Current / Economics

The Week of Reckoning

This week two dates arrive that could signal a sea change in what might be the most idiotic political crisis in American history.  For two weeks, the House of Representatives have precipitated a perceived standoff in which statements like this have been made:

“I think we need to have that moment where we realize [we’re] going broke,” Yoho said. If the debt ceiling isn’t raised, that will sure as heck be a moment. “I think, personally, it would bring stability to the world markets,” since they would be assured that the United States had moved decisively to curb its debt.

Yes, I’m sure these sentiments will calm the world markets.  **Sigh**  The above statement is confusing enough without the Washington Post seeming to editorialize within the quotation.  David A. Fahrenthold doesn’t put quotation marks around “that will sure as heck be a moment” and “the United States had moved decisively to curb its debt,” which leads me to question whether these statements are directly from Ted Yoho’s mouth or Fahrenthold’s thoughts.  As exasperating as that is, Ted Yoho isn’t done with the confusion crazy train:

During a teletown hall Thursday evening hosted by Rep. Ted Yoho, a caller named Frank from Gainesville asked about furloughed workers.

“The people that had to work should be paid,” Frank said. “But the people that are home watching Netflix and whatever, I’m not sure that we should be sending them checks.”

Replied Yoho: “Well, when we voted on that they were supposed to come back to work as part of that deal. … I agree 100 percent with you. If they’re not working, they shouldn’t get paid.”

What vote is Ted Yoho referring to?  This one:

Yoho voted last week to pay those federal workers in a unanimous vote in the House that passed 407-0. He said he voted “yes” because he was under the impression those furloughed workers were supposed to begin working as part of the deal.

Seriously?  Representative Ted Yoho’s impression shows incredible cluelessness due to the fact that furloughed workers will only return to work when the government reopens (or select DOD personnel are reclassified as “essential”).  Why am I wrapped up so much in the statements of a single confused freshman congressman from Florida?  Besides of the fact that Yoho believes voting for back pay would end the shutdown that I can be reasonably certain he wishes to continue?  No—I am far more curious why I have seen no media reaction whatsoever to Frank from Gainesville’s statement “The people that had to work should be paid.”  News flash—”essential” workers aren’t being paid.

The Ides of October

I came across an important question this weekend:

I put all this together and I start thinking that maybe the GOP will keep raising the debt ceiling, but the government will just be shut down forever, or at least until Republicans win the Senate and the White House back (which I don’t see happening in the foreseeable future), or lose the House (which I also don’t see happening). A few “vital govt services” will be restored piecemeal — military death benefits now, furloughed USDA salmonella fighters now, the VA a few weeks or months from now, and other bits of the government as bad headlines dictate. Eventually we’ll have pretty much everything up and running that employed suburban white people want from the feds (the social safety net for the poor, maybe not so much), and that’ll be the new normal indefinitely.

Explain to me why that couldn’t happen until, oh, say, January 20, 2017, at least.

If Steve M. had asked this in the first few days after I wrote an entire post about my perception of a coming revolt of the “essential” workers, I would have replied the shutdown isn’t likely to survive the month, let alone 3+ years.  I used to feel certain the approaching debt ceiling would be headed off by a sickout/strike/walkout when “essential” federal government workers realized they too were not being paid.  I predicted that realization would occur after the October 15, 2013 paychecks are withheld.  Especially now that all furloughed federal workers have been guaranteed back pay (with “non-essential” employees forced to sit at home while “essential” are forced to work and both classifications will receive their wages only when the shutdown ceases), I felt certain that the House’s shutdown gambit would collapse in the federal workforce equivalent of a general strike two days from now.  However, an experience I had at the airport this week shattered my happy illusion:

Bantering with a TSA officer at an airport security checkpoint, the screener laughed heartily until deadpanning “I’m doing fine except for not getting paid.”  No anger, just a general look of dejection.  Knowing he was forced to work for free, the TSA screener nevertheless was “patriotically” reporting for duty.  I apologized, not knowing what else to say.  But from that moment, I realized that the abuse federal workers have endured for years has not instilled a desire to revolt against the inflicted injustice. 

