When notorious US bank robber Willie Sutton was asked why he robbed banks, he replied "because that's where the money was." (Sutton actually denied ever saying that - blaming it on a reporter looking for a catchy quote.) What does Willie Sutton have to do with the Tea Party?
One of the central planks of the Tea Party's political platform that helped to contribute to the landslide Republican wins in the US mid-term elections was based on the fervor of its members and supporters to tame the deficit and to make permanent the Bush tax cuts. However, when asked, many voters who are angry at the level of government spending want to exclude Social Security, Medicare/Medicaid and the Department of Defense.
This is a significant point because these three items and the interest on the national debt account for over 65% of total US spending according to the Government Accountability Office (NYSE:GAO) - a branch of the US government. In short, that is where the money is. Furthermore, interest on the debt is only about 5% of total spending - the lowest it has been in many years due to the record lows in interest rates. Once this reality sets in for many who are demanding government spending cuts, it is likely that the tax cut agenda will get priority over the necessary spending cuts.
Earlier this year, European politicians suffered a political earthquake of their own when the financial markets pushed the nations of Europe to embrace fiscal austerity. After years of criticism, Europe's nations came to grips with their fiscal imbalances and social spending largesse to institute some of the most drastic spending cuts in over a generation. Led by the United Kingdom, Greece, Portugal, Spain and Ireland, the citizenry of Europe is facing public sector wage cuts, tax hikes and spending cuts on social services. Every level of society is impacted.
Already it seems that the electorate of many European nations is fed up with the cuts that are widely perceived to be aimed at helping the financial markets rather than the general population. In Ireland, where spending cuts are some of the most drastic in the Western world, austerity fatigue is setting in. A backlash is developing and the spending cuts are starting to bite into the ability of the economy to maintain forward momentum.
In addition, the markets are getting worried that Ireland's resolve is waning - along with revenue projections that are now seemingly not going to be met. Thus, the interest rates on Irish government debt are now screaming higher. It was interesting how little coverage this story has received as it was overshadowed by the attention on the Tea Party and the US election.
As the chart shows, if the US were to ever suffer the wrath of the financial markets as the nations of Europe have, the US political establishment would finally have to make the budgetary decisions that so many have called for. The problem is that talk is cheap - the path to fiscal balance is going to be tough. If this so called political revolution is to have a meaningful impact on the course of history, tough choices are going to have to be made. It is easy to argue for tax cuts as the solution to every economic ill - but as Europe is finding out, the path to fiscal responsibility is often tougher than it looks.
- Pacifica Partners Capital Management & Financial Post
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