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Debt Ceiling Debate – Politics and Policies July 11, 2011

Posted by Afflatus in Economics, Politics.
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A number of people have engaged me in a discussion about the ongoing debt ceiling negotiations with a great sense of anxiety. While a failure to raise the debt ceiling would be catastrophic for the United States (and the world), it is not yet time to start worrying. In fact, it would be strange if the negotiating parties, which effectively consist of the House Republican leadership and President Obama, reach a compromise deal before the final hour. For the next 10-14 days, the two sides will continue jockeying – through media outlets and face-to-face – in order to improve their respective negotiating positions.

Treasury Secretary Tim Geithner has said August 2 is the final day after which the Treasury can no longer use accounting tricks to avoid defaulting on some of its debt. Yesterday, the President said a deal needs to be agreed upon in 10 days in order to allow time for legislation to pass both houses of Congress to raise the debt limit in time. However, now is not the time to start worrying. In theory, one should not expect either side to compromise until it believes its negotiating position is at its peak strength relative to the other side. Unless one side comes to the humble conclusion that its negotiating position will only weaken in the future, do not expect to see a deal until the final hour. Despite this, I’m optimistic about a compromise deal occurring. Both sides consist of patriots who understand the devastating consequences America would suffer if they failed to raise the debt ceiling. Moreover, neither side wants to suffer the political blame for ruining the country’s financial dominance.

Many of my fellow Democrats have expressed exasperation that the debate has largely been happening on Republican terms. With the exception of the recent and marginal success Democrats have had in pushing the policy idea of closing tax loopholes on jets and yachts, the negotiations have largely taken place on Republican terms. This is especially true if you take a longer view and consider the Fiscal Year 2011 budget debate which culminated in early April. The reason for this right-leaning negotiation is that the Republican House majority, largely unified and highly disciplined, can credibly threaten that they will actually shut the government down (in April) or let the Treasury default on its maturing debt (now). In neither case could the President, or Democrats in Congress, credibly threaten to do the same. Why can the the Republican Party do this? Because it has been content to shirk the responsibilities of governing.

Since January the Republicans have proposed literally only one policy idea to help the fledgling economy: cut spending. Not only does this proposal fail on its own terms (they refuse to cut Defense spending, or subsidies for big businesses), but it is also economically fallacious. Current Republican arguments upend the foundation of modern macroeconomics, Keynesianism, which argues that counter-cyclical spending is required for a healthy economy. Put simply, this means that in times of economic boom (1990’s for example), government spending should be curtailed. In times of economic bust (2007-2009) government spending should be increased. This is based on the fact that during a recession three components of GDP (investment, consumer spending, and net exports) will almost certainly decrease. It follows that the fourth and final component of GDP should be increased. That’s called stimulus. It’s such a mainstream idea that even George W. Bush supported it.

This morning Moody’s Analytics details how government spending (stimulus and unemployment compensation) was crucial throughout the recession to keep the economy on its feet. Now, as it dries up, Moody’s is warning of a weakening of the economy. The June jobs report was poor – only 18,000 jobs were added to the economy. What’s striking is that the public sector lost 39,000 jobs! These are the direct result of federal, state and local budget cuts. Without these budget cuts forced upon government, the jobs situation would not look nearly as bad. Republicans insist on cutting government spending, and then when budget cuts lead to bad jobs reports, they bemoan the lack of jobs. Not only is this economically nonsensical, it is morally wrong. While refusing that rich people pay their fair share of the burden, they insist on cuts which disproportionally affect the poor. This is regressive and wrong. And it’s not the type of society in which I want to live.

So it is not yet time to worry about a the lack of a debt ceiling compromise. However, outrage over Republican economic ideology is long overdue.

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