I have to apologize to Matthew Yglesias, he does have the pulse of some federal “essential” workers.  However, I would predict that the pressure will build, both financially and a corresponding rise in anger, every 15 days (the dates of every missed paycheck) until the shutdown ceases or Congress and the president mutually agree to pay “essential” workers while forcing them to work.  I keep putting “essential” in quotation marks because these workers are “essential” to running this country, but paying them isn’t considered essential.  As I have been inundated with slavery references from reading Team of Rivals for the last two months, I cannot help but conclude that the shutdown is enslaving hundreds of thousands of abused federal employees.  An imperfect analogy, I know—the “essential” workers could up and quit en masse, but that would not change the fact that the country will grind to a halt if that were to occur (15,000 air traffic controllers ceasing to work would be far more catastrophic to the national airspace system now than in 1981).  Even if the federal government found applicants to fill the “essential” jobs, the government would still be in the position of requiring the replacements to work without being paid.  Good luck with that.

Stupid Is As Stupid Does

As I mentioned from the beginning of this particular post, this is quite possibly the most idiotic political crisis in American history.  I prefer to avoid giving any support to either of the specific antagonists in this incredibly stupid struggle, as I find any politician with a (D) or and (R) after his or her name supremely unqualified for public office.  But if I am going to ill-advisedly enter this fray, I should probably qualify my assertion.

Republican legislators inhabit the Greek land of idiotes.  Meaning literally “private person,” modern equivalents are amateur, unskilled, unprofessional (not to mention incompetent).  Debt default denialism is running rampant through this political party, in direct conflict with the assertions of practically every person with training in finance or economics.  But in spite of the demented circus running the House of Representatives, their opponents are perhaps more incompetent.

The executive branch created this mess by pursuing “negotiations” in 2011, when the only appropriate response to elected legislators threatening to default on the debt is to politely tell the clowns to go…you-know-where and do you-know-what.   Worse, Democrats in the Senate, will far greater federal government experience than the American president had, signed off on the idea that swapping tax increases for spending cuts is wise policy without considering that tax increases and spending cuts both have the effect of stunting economic growth, and thus damaging the “recovery,” such as it is.  In essence, the “grand bargain” involves conservatives demanding austerity while liberals demand more austerity.

The naysayers naturally harp on the size of the deficit in 2011 (but conveniently ignore the fact that the federal deficit has been halved since then).  This too is idiotic in so many ways.  Inflation keeps trending downwards relentlessly (only prevented from turning to actual deflation by “sticky wages”), while interest rates are stuck at the zero lower bound.  In other words, the polar opposite of the 1970s (whose stagflation did not occur for the reasons the naysayers expose anyway).  To add to the stupidity brew, a significant percentage of Republican officeholders are hell-bent on forcing the United States of America to default on its debt.

A Moment of Catharsis

 What might this default look like?  Maybe like this:

But as I and many others have emphasized, even if this is possible, it would be a catastrophe, because the Federal government would be forced into huge spending cuts (Social Security checks and Medicare payments would surely take a hit, because there isn’t that much else). We’re looking at something like 4 percent of GDP, which given fairly standard multipliers would imply an eventual contraction by 6 percent.

Except that standard multipliers are wrong — it would be much, much worse. I haven’t seen anyone making this point, but it’s very important.

Standard estimates of the effects of cuts in government spending take into account the role of the federal government as an automatic stabilizer: the deficit rises as the economy shrinks, mainly because tax receipts go down but also because safety-net spending goes up. Typical estimates are that the federal deficit rises around 40 cents for every dollar decline in GDP:

 

But if the federal government is up against the debt ceiling, it will have to offset these revenue declines and automatic spending increases with further cuts. So the initial 6 percent decline in GDP would force a further 2.4 percent of GDP in cuts, leading to another round of GDP decline, and so on.

Take these effects into account, and the multiplier effect of an initial decline in government spending should be around 2.5, not 1.5. So we could be looking at a 10 percent decline in GDP, and a 5 point rise in unemployment, even if interest is paid in full.

So…Ted Yoho thinks this would stabilize world markets (who said world markets were destabilized in the first place)?  But there is a caveat to all this:

This wouldn’t happen all at once; it won’t happen if the debt ceiling crisis lasts only a few weeks, in part because many of the people being stiffed would still expect payment eventually. But a sustained debt crisis could have immense negative effects even if default on securities (as opposed to default on contracts, which would still happen en masse) is avoided.

