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The Shutdown, the Debt Ceiling, and Our Credit Rating

Irwin M. Stelzer

Two stories were promptly featured on the front page of the Wall Street Journal a few days ago. America either is, or in a few months will be, the world’s largest producer of energy, “a new era of opportunities,” says Adam Sieminski, head of the U.S. Energy Information Administration. And feuding politicians have temporarily shut down a part of the government that accounts for about 10-12 percent of federal spending. Guess which is more important to the U.S. economy in the long run.

The president says that the shutdown and the impending fight over the debt ceiling are “catastrophes,” the mot du jour of the White House and the Treasury. Warren Buffet says, “The markets are not gonna fall apart. We will go right up to the point of extreme idiocy but we won’t cross it.” Three-quarters of the businesses in his widely diversified Berkshire Hathaway empire (stock market valuation  around $260 billion) are doing better. “Our furniture stores are up 8% or 9%….Our railroad carried 207,000 cars last week. That’s the highest this year. September is about 5% to 6% over last year.“  It is not unreasonable to ask whether you want to bet on Obama or Buffett in deciding about the longer-term outlook for the American economy if you have some spare change to invest. 

And worry not about default if Congress and the president can’t agree on raising the debt ceiling before another of the standoffs that precedes some deal. You can take with a bag of salt warnings by bankers, all subject to government regulation and some under investigation, who emerged from a White House meeting dutifully echoing the “catastrophe” line. As the Lindsey consulting group puts it, “incoming revenue has interest payments covered ten times over. Social security checks, pay for the troops and other high priority items would easily be covered…. Hardly a default in the usual meaning of the term.” Some costs would have to be cut if the government is forced to live on the trillions flowing into its coffers from tax receipts, rather than rely on more borrowing, largely from the Chinese. But a government that admits to employing 800,000 non-essential workers (some of whom do valuable chores) and is spending over $3,500,000,000,000 per year surely can find some savings somewhere.

The Treasury claims it does not have the technical ability to prioritize payments so as to assure that interest obligations are met, despite the fact that even the tiniest business does this regularly. The absence of an ability to prioritize might be why the president is predicting disaster if the ceiling is not raised. Or it might be because Obama sees political advantage in tarring Republicans with the “default” brush and its alleged “catastrophic” effects. I report, you decide. 

While considering the direction of policy, don’t forget an institution celebrating its 100th anniversary-the Federal Reserve System and its board. If there were any doubt that the Fed’s monetary policy gurus will continue to print money in an effort to accelerate the recovery, the latest brawl in Washington should dispel it. Chairman Ben Bernanke has made two things clear: One is that he views it his job to offset the headwinds blowing from the nation’s capital, and the other is that the most important bits of data on which he will base policy are the unemployment rate and associated readings of the labor market’s temperature.

Since Bernanke is breathing what the Lindsey Group describes as “the foul air in the swamp that has become the nation’s capital,” he has to know that the headwinds he now has to offset are blowing at gale force. As for the labor market, we are at a bit of a loss to get a clear reading: The numbers-crunchers at the Department of Labor are classified as not essential to the safety and health of the realm, and so are on temporary furlough (a de facto vacation, since they will eventually collect back pay for the days they didn’t work). As a result, yesterday we did not get the employment data traditionally issued on the first Friday of each month. The “data driven” Fed will have to do without some of the data that it says drives its decisions. But is a safe bet that nothing in those data would have shown such a marked fall in the unemployment rate, and/or rise in the labor-force participation rate to prompt Bernanke to dust off the aborted taper.

I have always felt that we should leaven all data with anecdotal evidence. So here are some recent events in the labor market.

  • Builders from Phoenix, Arizona to Washington, D.C. tell me they are having difficulty finding skilled construction labor.
  • Makers of toilets tell the Wall Street Journal that to shift production from China they are trawling the labor market for workers with the strength to lift heavy bowls and the skill to produce smooth surfaces—“the strength of a football player and the hands of a sculptor”, according to the president of one manufacturer of plumbing products. Not much luck.
  • Mike Miller, CEO of Artex, tells the New York Times that he would like to shift even more of his firm’s production of textiles from China, but “The sad truth is, we put ads in the paper and not many people show up” to fill the openings in his Minneapolis factory, even though wages are up in real (inflation-adjusted) terms by over 13 percent since 2007. Perhaps benefits have risen faster than wages, perhaps factory life is unappealing to the younger generation.
  • The geographic mobility that is a reflection of the strength of the labor market is rising. More Americans moved from one state to another last year than at any time since 2010, good news, but fewer than were willing to chase jobs in pre-recession years. 

Of course, conditions in the labor market might be beyond the ability of the Fed to affect. American Enterprise Institute economist John Makin, in a soon-to-be published comment, argues “that there exists little evidence that monetary policy can produce a sustained impact on the rate of unemployment… the sustained impact is by no means assured.” No matter: Bernanke believes he can affect the unemployment rate with an easy monetary policy, and his likely successor, Janet Yellen, believes that even more strongly. If there is to be a trade-off between unemployment and inflation, Yellen has made clear that she views inflation as the lesser evil.

Economists seem to agree-or at least those at Goldman Sachs and at Standard & Poor’s agree-that each week that the shutdown continues will shave 0.3 percentage point off fourth quarter GDP. But then they part company. Unless the current shutdown becomes more protracted than its predecessors, warn analysts at Goldman Sachs, the shutdown “would have modest macroeconomic effects.” Economists at Standard & Poor’s are a bit more nervous. They predict that the shutdown, combined with a battle over the debt ceiling “could significantly hurt consumer sentiment, as well as the economy.” But in a separate report by S&P’s credit analysts, the rating agency says, “The debt ceiling debate is unlikely to change the AA+ U.S. sovereign debt rating.” That prognosis differs sharply from the one floated by the White House: a global recession is likely unless Republicans cave, and soon.

It is important to note that even the negative forecasts refer to the impact of the shutdown on fourth quarter GDP. But much of any loss will be made up soon after the shutdown ends; defense contracts held up will be authorized, furloughed workers will get back pay. Looking further into 2014 the positive signs we were seeing before the politicians put the “political” back into “political economy” remain. Gasoline prices are softening, the equivalent of a tax cut for consumers; the auto market remains strong; the housing recovery seems to be on track despite a slowing in the rate of price increases and in pending home sales; rising commercial and residential property prices are strengthening bank balance sheets; and the reaction among most businessmen to the Washington follies seems more bemused annoyance than protracted gloom. But never underestimate the ability of our politicians to turn gold into dross.

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