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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

October 16, 2013 at 11:52 AM

The debt deal: Less than it seems

The state of play as we approach noon Pacific Time is that the Senate has reached a deal to reopen the government and avoid default. Stocks are up. Isn’t this a great day. Well, no.

Here are a few important reasons why:

1. Long-term stability for U.S. debt (and hence, the entire global system of finance). The Senate deal apparently would only raise the debt ceiling until Feb 7, setting up another chance for the House tea party minority to take hostages in a little more than three months. One doesn’t keep Treasury securities as the world’s safest haven and the dollar as the world’s reserve currency by such banana republic behavior.

2. The government would only be funded through Jan. 15. So the normal budgetary process, where an annual budget is passed, is again short-circuited and yet another hostage crisis looms. This has enormous ramifications all over the economy, whether for private-sector government contractors deciding to cut staffing amid the uncertainty to continued gutting of scientific and medical research funds.

3. Austerity continues. The deal does nothing to stop the sequester cutbacks or the austerity from the White House, which long ago surrendered to Republican demands that reducing debt, not high unemployment or future competitiveness, is the priority of the federal government. Not only that, but a new study finds that congressional budget battles have cost the economy $700 billion so far.

Of course many of these same lawmakers evidenced no such worry when we were putting two wars, tax cuts for the rich and Medicare D on the national credit card.

4. The liquidity trap continues. Although corporate profits are at records, the big companies are sitting on cash. The rate of consumer spending is dampened. People keep deleveraging and saving. This is the “paradox of thrift,” where this behavior leads to less investment, not more.

For five years near zero interest rates have prevailed and the Federal Reserve has resorted to unconventional measures such as buying vast amounts of mortgage-backed securities. Yet the economy is growing only slowly, despite the party on Wall Street.

This is a new-age liquidity trap. Slow growth actually makes it harder to pay off debt. And the government is making the problem worse by austerity rather than investing in things like infrastructure, research and education that would more than repay their initial cost.

5. We remain in a jobs and opportunity crisis. The drama in Congress took away the focus on 11.3 million or more without jobs, millions more stuck in part-time jobs, job creation skewed to low-wage, part-time work, a record number of households on food stamps and the greatest inequality since the Gilded Age. By failing to address these issues and playing chicken with a world financial meltdown, the tea-party House made it worse.

The United States has put on quite a show for the world. It’s too dangerous to be called an embarrassment.

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