Business, Economics, and the Debt Ceiling Crisis

I just got back from the International Academy of Business and Public Administration Disciplines (IABPAD) conference in Hawaii. All the economists there were aghast at what Congress is doing to the US economy. These are people who teach at business colleges and are presumably pro-business. Indeed, many of them came from the business world before taking up teaching. One paper, done well before this insanity started, looked at what influences the rate of consumer savings in the US. This is important because we are a consumer-based economy. While a certain amount of saving is a good thing, if it gets too high, that acts as a drag on growth. They found that the two most important factors impacting the savings rate — the percentage of personal income that gets saved — were personal net worth and the general interest rate. If net worth was up, spending was up. On the other hand, if interest rates were up, spending was down.

What has this to do with today? Well, failure to raise the debt ceiling will lower foreign confidence in the US. Not in our ability to pay, but in our willingness to pay. US securities will no longer be risk-free, because Congressional Risk will have to be added to the other forms of risk, like Exchange Rate Risk. That will raise interest rates. Among other things, those higher interest rates will kill the housing market. At the same time, you can expect the stock market to tank, because of the uncertainty (you know, the thing that Republicans are always saying hurts businesses), and because of the interest rates. The result will be a drastic drop in individual net worth.

So, the combination of decreasing net worth and increasing interest rates will drastically increase the savings rate. Which, by the way, has already climbed back toward pre-1980’s levels. That will kill consumer spending, and reverse our recovery from the Great Recession.

The data isn’t available yet, but I wouldn’t be surprised if all of those government workers, and Social Security pensioners, and US military families, hadn’t already cut spending to the bone, because they aren’t sure if they can make it through August without a paycheck — it’s not been so very long since lower-ranking enlisted families qualified for food stamps. And the civilians in towns and cities with a significant military presence are cutting their spending, because they can see the military cutting back.

So, as one commentator put it, the damage has already been done. No-one is going to trust that the US government won’t go insane, again, at some point in the future.

This crisis didn’t have to happen. For one thing, this isn’t the worst Debt/GNP ratio we’ve ever had. Over the history of the US, it ranks about 7th. For another thing, there’s no reason to have a debt-ceiling law in the first place. Only one other country in the world has one. The fact is, as one commentator has pointed out, when Congress approves a certain tax structure (income) and a certain spending structure for a given year, such that income is less than spending, they have already approved an increase in debt, because that's the only way that can happen. The debt ceiling law is an unnecessary self-inflicted wound.

The whole thing is a manufactured crisis. Deliberately manufactured by the Republicans. Presumably, their hope is that they can crash the economy and climb back to power on the rubble.

I used to be a Republican. I don't admit that to people very much any more.

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