a little more seasoning he would easily give Obama a run for the money.

Again, I'm not sure if Ryan's prescription is going to work. Intellectually I understand what MMT'ers (Modern Monetary Theory adherents) claim to be true. Namely that Federal deficits don't really matter. Technically they are correct in saying the the government can not run out of money. The government is an issuer of a fiat currency, a floating rate currency tied to nothing. It's been that way since the 1970's when Nixon took the U.S. off the gold standard. If the Federal government needs more money they just add zero's on balance sheets. Taxes are collected to temper the public's ability to spend and potentially overheat the economy, but not to actually fund the Federal government. It's a hard concept to grasp considering how much emotion and rhetoric goes into the tax question. Still, I have a hard time with the notion that deficits don't matter at all. Small deficits really don't matter, but multi-trillion dollar deficits???

Yes, 2012 should be a pretty interesting year. Either the Republicans will join Ryan and really take the fight to President Obama or they will capitulate and enjoy another four years of multi-trillion dollar Federal deficits while they wring their hands in dismay. The problem I see with allowing the Federal government to spend without restraint is the overreach and power grabbing that will inevitably result. Freedom just slips away. More states and more individuals will become wards of the Federal government. It's already happening.


CW