From the January 8, 2010 Washington Examiner
January 8, 2010
by Irwin Stelzer
There’s bad news coming from the commercial property market, but not the sort you have been hearing from banks that loaned money to developers of properties that have fallen in value.
The bad news comes from Washington, where a group of foreign investors represented by HSBC Holdings PLC just paid a top price for a stake in 1625 Eye St., an 85,000-square-foot office building that The Wall Street Journal reports is fully rented.
It seems that these investors and others like them are bullish on the D.C. commercial property market because they expect the government to continue to grow and sop up office space at a rate that private sector firms in other cities cannot hope to match.
Good news for property developers, bad news for taxpayers, who will suffer a double whammy: The cost of all those new bureaucrats, and the rising cost of the space needed to house them and their mounds of paperwork.
This means that the federal deficit, already at levels that have the rating agencies warning that the triple-A rating on our government’s sovereign debt is no longer beyond question, is due to remain at levels that at one time were considered unthinkable.
John Podesta and Michael Ettlinger, president and vice president, respectively, of the liberal Center for American Progress, see real dangers in the long-term debt outlook:
“The deficit is projected to drop in the next few years, but never below 4 percent of GDP &hellip After hitting a low in the middle of the decade, it will rise for the rest of the decade and beyond. The mere anticipation of such a large, sustained deficit poses risks to financial markets and the economy, and undermines U.S. standing.”
And this grim scenario is based on assumptions many observers believe to be excessively optimistic.
Add to this the fact that the Social Security and Medicare trust funds will be out of money in 2017 and 2037, respectively. That sounds a long way off, but well before then investors will be raising the interest rate they demand to continue lending the government the billions it needs to cover its deficits. Panelists at the recent meeting of the American Economic Association told interviewers the situation “frightens all of us.”
It undoubtedly also frightens Fed chairman Ben Bernanke and at least some of his colleagues. They have been keeping interest rates close to zero to encourage borrowing and to make cheap funds available to banks to relend, so that they can build up their profits and capital bases. And they have been printing money with which to buy all those government IOUs.
The Fed says it knows how to cut back on all these stimulus policies, but is waiting to pull the trigger until it is certain that the economic recovery is sustainable and the job market on the mend. But if the federal government keeps spending as if tomorrow will never come, the Fed will have to make its move sooner rather than later.
With no end in sight to deficits that come to an outsized portion of our GDP — we are now up there with Greece in the size of our deficits relative to our GDP, and that country’s debt has been down-rated — the Fed might, just might, feel obliged to tighten sooner and harder than it otherwise would. It might feel uncomfortable throwing the kerosene of cheap money onto the flames created by large deficits.
Voters have so far been diverted by the battle over health care, soon to conclude. Then, their attention will focus even more intently on the budget deficit. Not that the specific numbers, or the specific proposals, will be etched in the memories of other than full-time political geeks. They won’t.
Instead, most people understand something more human than policy wonks’ talk of pay-as-you-go (unenforceable), or a line-item veto (unattainable), or wasteful spending (inevitable). They don’t like the idea of leaving a huge bill for their children and grandchildren to pay.
The president and the Congress have no such compunction. Their time horizon is the next election, not the coming-to-age of their grandchildren. Which is why spending is for now, and deficit reduction for another day. That strategy just might backfire. The economy is recovering. Not rapidly, and not in all sectors, but recovering.
That could come to an abrupt halt if the Fed is forced to tighten too soon. And with it the recovery, and the public lives of more than a few politicians.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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