I, like Dean Baker, have questioned whether if the day of default has been pushed back as a result of the government shutdown.  But so long as the federal government is still running an operational deficit, that day will come.  This leads me to a crazy question of my own: should this country give the denizens of idiotes the default they want?

If anyone ever reads all my essays (a dubious proposition: I doubt anyone will ever read even one of my essays), the reader might conclude I too have gone crazy.  But here me out—a short default would have one of three effects:

  1. Markets react very negatively, but quickly bounce back from the shock and do little lasting damage, especially considering the chastened default deniers/default embracers are forced to retreat quickly.
  2. Default deniers/default embracers are proven right—the markets react positively or do not react at all.  In this outcome, the powerful Wall-Street types that have been warning of an economic cataclysm should forever be branded the empty suits that many such financiers are.  Though it would be deflating as well, as it could chalk up a massive mark for Tea Party accuracy.
  3. Default precipitates a full-blown meltdown in the financial markets and/or economy.  Likely in the aftermath of such an event flirtations with default will be seen as taboo for generations to come.  

In the event of a catastrophic default the turmoil might be a good impetus to introduce a stratagem I advocated last year.  Scenarios one and three (I would consider two improbable) should put enough force behind legislation to slaughter the debt ceiling:

Needless to say, I consider the debt ceiling to be the root cause of the January conundrum.  The fact that the next required lifting of the debt ceiling (projected to threaten a debt default AGAIN next February) is not mentioned hand-in-hand with the so-called “fiscal cliff” austerity is astounding to me.  January would only involve haggling over tax rates if it weren’t for the nutty reality that agreeing to pay the U.S.’s debts has become controversial.

I would postulate that any agreement to avoid the “fiscal cliff” should at the very least raise the debt ceiling; otherwise the nation returns to square one haggling over that issue a month later so what’s the point?  However, because paying debts has become controversial to a significant number of congressmen and senators, I have come to believe raising the debt ceiling is insufficient.  The debt ceiling itself has to go.  At the very minimum, a successful outcome for the entire nation’s sake must include the elimination of the debt ceiling and the legislated assurance that all current and future debts are guaranteed to be paid.  This policy should seem self-evident, but since 2011 it clearly is not.

In short, a default might be a perfect moment of catharsis.  It would stave off the possibility of even worse idiotic political standoffs:

  • The U.S. doesn’t go over the edge.  Infuriated Republicans, believing again that they have been sold out, initiate a series of further shutdowns and threaten debt default, demanding the full repeal of the 16th and 17th Amendments to the U.S. Constitution, the Federal Reserve, automatic economic stabilizers, and the entire social safety net.

The major concern is over scenario three, but this possibility is equally (if not more) harrowing:

  • The U.S. doesn’t go over the edge.  Infuriated Republicans, believing again that they have been sold out, initiate a series of further escalations by reaching for more dangerous ways to try to force their vision on the American populace, the sequence of failures eventually turning to actual weaponry.

How likely is the last object to occur?  That’s just it—completely unknown.  During the lame-duck session after the 2010 midterm elections, the outgoing Democratically-controlled Congress refused to raise the debt ceiling, demanding Republicans to have some “buy-in on the debt.”  That turned into an disaster in 2011, but at least the Republicans’ supposed leaders steered clear of actually shutting down the government or defaulting on the debt.  Whatever control was exhibited two years ago has evaporated in the succeeding two years, leaving behind only a caldron of fury.  The history of this nation contains far worse. 

What am I alluding to here?  The sky’s the limit, but worse than debt default are “Second Amendment Remedies.”  In researching the Civil War, I have noticed that the widespread seizure of federal military equipment, facilities, and weapons in the seceding states lit the keg that detonated in 1861.  Open talk of secession has crept back into vogue in some states, and U.S. Army facilities such as Fort Bragg, Fort Benning, Fort Hood, Fort Lee, Fort Pickett, Fort Polk and Fort Rucker are all named after Confederate military officers (and all those installations lie in former Confederate states).  In short, this nation really needs a moment of reckoning before we tear each other apart.

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