Tuesday, October 8, 2013

How does the Washington impasse end? Ask Italy!

As the markets sell off and start to panic over the prospect of a breach of the debt ceiling and default, many are asking, "What does the Tea Party want?"

Russ Douthat (via Mark Buchanan), writing in the New York Times, hit it on the head. The Tea Party feels frustrated that, despite the Reagan and Republican victories that began in the 1980's, it never managed to roll back government to the pre-FDR days [emphasis added]:
So what you’re seeing motivating the House Intransigents today, what’s driving their willingness to engage in probably-pointless brinksmanship, is not just anger at a specific Democratic administration, or opposition to a specific program, or disappointment over a single electoral defeat. Rather, it’s a revolt against the long term pattern I’ve just described: Against what these conservatives, and many on the right, see as forty years of failure, in which first Reagan and then Gingrich and now the Tea Party wave have all failed to deliver on the promise of an actual right-wing answer to the big left-wing victories of the 1930s and 1960s — and now, with Obamacare, of Obama’s first two years as well.

“They didn’t dare,” Frum wrote of the Intransigents’ Reagan-era predecessors, “and they realized that they didn’t dare.” Well, this time, no matter the risks and costs and polls, there are small-government conservatives who intend to dare — because only through a kind of wild daring, they believe, can the long-term, post-New Deal disadvantage that the cause of limited government labors under finally be overcome.
Mark Buchanan went on to quote readers in the commentary of Douthat's column who believed that the Tea Party wants to engage in a quixotic quest to roll back Social Security and Medicare
What Mr. Douthat apparently fails to grasp is in democracies, majorities matter, and Americans have repeatedly--in both elections and opinion polls--indicated that there isn't just majority support--but super-majority support for maintaining and even strengthening the programs that formed the heart of the New Deal (Social Security) and the Great Society (Medicare)"

The right's passionate hatred for both programs--and for the true believers' obsession with dismantling both--is not shared by anyone outsider their base.
In a recent post (see Government shutdown! Time to sell?) I pointed to a column by Anatole Kaletsky, who wrote that such a stance would mean political suicide for the Republican Party. In previous budget battles, the GOP managed to roll back discretionary spending, but that battle is mainly over [emphasis added]:
[T]he big spending reductions implemented since the 2011 budget crisis have left little scope for further significant reductions in discretionary spending. Fiscal conservatives now recognize that the only programs large enough to transform the budgetary outlook are Social Security, Medicare and Defense — but these programs tend to be strongly supported by elderly and conservative voters.
Now the battle has turned ideological:
The Republicans are no longer trying to extract major spending reductions in exchange for their budgetary votes. Whereas previously, Republican leadership insisted that any increase in the debt ceiling must be matched dollar for dollar by public spending cuts, this “Boehner Rule” has been quietly dropped. Instead, Republicans are now using budget votes to advance a political cause, the abolition of Obamacare, which is purely symbolic because it offers no scope for compromise with the president and therefore no chance of enactment.
Can the Tea Party truly drag the rest of the GOP with it into this ideological battle? A win for the Tea Party would create conditions for permanent Congressional paralysis and make the United States virtually ungovernable.

What does Berlusconi want?
One parallel to the current situation in Washington can be found in Italy, a country that is so laughably ungovernable that it has had about 100 governments since the end of World War II. The latest drama emerged when Silvio Berlusconi, upon convicted of tax evasion and having lost the appeal of his conviction, threatened to bring the government down. Time rhetorically asked, "What does Berlusconi hope to gain?" [emphasis added]:
On Oct. 4, a senate committee was expected to vote to strip him of his senate seat. On Thursday, nearly all of Berlusconi’s senators threatened to resign if it did so. In response, Letta flew back from a visit to New York and called for a vote of confidence early next week. The following day, Berlusconi pulled the plug. Nominally, the motive was over Letta’s failure to stop a rise in Italy’s value added tax. “The decision taken yesterday by Prime Minister Enrico Letta to freeze government activities… is a serious violation of the pacts on which this government was formed,” Berlusconi said in a statement.

