The ongoing series of political crises--debt ceiling
expansion, deficit cliff, and sequestration--started with the debt ceiling
imbroglio of 2011 when Congress refused to give the president of the United
States an increase in the debt ceiling he requested. That led to a Moody's
credit ratings downgrade of the U.S. for the first time in the country's
history. A similar confrontation between Newt Gingrich (Dick Armey, and John
Boehner) and President Clinton in 1995 failed because Pres. Clinton called
their bluff.
Historically, starting in the mid-1940s, the debt ceiling had been
raised ninety-four times--apart of the hiccup in 1995. But the present
confrontation between the Congress and the White House has spawned a a series of
crises--deficit cliff, sequestration, a looming continuing resolution, and the debt ceiling. These create market uncertainty and low confidence in government, particularly Congress, which ultimately slow the anemic economic recovery.
Section 4 of the 14th Amendment to the
U.S. Constitution gives the president the authority to pay legally incurred debts (i.e. approved by Congress) of the United States government. It states in part, "The validity
of the public debt of the United States, authorized by law, including debts
incurred for payment of pensions and bounties for services in suppressing
insurrection or rebellion, shall not be questioned. " Bill Clinton has stated that, were he
president now, he would do an end-run around the Congress using the 14th
Amendment as his authority. Obama, however, is politically restrained from doing this--even if such an action is constitutional--because it would lend credence
to charges put forward by his detractors that he is a dictator. But if he were to invoke the 14th Amendment,
the spending debate would be rendered moot. And, going forward, it could also speed up the rebound from the recession.
In any case, the notion of circumventing the Congress is a pipe
dream, nothing more. It is not going to take place, not in this irrational, adversarial
and vindictive political environment where scoring political points is put
before the economic prosperity of the nation. So, the crises, uncertainties, and anemic economic growth will continue, perhaps for the next two years, at least until
the 2014 mid-term elections. Then, possible changes in the political composition of
the Senate and the House might favor economic growth, although gerrymandering could thwart the will of the people again.
Spending Cuts Don't Lead to Economic Growth.
Yet, the squabble around the deficit is still
misdirected. The fact is there is scant empirical evidence that spending cuts
are the pathway to economic growth. Ironically, this point can perhaps be best made by pointing out an exception to the rule. In the case of Estonia, the economy did grow following spending cuts, which included a 10-percent cut in wages,
tightened health benefits, and a rise in the pension-eligibility age. All of these
measures were implemented largely with the consent of the people and without
any outburst of civil discontent, as occurred in other European countries, most notably
Greece. The government also devalued the Estonian kroon (the country's currency), making the country's goods more competitive on the world market and resulting in an export explosion.
Granted, austerity in the form of lower wages and a cheaper kroon seem to have worked in Estonia. But there is also a downside to this story. Reports indicate that one
response to Estonian austerity has been a flight of labor. A study in The
Baltic Times states: "The daily Eesti Paevaleht commissioned a
study [in which] 1,000 Estonians of working age were asked if
they have, in the past six months, considered leaving Estonia. Thirty-seven
percent answered in the affirmative.... Considering that not all
people who consider this actually leave, around 108,000 people could leave
Estonia, according to these results."
In other EU countries, such as Greece, Spain, and
the UK (which slipped into a triple-dip recession), austerity has not worked at all. More importantly, it is still not clear,
theoretically or as a practical matter, how cuts in spending can stimulate
economic growth. The argument on its face is counter-intuitive, and the evidence
weak at best. And even the positive side of the Estonia experience does not answer the question.
Moreover, despite the political hits it has taken, the American Economic Recovery and
Reinvestment Act of 2009. the so-called "Stimulus," offers strong evidence that government spending can help foster economic growth. From the enactment of the Stimulus in 2009 to 2013, the American economy experienced 36 months of job growth during which 5.523 million
jobs were created. (See data from Think
B.I.G.) Job growth might in fact have been considerably more robust without the
concerted political obstructionism of Congress and the lay-offs of police officers, firefighters, and teachers by mainly red-state governors in
the name of balanced budgets. Still, if Main Street's performance has been
lackluster, Wall Street's has been quite spectacular. It has rebounded from a bear-market low of 6,594.44 in 2009 (March 5th) to 14,455.28 on the Dow
as of March 13, 2013. And while wage growth has been flat, and the cost of
capital cheap (thanks to the Fed's easy-money policy and low interest rates), corporate profits are going through the roof. Some evidence of a failed stimulus!
The Intractable Debt Issue.
The federal debt can increase in two ways: when the government
sells debt to the public to finance budget deficits, and when it issues debt to certain government accounts like Social Security and Medicare for their reported surpluses.
A simple way to
think about this arithmetically is as follows: the change in the national debt is equal
to the current deficit plus the interest on the debt.
$1.36 trillion is a
gargantuan number and we need to be seriously concerned about it. But we should
also be realistic about it and place it in some context. There are
lots of reasons government spending as a share of GDP is expected to grow. For one thing, the
population of the U.S. has grown and with it the labor force, out of which
retirees become beneficiaries of Social Security and Medicare distributions. A
growing population also necessitates more public schools, roads, and also prisons. And
even if we balanced the budget, the debt would still change by the amount of the
interest payment obligations on the outstanding debt.
In the absolute, the
magnitude of the federal debt is mind-boggling. But that says nothing about our
ability as a rich nation to service our debt. In that context, it is better to think of
government spending as it relates to GDP--and it appears that ratio is
declining. This issue, however, will be left to another discussion, as it is not germane to a larger point that needs to be established first: namely, that both the absolute and relative size of the national debt are of far less concern than economic
growth and lower unemployment.
Who Owns the Debt?
To start that discussion, let's first dispense with a few fallacies.
First, the government is not like a household. It can print money; we can't.
The Treasury Secretary is authorized by the Constitution (Article 1, Section 8)
to mint coins of any denomination--hence, the recent conversations about minting a $1 trillion platinum coin. (As an aside, the process by which this would work is that the
Treasury Mint would first strike the coin and the Treasury would send it to the Federal Reserve Bank.
The Fed would then send $1 trillion to the Treasury for use in paying the government's bills. The Treasury, however, would need to mark time until the debt
ceiling was increased. With that act accomplished, the Fed could then send the coin back to the Treasury Mint, where it would be melted down and the trillion dollars taken
off the books. With a higher debt ceiling, the Treasury could in turn sell more debt in the form of bonds.)
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