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Can politicians comfort the markets while hammering each other?

I've been reporting out a column on deficits this week, and what really comes through when you talk to the people worried about this stuff is that the question is not "what can we do to reduce the long-term deficit?" but "what can we do that will convince the market that we plan to reduce the long-term deficit?"

These questions are crucially different. For instance: The long-term deficit is largely caused by health-care spending. Two policies that might bring down health-care spending are a tax on high-value plans and a commission empowered to aggressively reform Medicare to cut costs.

As it happens, Democrats passed both policies into law in the Affordable Care Act. For political reasons, however, both of them are delayed until 2018. Republicans could have reassured markets by saying that the bill itself is a travesty but these cost controls are important and they will do everything in their power to make sure that they take effect, and they'll in fact work to make them stronger. Instead, Republicans said that neither policy would ever make it into the real world, as they were going to repeal them both and, if they didn't, Democrats would change their minds on both policies before implementation. Hard for markets to feel too good about that.

Electoral incentives push the two parties to discredit , demonize, and promise to undo whatever accomplishments the other comes up with. That's as you'd expect it to be, but it's going to make it much harder for the political system to reassure the markets that policies they pass now will work as promised. We've already missed one opportunity to trumpet our deficit accomplishments before the market this year, and we'll no doubt miss more as time goes on.

By Ezra Klein  |  June 23, 2010; 2:11 PM ET
Categories:  Budget  
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Comments

This constant arguing has actually happened since our earliest days as a country.

FDR, for example, had a very vicious anti-war, pro-nazi Republican party to contend with before WWII. I forget the guys name, but there was even a popular Rush Limbaugh of the day back then.

The difference today is that the American people can't seem to make up its mind about who should lead for the long term. We keep swapping the White House, and the House and Senate are almost always in recent years closely divided so that the minority can block any progress.

Part of the problem is the media, which attacks whatever party is currently in power regardless of whether they deserve it or not. The media has never been as powerful, or profit-driven or corporate controlled as it is now.

We need to make up our minds about where we want to go as a country and who we are. Unfortunately, our system is geared for a two party system. A third party can't succeed.

Posted by: Lomillialor | June 23, 2010 2:37 PM | Report abuse

The good news is that a dose of positive political gridlock healthy enough to reassure savvy markets exists; however, the positive financial effects of the gridlock (in particular, that it forces adherence to deficit-reduction promises made by the Social Democrats) is likely to be scorned by the very people who proposed the purportedly deficit-reducing policies.

For example, since inception, Medicaid has been a financial nightmare and even now the program has the potential to doom the nation. The largest positive effect of the PPACA is that it is likely to eliminate Medicaid, the state/federal partnership in which citizens are taxed by both levels of government in an effort to underwrite the health care costs of non-taxpayers.

At present, each state must decide if it wishes to accept federal taxpayer dollars for Medicaid and thereby assent to the new PPACA-imposed federal regulations: states which simply decline the federally-collected taxpayer dollars are free to do essentially whatever they please regarding health insurance and indigent care. The reality is that most states -- absent additional Medicaid funding -- simply lack the funds to participate in a post-PPACA Medicaid system.

The so-called jobs bill being debated this week seeks to dole out federally-collected taxpayer dollars to pay the Medicaid gap enlarged by passage of the PPACA. Ultimately, either the Social-Democratic Party members who favored the PPACA will have to admit fraudulent numbers, states will have to raise taxes substantially to pay the new Medicaid costs, or Medicaid will quietly disappear. Given that most Members of Congress don't wish to be remembered as frauds and that most states will not (or cannot) raise taxes, that leaves the positive result of Medicaid elimination. In the alternative, the Social-Democratic Party propaganda machine may successfully conceal the extra spending on Medicaid... a solution which works only until about mid-2011: even in that fourth scenario, Medicaid disappears.

Posted by: rmgregory | June 23, 2010 3:30 PM | Report abuse

The health-care bill is a bad example, because Democrats aren't exactly out there defending it strongly.

Posted by: tomtildrum | June 23, 2010 4:49 PM | Report abuse

The markets don't worry about economic policy until an election draws near. Until then, it's he said-she said and doesn't count. Once the polls close, the market votes its preference. That's why Adam Smith called it Political Economics.

Posted by: tomcammarata | June 24, 2010 3:44 AM | Report abuse

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