What’s less clear is what Berlusconi, who turns 77 on Sunday, stands to gain from the maneuver, which only increases the likelihood that the senate will eject him. His denunciation of taxes seems to herald the beginning of a campaign, but there’s no guarantee there will be anything to campaign for. “I really can’t see any strategy, only frustration and anger,” Orsina said. “He left a rough path for one that is even rougher.”
It sounds like the same kind of "frustration and anger" that the Tea Party feels about the state of America. What happened next? Berlusconi appears to have overplayed his hand and  Bloomberg reported that the Letta government survived the vote of non-confidence:
Italian Prime Minister Enrico Letta won confidence votes in parliament today after Silvio Berlusconi backtracked on a pledge to bring down the five-month-old government as his party showed signs of deserting him.

Letta won the support of the Chamber of Deputies, the lower house of parliament, where he has a solid majority. Earlier today in Rome, the prime minister was supported by 235 senators with 70 opposed. That followed by hours former Premier Berlusconi’s announcement that he would support the government, reversing an earlier pledge to oppose Letta.
That's because members of Berlusconi's party threw him under the bus:
Cracks in Berlusconi’s People of Liberty party, or PDL, began to show when prominent figures including Deputy Premier Angelino Alfano said they’d vote for the government.

Has the Tea Party overplayed its hand?
Today, as the stock market tanked, panic is starting to set in. Note the alarmist tone of the headlines on Marketwatch at the end of the day:

Cullen Roche calls the whole affair a circus and says that he is speechless. He is not alone in among the cacophony of market analysts who hold this position.

While I understand the ideological position of the Tea Party in trying to roll back Big Government, taking action to undo Social Security and Medicare is politically untenable - and the Establishment wing of the Republican Party knows that. Furthermore, the Establishment wing, with its deep connections to the Top 1%, would loathe to stand idly by and plunge the country into a global financial crisis.

Just before the last Presidential election, I wrote about a scenario where a civil war erupts within the Republican Party (see November speed bumps):
Assuming that we get a status quo electoral result, I believe that the market hasn't considered the possibility that the Republican Party could turn on itself. The GOP has been divided between two wings, the Establishment wing, as exemplified by the likes of George H. W. Bush, the classic East Coast Establishment patrician, and the social conservatives, as exemplified by Sarah Palin and the Tea Party.

You could see the tension develop as the presidential nomination battle developed. The social conservatives lost the nomination, but closed ranks with other Republicans and for the sake of the Party. The implicit message was, "You get your chance to make your mark this time."

What happens if Mitt Romney implodes? Could the social conservatives start to point fingers and try to blame the Establishment wing for the loss and split the GOP? If that happens, the Tea Party and their social conservative allies would make an ideological stand in order to differentiate themselves from the Establishment Republicans and send the country over the fiscal cliff like an innocent bystander.
OK, the Tea Party didn't make an ideological stand over the fiscal cliff, but it is doing so now over the debt ceiling as leverage with Obamacare as their casus belli. How does the Establishment wing react? Go along with the Tea Party and commit electoral suicide or do what the PDL did to Silvio Berlusconi?

My bet is that when push comes to shove, they take the latter path.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.


Anonymous said...

Tea Partiers can't damage the government more than it's already damaged. The sooner the people recognize the true hopelessness of the Federal government the better. It's time for a reset, fiscal conservativism and the return of private money.

How's that bullish stance going? :-)

JerryC said...

Cam; Another one of your well thought out and documented posts. One bone to pick is, please - this "Tea Party" is not a party!. They are a wing of the Republican party. The Tea Party contingent, the Tea Party group, etc. A carefully selected name, it seems.

Joe "Truth 101" Kelly said...

The Tea Party is the bridesmaid who wants to be the bride. Dangerous to have around.

Anonymous said...

a well written piece, a must to read on American politics, and jerry C is correct:

One bone to pick is, please - this "Tea Party" is not a party!. They are a wing of the Republican party. The Tea Party contingent, the Tea Party group, etc. A carefully selected name, it seems.

and it is actually healthy, bringing in extreme views and let the system decides, and us system overall is a good working system, the best in the world

Anonymous said...

For what it is worth:
I have heard members of the the Tea Party, including elected members of Congress state that the Tea Party think of themselves as "The Tea Party" and that their allegiance is first to the principles of The Tea Party before any allegiance to the Republican Party. I was surprised when I first heard this being stated, but since then (over two years ago), the actions of those who have been elected to national office who identify with the Tea Party would seem to be very consistent with the notion that their loyalty is to the principles of the Tea Party and that they are Republicans in name only.