GO AHEAD, SHUT IT DOWN

Time is an illusion, lunchtime doubly so. ~ Douglas Adams

Reality is merely an illusion, albeit a very persistent one. ~ Albert Einstein

So here we are edging ever-closer to yet another fiscal confrontation for the Federal government. You remember, a week ago we were told that unless the Republicans and Democrats agreed to a budget for the current fiscal year (that started on Oct 1^st, 2010) the government would stop functioning at midnight Mar 4^th. Well, that date has come and gone with no shutdown because the politicians unsurprisingly agreed to a temporary postponement in the form of a continuing Federal budget for the next two weeks. This agreement was labeled by the media as a "win" for the Republicans for reasons obscure to those of us who live beyond the Washington, D.C. beltway. Are we supposed to be happy the politicos managed to keep the government operating for all of two more weeks? I think not.

It's not a win at all. It's an all too solid example of how NOT to run a government. Here we are 19 weeks into the government's fiscal year, and Congress still hasn't passed a budget. [President Obama recently submitted his proposed budget on schedule for the next fiscal year, starting Oct 1^st, 2011 for Congress' consideration.] Given the level of fiscal malfeasance that Republicans, Democrats and every other form of politician (at every level of government) have perpetrated over the past decades, it's a wonder why we public citizens let them keep playing us as pawns while at the same time hugely benefiting the kings and queens of narrow, private interests.

The wonder might be explained as a five-star example of fiscal illusion, a macroeconomic term that describes people being not as "aware" of government tax revenues as they are of government expenditures, since many voters visibly benefit from government expenditure programs (funded by "hidden" revenues). People don't (or can't) link these benefits to the taxes they pay. Thus, fiscal illusion makes the cost of government appear less expensive, especially when financed by deficits, than it actually is. This has provided incentives to politicians of both parties to expand government expenditures but not raise revenues to pay for them. In this sense, we citizens share in the responsibility for our nation's fiscal calamities. In a general sense we continue to want a level and range of government-funded programs that we're not willing to completely pay for. "Shared sacrifice" is an alien concept that doesn't need to apply to me, only others.

These folks who we've voted into office have so often kicked the fiscal can down the road and played off competing interests by saying that someone else wants your piece of the remaining economic pie, they really have no sense of adopting an alternative approach. That's as outrageous as it is depressing. And these familiar fiscal tactics – tactics that got us into this mess – are now again being displayed and discussed in Washington and elsewhere. An apt characterization of them is attributed to Jennifer Brunner, a former Ohio secretary of state: "A dozen cookies are put down in front of a CEO, a union member and a tea-partier. The CEO takes 11, and then says to the tea-partier, 'That union guy wants yours.' "

Given that politicians are going to use only politics not rational thought to decide what programs should be cut and what taxes should be increased, what should we do? Begin by recognizing that neither party has any incentive to truly put all options on the negotiating table that actually could resolve much fiscal difficulty. Considering entitlement reductions (a heresy for Democrats), tax increases (an apostasy for Republicans) and defense cuts (similar for both Republicans and many Democrats) pale in political importance when compared to promising cuts in public broadcasting, planned parenthood and faith-based programs. Next, we should acknowledge that neither political party will be willing to seek and support meaningful fiscal solutions as long as political campaigning is happening – and there is always campaigning occurring. Sub-standard, short-term solutions from conventional fiscal politics have shackled the nation and thus require us to seek other answers.

Given that politics cannot be cast aside, I'm now in favor of moving "out of the fiscal box" and just shut down the government and end the charade that a meaningful fiscal resolution will be enacted by politicians. Fiscal illusion rests on the presumption that government expenditures/programs are more visible than the taxes that finance them. Let's see what happens when government programs disappear. Perhaps naively, a shutdown might be scandalous enough to clear the mindset of both Congress and the President so they can start using reason and logic. Better late than never, but given what happened on Mar 4^th, the Democrats more likely will simply fall on their shrinking sword and let the Republicans define the terms. As shocking as shutting the government down might be, it will pale in comparison to what the US will need to do if our politicians can't soundly resolve our longer-term fiscal problems. When (not if) this happens, global bond markets will start telling the Treasury Dept that US government bonds will need to carry a much higher yield –not has high as Greek 10-yr bonds' 12% yield today (after Moody's downgraded Greek debt), but likely higher than the current Treasury Note yield of 3.4% This avoidable eventuality will ultimately cost every citizen more fiscal pain, even if it's illusory to most.