Wednesday, August 3, 2011

The Ladder of Escape (in US Budgetary Politics)

On Tuesday I was in London for a day of culture - something I rarely get in my current home town of Corpus Christi. So in the morning I ended up at Tate Modern to see the Joan Miró exhibition.  Miró was a staunchly nationalist Catalonian painter who lived through the upheaval of the Spanish Civil War and when he moved to France in 1938 to escape it, got caught up in the beginning of the 2nd World War as Germany planned and then enacted it's invasion of France.

That morning I had been happy to hear about the deal struck thousands of miles away in DC between the two main US parties, what I didn't realize was that the "Ladder of Escape" theme that runs through so many of Miró's paintings was really what was going on in the negotiations in DC that had just been finalized.  In Miró's paintings the "Ladder of Escape" (seen in red and black disappearing upwards) acts not only as the restlessness of a perpetual émigré but also the idea that you can escape from reality into an abstract fantasy world, as Miro did in terms of his art being a sanctuary from all the terrible things going on around him.

As the FT makes clear this morning in an excellent review of the agreement "forged of necessity" by Robin Harding, the spending cuts are post-dated to when either the current raft of politicians have been voted out of office or when economic circumstances will have changed considerably so that in a new Congress the current agreement can safely be ignored. Hence although the media stated that markets fell today because of high levels of Italian government debt, I think the truth as to why markets plunged yesterday is probably much closer to home.

Of course, the reality of dealing with budgets is not pleasant - cuts have to be made and whole sections of the population have to be asked to carry an increased burden, but ultimately at some point down the road that is what must happen.  The question is "when"?  So I can see the temptation in front of the politicians - specify that most of the cuts will happen in the future and appoint a committee to make the cuts that need to be made now, and then climb up the "Ladder of Escape".  Larry Summers (in the FT) has also noted that these spending cuts are agreed relative to a baseline, but there is no reference to any baseline in the agreement, so no doubt this can be interpreted quite a few different ways, an omission that might have been intentional to help get it passed and on President Obama's desk in time.

That is certainly not to say that I favour the UK approach of the Conservative/Lib Dem coalition.  Their policy is basically to hike sales taxes and slash government services and departments, as well as downgrading public sector pensions considerably, while also cutting the number of University places available to this year's intake and dramatically increasing tuition fees. Economic growth is almost non-existant in the UK and the country could very well slip into recession later this year. But I would say that I like the fact that there are both spending cuts and tax increases (what Obama calls a "balanced approach") despite the fact that the timing of the UK policies are just too rapid. I think what needs to be emphasised to the American people though is that new taxes will have to be raised if they are to begin to properly address the problem without gutting the welfare state or the military - that is just the reality, and even conservative economists like Robert Barro agree on this point.

Now in these blogs I have maintained all along that the US would be slowest to come out of the 2008/2009 recession because it had the catalyst for the global downturn, and would probably need most stimulus. But now that the stimulus is virtually complete it does not seem exactly the right time to enact some draconian pull-back, but obviously it does compel the administration to explain to the markets how it plans to get it's fiscal house in order down the road. And therein lies the main problem - its policies of increasing taxes on the rich to pay down some of the debt was just not grounded in political reality, given the emergence of the tea party and the pledge that the Republicans had taken to Norquist's association. So all the adjustment had to come on the spending side, and that just isn't going to happen quickly given the fact that we're still dealing with 2 wars, and a housing market that is still in decline in many parts of the nation.

There are several important questions that come out of the brinkmanship we experienced over the weekend, and one of them must be whether it would have been better not to reach an agreement that is more fantasy than reality, and then to have faced the consequences, rather than sign something that clearly lacks credibility.  No-one wanted a default, but there again running a sensible fiscal policy requires some reality checks on all fronts, not just that of taking a surgical knife to government spending.

So back to Miro again and while Miro was exiled from his beloved Catalonia to France (Paris) he painted what for me was the best picture in the Tate Modern exhibition - that of a "Still Life with Old Shoe". Here ordinary objects become fantastical - you can see the vivid colors surrounding everyday objects like an old shoe, a piece of bread, a knife in a potato and a bottle of wine. I think the point Miro was also trying to make is that when you face extreme pressure, the ordinary things in life matter a lot, and garner extra meaning. I can't imagine what analogy one might make for the budgetary mess here, but I'll be pondering that over the next few days!

Certainly though if you happen to be in London before September 11th, I would definitely recommend you take some time to see this fascinating exhibition! 

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