Debt deal's done, but does it make sense?
This article first appeared in the St. Louis Beacon, Aug. 2, 2011 - After weeks of speeches, posturing and negotiations, Congress has finally raised the nation's debt ceiling, just hours before the country could have been forced to default on its obligations.
But just because the deal is done doesn't mean that economists and others like it -- or even think that it was necessary.
"Why do we even go about having this vote on a periodic basis?" asked Rik Hafer, a research professor of economics and finance at Southern Illinois University Edwardsville and a Beacon columnist.
"If you look at the debt ceiling over the past 25 or 30 years, it just goes up. It never goes down. People ask me, why do we have this process? What it does, for better or for worse, is it forces politicians to put their name in the yes or the no column, and it creates a public record on their position on the debt. Then they look at me stone-faced and say so what? And I have to agree with them."
Worse, said Murray Weidenbaum, the business and economics professor at Washington University who chaired President Ronald Reagan's Council of Economic Advisers, the often-heated debate highlighted a basic defect in current political discourse in Washington.
"Go back to 1960," Weidenbaum said, "and plot the members of the House and Senate, the most conservative Republican to the most liberal Democrat, by their voting record. There was a big overlap. The most moderate Republican was to the left of the most conservative Democrat. There were lots of those and vice versa on the Democratic side. You had a large area of middle ground, and that was the basis for compromise.
"You now have zero overlap. The most conservative Democrat is to the left of the most liberal and moderate Republicans. That makes it hard to compromise."
Here is more of what they and others told the Beacon about how they view the newly minted debt deal.
David Rose, chair, economics department, University of Missouri-St. Louis:
He pointed out that the failure to raise the debt ceiling would not technically have resulted in default. Though the government is spending more than it is taking in, and floating more than over $4 billion a day in new bonds to cover the daily deficit, enough revenue is still coming in to cover interest payments.
"The problem with not raising the debt limit," Rose added in an email message, "is that the government will no longer be able to float new bonds. This is like a person who, having solved his credit problem year after year by getting new credit cards to pay the interest balance on old ones, suddenly finds that he's run out of credit card companies. If the guy brings in enough money each month to cover all the credit card company interest charges, he doesn't have to default, but he'll have to cut way back on his expenses immediately.
"In any case, this alone will not precipitate a default. Significantly, it also would not have resulted in people failing to get their Social Security checks."
Without an increase in the ceiling, he said, the result would not be a total shutdown of the federal government, but Washington would have only been able to spend about 60 percent of what it would have been spending.
"The longer-term issue," Rose added, "is that much of our current expenditures are in the form of interest on the debt, and that number is growing. This is alarming because it is already high at very low interest rates. It is impossible to keep interest rates this low for very long. Fed bond purchases, which reduce interest rates at the margin, also seed inflation. As inflation rises, creditors demand correspondingly higher interest rates just to cover the reduced purchasing power of the dollars they'll be repaid in.
"This means that if we continue deficit spending, we will eventually come to a point in which it will be impossible to cover even the interest payments from our revenues. How soon depends on many factors so it is foolish to try to predict, but it is never wise to walk only a foot away from the edge of the Grand Canyon...
"As the debt/GDP ratio rises, the likelihood of a de facto default rises. What I mean by this is that the government gets so far over its head that it has to monetize the debt, which causes inflation and means that creditors will be paid but the value of the dollars they are repaid with will be so much lower than what they expected. This is not fanciful; it has happened again and again in economic history across a wide range of countries. It's just never happened here."
Rik Hafer, research professor of economics and finance at Southern Illinois University Edwardsville:
On the failure of the debt plan to include new revenue, Hafer said that current spending is unsustainable without new dollars to help pay for it, but the problem in raising those dollars can be laid to the same issue that Weidenbaum raises: politics.
"You can't have the kind of entitlement system that we currently have without paying for it," he said. "And you can only do it two ways -- cut spending on education or the military or whatever it is, or raise revenue. It's got to come from somewhere. That's the debate that occurred in the president's commission, which got ignored.
"One would hope that would become a very important discussion. The problem is, given that politicians will be doing it, with a presidential election coming up, that isn't going to happen. The downside is that the public is becoming more and more frustrated. There are some warning signs out there. People have to start thinking realistically about what the U.S. economy is going to be 40 or 50 years from now, not just in the next election cycle."
The public's frustration has shown itself in the rise of the tea party, but Hafer said he did not want to lump members of that movement in as drivers of the latest debate.
"What does it take to get the parties together to say, 'We have this problem down the road; how are we going to deal with it?' To some extent, I'm not sure the brinksmanship was useful because the public became very disenchanted with the process. A lot of people held up their votes to try and force that very important discussion, but in the end, raising the debt ceiling may have forestalled that discussion."
And as far as the required discussion of a balanced budget amendment, which apparently influenced many conservative House members to back the debt agreement, Hafer said it's an old idea that doesn't have any new support.
"It was heavily discussed when I was in graduate school in the late '70s," he said, "and it never gets any traction because like most politically crafted amendments, it would lack teeth. Those kinds of amendments -- unless they are going to be so generic to say that over the period of a decade on average government will endeavor to balance its budget -- don't work. Or there will always be some event that people will point to, like a recession, so that will be an escape valve to keep us from coming up with a balanced budget.
"I don't know that the budget needs to be balanced. I don't know that that is an end objective that people should be shooting for. Keeping taxes and expenditures within a certain range relative to the size of the economy is a more doable objective. You can actually balance the budget and have a government that is much more intrusive in the economy than having an unbalanced budget but have a much different role for government."
