An old friend's funeral services took me to Washington, D.C. last week before, during, and after the debt-ceiling debate. I used the time to meet with a number of capital regulars who, for the most part, had big jobs in previous Democratic White Houses and administrations, the Congress, and the media. The regulars were just as irritated and impatient with the current state of policy and politics as ordinary voters out in the country. More on that below.
As expected (see my July 10 blog post on the subject), the lifting of the debt ceiling was accompanied by some modest short-term policy changes, while more difficult taxing/spending decisions were bucked to a bipartisan Senate-House committee yet to be appointed. At the end of the week, Standard & Poor's issued the first downgrade in history of the U.S. credit rating. Since financial markets had shut down for the weekend, the downgrade's effect will not be felt there until early this week. There was immediate and strong international reaction among governments and finance ministers, however.
The Chinese, perhaps not surprisingly, lectured us about the size of our continuing residual debt. We have to listen because they hold a good share of that debt and could wreak havoc by dumping it. Domestic economic data, released about the same time, were disappointing and raised fears of a double-dip recession.
Some facts to bear in mind:
•Despite the incremental measures taken in the debt-ceiling deal, federal debt is headed toward $15 trillion.
•Unemployment remains above 9 percent; the number is 18 percent if you include those who have stopped looking for work or are only partially employed. The present economic growth rate, below 2 percent, is not sufficient to make even a small dent in those numbers.
•The effects of the 2009 stimulus package, modest at best, have run out and public-sector layoffs at state and local level are increasing; private-sector employment is rising very slowly.
•Home values have fallen by about one third in the past five years and will fall further until the market has cleared the backlog of unsold and foreclosed homes. A huge percentage of post-2005 homeowners are "under water" on their mortgages; that is, their mortgages exceed the total value of their homes.
The available policy options do not promise early turnarounds.
The 12-person debt-reduction committee, to be appointed by Democratic and Republican congressional leaders, is supposed to submit its recommendations by Thanksgiving. Its proposals are likely to be quite close to those made by last year's Bowles-Simpson commission, appointed by President Obama, and the independent Rivlin-Domenici commission.
That means changes will be recommended in Social Security, Medicare, and Medicaid formulae which will put those programs on a sounder long-term basis while cutting their overall costs. Benefit levels will remain near their present levels and no one presently over 55 will feel much impact. Its most beneficial recommendations will be for tax reform. Not only are big subsidies and loopholes (the infamous ethanol subsidy is most cited) likely to be proposed for elimination but such provisions as the home-mortgage deduction could be pared back — for instance, by capping the deduction for bigger mortgages. Its tax-reform recommendations could call for lowering rates in all brackets, thus helping near-term growth.
Just as with the debt-ceiling negotiations, discussion of the commission recommendations will go right to the wire. But public anger about the debt-ceiling fumbling — and anxiety about a new rating-agency shock — will in the end lead to acceptance of the commission's main proposals.
Obama, the Congress, and the Federal Reserve face a daunting task in averting a double-dip recession. The 2009 stimulus package was sloppily conceived and designed, and Congress will not pass an expensive second package. Interest rates already are effectively at zero. The Fed recently ended "quantitative easing" — that is, massive government bond purchases — but is likely to resume it if growth numbers remain flat or turn negative.
Like what you just read? Support high quality local journalism. Become a member of Crosscut today!