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Debt Ceiling Part Two: Economic Disruption Is GOP Goal

John Boehner, the leader of the House Republicans, has promised yet another fight with the White House over the debt ceiling.

The euro zone is in deep economic trouble. The red-hot economy in China is slowing…quickly. The Federal Reserve is wavering. Yet, the biggest threat to the emerging U.S. economic recovery may be the obstructionism taking place by Republicans in Congress.

Insanity Part Deaux

Republicans screwing America (making Santorum) (Photo credit: EN2008)
If this sounds familiar, it’s because we suffered through an identical performance last summer. Every objective analysis of that episode lead to a troubling conclusion: It almost derailed the recovery. This time could be a lot worse.

Around the end of this year, the federal government will bump up against its $16.4 trillion borrowing limit, as a direct result of money already spent and tax laws enacted over the years by Congress. To raise the limit, legislators must pass a separate law. In principle, the extra level of approval can serve as a useful mechanism, forcing Congress to debate its priorities. But refusing to raise the limit wouldn’t free the government of its existing spending obligations. But it would leave the government with no choice but to default on its debts.

In other words, congressional Republicans are again talking about taking the government’s credit worthiness hostage when they threaten not to increase the debt ceiling. Politically advantageous as this may be, it is terrible economics. To understand why, consider the economic effects of last year’s debt-ceiling debate. Maybe if we know our history, we will not be doomed to repeat it.

Confidence Drop

High-frequency data on consumer confidence from the research company Gallup, based on surveys of 1,500 Americans daily, provide a good picture of the debt-ceiling debate’s impact.

Source: Gallup

Confidence began falling right around May 11, when Boehner first announced he would not support increasing the debt limit. It went into a dive as the political stalemate worsened through July. Throughout the entire episode, confidence declined more than it did following the collapse of Lehman Brothers Holdings Inc. in 2008. After July 31, when the deal to break the impasse was announced, consumer confidence stabilized and began a long, slow climb that brought it back to its starting point almost a year later.

Businesses were also hurt by the impasse. The impasse proved far more damaging than the regulatory uncertainty on which Republican criticisms of Barack Obama’s administration have focused. Employers held back on hiring, sapping momentum from a recovery that remains far too fragile. It couldn’t be clearer that the GOP intends to repeat this scenario to adversely affect President Obama’s re-election bid.

Growth in nonfarm payrolls actually declined to an average 88,000 a month during the three months of the debt-ceiling impasse, compared with an average of 176,000 in the first five months of 2011. Payroll growth subsequently recovered and has averaged 187,000 jobs a month since. Despite the rebound in job growth, employment is still below where it would otherwise have been.

There are also more visible permanent scars. The sense that the U.S. political system could no longer credibly commit to paying its debts led the credit-rating company Standard & Poor’s to remove the U.S. government from its list of risk-free borrowers with gold-standard AAA ratings. Standard & Poor’s specifically mentioned the debt-ceiling impasse in its justification for the downgrade, which the GOP naturally blamed on President Obama.

Deliberate Economic Disruption

The data obviously advises us that the previous debt-ceiling standoff was a deliberate act of economic incapacitation. The only way to avoid this conclusion is to argue that consumers and employers were reacting to other economic dynamics. But the debt ceiling was the dominant economic story in the U.S. at the time. Although the European debt crisis was a rising concern throughout 2011, the real trouble in Europe manifested during the period when U.S. consumer confidence and employment were recovering, albeit slowly.

The next debt-ceiling battle will be worse, because the stakes are even higher. In addition to the threat of default, the U.S. is facing the so-called “fiscal cliff”: a raft of spending cuts and tax increases that will happen at the end of this year unless Congress acts to postpone them. Another stalemate would almost certainly plunge the economy into a deep recession. Our best alternative is for Congress to set aside partisan politics and work together with a common goal of helping our country out of the Great Recession.


Republicans will take the country down rather than allow an opportunity to damage President Obama’s chances at re-election to pass unexploited. Republican leaders have explicitly said so.

Source: HgTransEcon


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