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Busch: Solving Gridlock and the Deficit

The 'Washington is broken' chatter is in hyper-drive out of DC with the announcement by Senator Evan Bayh (D, IN) that he is retiring. Bayh was particularly critical of the partisan wrangling and animosity currently on display on Capitol Hill. Bayh stated that he loved serving the citizens of Indiana, but hated the process of making law in the Senate.

Besides making the 2010 mid-term elections a bit tougher for Democrats to retain their large majorities, the comments Bayh made on CBS's Early Show were particularly damaging. "If I could create one job in the private sector by helping to grow a business, that would be one more than Congress has created in the last six months," he said. This will stand in stark contrast to the announcements we get today on President Obama's 2009 $787 billion stimulus program.

Today marks the one year anniversary of the signing of the law creating the programs. It is the major piece of legislation that the harmonized Congress and White House have completed. Health care, cap and trade, and financial regulatory reform are still not ready to be done and may not see action ahead of the mid-term elections. While the Associated Press states that the stimulus bill has saved/created 3.5 million jobs, the President's own economic team metrics showed that the program would stop unemployment at 8%. Perhaps it would've had the full amount of the stimulus been deployed. Estimates now show that only about half has made it out the door.

Bayh's comments on job creation will stand in sharp contrast to whatever President Obama and Democratic leadership state today to celebrate the one year anniversary. The major problem with the stimulus plan is that is not nearly as effective as it could've been. The $170 billion in tax cuts for the middle income earners is a great example of the problems.

Research shows very clearly that if recipients believe the cuts are temporary, they will save the money or pay down debt. If the recipients believe the cuts are permanent, they will spend the money. Given that President Obama just stated that all solutions to the US debt problems are on the table including a middle class tax hike, one has to believe that tax cut recipients don't believe the cuts are permanent. Therefore, the cuts did not have their intended maximum positive effect and yet they contributed their full weight towards expanding the deficit.

Today, the NYT runs an article on how the gridlock is negatively impacting the nation's ability to deal with a massive budget deficit and massive increase in public debt. Due to being shut out of the legislative process from health care to the stimulus bill, the Republicans are not cooperating on any additional measures to deal with the deficits in an election year. In fairness to the Democrats, the long term problems for the debt reside in entitlement programs that were expanded (i.e. the prescription drug bill) under Bush. The major concern is that the solution put forward by the party in power solely focuses on raising taxes on upper income earners.

This is also the major concern conservatives have over the creation of a debt panel that President Obama is going to sign on Thursday. The solution will primarily focus on raising taxes and will exclude the truly important aspect of cutting both the entitlement programs and spending overall. It is the way of Japan. A poor man can't spend his way to prosperity nor can a government tax it's way to fiscal probity.

Until the President leads Congress on serious deficit reduction plans that include cuts to entitlement programs, all the articles about the disease of gridlock will be true and negative for the markets.

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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.