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Posted: October 12, 2013 3:09 p.m.

The perfect fiscal storm

The political disappointments in today’s government abound. The national debt is out of control, the ideological divides are gaping, and the government has been shut down for more than a week. The average person has not yet felt the effects of the shutdown, but the concern for our nation’s future is clear. Just about everyone has an opinion, but it’s hard to find the real factors that must be considered in the current economic environment.

The government shutdown won’t have a direct effect on any one family (outside of those who are currently furloughed) — initially. However, the shutdown will become more serious as time progresses, government services remain closed, and workers remain furloughed. Government expenditures on employee wages, for roughly 800,000 people, will be zero in the short term and demand will fall, accordingly. Furthermore, many government contractors who depend on sales to government agencies will not meet their expected sales goals.

As the demand for goods and services slowly decreases in the coming weeks, and assuming the shutdown continues, our already fragile economy will be negatively impacted. With the current, slow economic growth rate of about 2 percent, the U.S. recovery is anemic and another impact, even one that is self-imposed, will create uncertainty that will almost certainly inspire disruptive market behavior. Uncertainty is always paired with fearful market reactions, and tranquility quickly absconds. Markets have, so far, reacted as if this government shutdown was orderly and expected. To this point, there hasn’t been a large economic impact, but investors are becoming weary, and the stock market itself has begun to show signs of fear. If the shutdown persists, businesses will have trouble planning for the holiday season, making hiring decisions, and making educated sales projections for the foreseeable future. If the government shutdown lasts longer than a few weeks, local businesses will sell fewer goods and services and unemployment will, at best, remain constant. In fact, the effects are even greater from the debate over the debt ceiling. Coupling the two creates a nearly perfect, self-imposed fiscal storm.

The debt ceiling allows the government to continue its operations from year to year via debt financing. If our lawmakers cannot come to an agreement on a federal budget and fail to pass legislation leading to the increase of the debt ceiling, the U.S. will likely default on many of its obligations.

Defaulting on U.S. debt obligations has implications that will be felt worldwide, but most powerfully here at home. If the U.S. defaults on its debt obligations, the AAA credit rating of our nation will be decreased. With a lower credit rating, future debt financing becomes more expensive as interest rates across the entire economy will rise.

The idea of not increasing the debt ceiling because it will somehow save money for the U.S. is simply incorrect. In fact, not increasing the debt ceiling will cost our grandchildren far more than if we do, in fact, raise the government’s credit limit.

Raising the debt limit isn’t the same as asking for a greater credit line on a credit card to finance a lavish lifestyle; in fact, it is entirely different. Most of the debt the U.S. owes is owed to its own citizens, corporations, the Federal Reserve, Social Security, and intra-governmental holdings. Of the nearly $17 trillion in debt, less than one-third (about $5.5 trillion) is owed to foreign countries.

In fact, it is commonly quipped that China could foreclose on the U.S., but China only owns about $1.3 trillion of U.S. debt. Raising the debt limit is more like asking your husband or wife to dip into savings to pay existing credit card payments with the knowledge that you will get a raise next year. Raising the debt is spending next year’s raise today, but keeping our credit card payments steady.

After a default on our debt, even with an increase in revenues next year, the money it would take to service existing debt would grow even larger, making payments more difficult. Existing debt would become more expensive, and the problems we think are serious today will become catastrophic in the future.

It is not possible to balance the U.S. budget at this exact moment, and certainly not by defaulting on our national debt obligations. Balancing the budget will take years of decreased spending and increased revenues. Balancing the budget will require our citizens and lawmakers to understand that we will have booms and busts, which result in increases and decreases in tax revenues, every 7-10 years, and that our deficits will always increase during recessions. Balancing our budget will require responsible fiscal policy, long-term commitment, a steady leadership, and a patient population. Balancing the budget will take small changes to expenditures in the presence of small increases in real GDP and tax revenues. Before we can balance the budget, ironically, we must first increase the debt limit.

Before we can increase the debt limit, unfortunately, we must first agree to reopen the federal government.

Mark Flowers, M.S., is an economist at Georgia Perimeter College. He can be reached at Mark@modernsense.net.

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