Murray Weidenbaum, business and economics professor at Washington University:
Weidenbaum goes further on the balanced budget issue, pointing out that even though many people make the point that states have to balance their budget, so Washington should as well, that argument really isn't true.
"Let me correct all the misinformation I've heard," he said. "People say almost every state has a balanced budget amendment. Not really. They have balanced their current budget, but what are all the state and local bond issues about? That's borrowing. They borrow for capital projects. Want to build a school? Want to build a road? They float a bond issue.
"That kind of amendment is so darn restrictive. If a severe national defense emergency plays out, and in this dangerous world that's very possible, I'd hate to have us restricted because of a constitutional amendment. In an election year, if you have a serious recession where revenues come down, can you raise taxes in a recession to make up for it? I don't think these folks have thought it through, though they typically are very sincere people. They don't trust the so-called information they are getting from the standard sources in Washington."
That misinformation, he said, leads to poorly framed debates, ones that rely less on facts and more on politics.
"As a practical matter," Weidenbaum said, "I'm usually not in the position of defending the White House. But most of the revenue lost through special tax provisions, in dollar terms, benefits the middle class. To start cutting them, like for mortgages or for employer-paid pensions -- this is big money, and I don't think that given the timing of this episode, anyone wants to open up those contentious matters. So you're left talking about small potatoes. Why bother?
"There are a lot of people with dug-in positions, on both sides. Attention has been given, for example, to a pledge not to raise taxes, and that's fine. But there are a lot of folks on the other side who don't want to touch Social Security. After all, people have paid for it; they're entitled to it. No one in either party has the courage to say publicly, in plain English, that when it comes to Social Security, Congress has voted more benefits than money to pay for them.
"Debate on that gets kind of contentious in a hurry. I know why the tea party folks come across as not the most knowledgeable on the technical facets of budgeting, but people who defend Social Security in a knee-jerk manner because they paid for it don't come across any better, and they usually are on the liberal side."
Who will be hurt by such finger-pointing and stalled debate?
"Anyone who has a 401(k)," Weidenbaum said. "Anyone who wants to get a new mortgage or any state and local government who wants to raise money for improvements or consumers who have large credit charges. I think it's quite clear that interest rates will be higher for all of us. That's not good."
Benjamin Ola Akande, dean of the business school at Webster University:
His view of the compromise signed Tuesday by President Obama:
"The debt deal is an interesting result of which the average American is the one who made the compromise. The option of not getting it done is catastrophic."
He thinks the projected savings are realistic; the timetable for further action, he said, because it is so compressed, may prod lawmakers in Washington to act in ways they may not have otherwise.
"The timetable is very aggressive," Akande said, "given that the next decision time is November to cut $1.5 trillion or the triggers will happen. Sometimes the best decisions are made when there is not time to waste."
One of the topics for those decisions will be whether additional revenue should be included in efforts to cut the deficit, he added.
As far as the balanced budget amendment goes, Akande's view is clear and to the point: "The balanced budget amendment is nothing new. You recall Gramm-Rudman? The Tea Party folks will certainly get a vote on it and it will be soundly defeated."
For Akande, though, something was missing from the final deal: "How I wish our elected officials could put the same effort they put on the debt ceiling on how to deal with the fact that 24 million Americans are unemployed."
In terms of the cuts in defense spending likely to come as a result of the debt-ceiling agreement, a spokesman for the defense, space and security operations at Boeing said the company would not be issuing a statement beyond what W. James McNerney Jr., Boeing's chairman, president and CEO, wrote, along with other business leaders, to the White House and members of Congress.
In the letter, released last Friday by the Business Roundtable, McNerney and others urged the elected officials "to enact legislation now that raises the debt limit and puts the United States on an immediate and real path toward fiscal responsibility. From our experience and with conviction we can tell you: Inaction poses an unacceptable financial risk to the nation's economic growth and job creation."
Stating that further inaction would have "unacceptable consequences," the heads of companies such as MasterCard, JPMorgan Chase, Wal-Mart, Exxon Mobil, General Electric and others said the nation needs "a serious plan that puts America on a true path to a sound fiscal future."
"Effects of default will reverberate throughout the economy," the letter added, "throttling growth, discouraging hiring and casting serious doubt about any long-term recovery. The United States would become a less attractive place to invest and operate. Failure to act now will further exacerbate the difficulties in addressing the long-term issues of government size and spending. Not only will America's creditworthiness suffer, so will America's credibility.
"We have been speaking with increasing urgency about the economic harm caused by the inability to predict what the federal government might do in terms of regulations, taxes, spending and borrowing. The current impasse only magnifies such uncertainty. Our elected leaders must come to an agreement that preserves America's global reputation and economic vitality."
In an email, Boeing defense spokesman John Morrocco noted that the company supports efforts "to maximize affordability and improve productivity" in defense spending.
"We fully understand the need to ensure taxpayer dollars are spent wisely," he said, "especially during these times of economic challenge and defense budgets that have been stretched by the needs of a nation at war. Boeing has been taking significant steps in the direction of reducing costs and improving efficiencies in military production programs like the F/A-18 Super Hornet and rotorcraft, as well as through facilities consolidation and various other productivity improvements.
"We have been anticipating flattening defense budgets for some time so, in addition to our initiatives to manage cost and increase efficiency, we have been positioning ourselves for growth by focusing on increasing international opportunities, as well as moving into new markets and targeted adjacencies like unmanned systems, cyber security, energy management and support and logistics."