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Jon Talton

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

Category: Debt ceiling debate
October 15, 2013 at 10:32 AM

Whistle past the debt default graveyard at your own peril

The Associated Press distributed a story implying that default is no big deal. “You hear the same proud claim every time Washington wrestles with the debt limit: The United States has never defaulted. But the record’s not that clean. America has stiffed creditors on at least two occasions.” One was during the war of 1812. Another, it claims was in 1979, when “lawmakers determined to attach a strong balanced-budget amendment to the (budget) bill. They finally relented, the day before Social Security checks were expected to start bouncing.”

It’s a nice story, comforting, wrong. In 1814, the United States was a developing nation heavily dependent on trade with the country we were fighting, Great Britain. Even so, the economic consequences of the War of 1812 were catastrophic and took years from which to recover.

By the way, Andrew Jackson, a pre-tea partier, was obsessed about the national debt when he wasn’t stealing land that had been promised to native tribes in solemn treaties. As president he paid it off. This did not prevent the financial panic that ruined the administration of his chosen successor, Martin Van Buren. It arguably made it worse, choking off foreign investment.

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Comments | More in Debt ceiling debate | Topics: federal default, Federal shutdown

October 8, 2013 at 10:35 AM

The shutdown’s toll on the economy

Want to find out data on Washington exports? You’re out of luck. The U.S. International Trade Administration’s valuable TradeStats site is down because of the shutdown engineered by House Republicans. But that and such photogenic consequences as closed National Parks count for nothing against the trouble being inflicted on the poorest of the poor.

We pretty much abolished welfare during the Clinton years, replacing it with a paltry program called Temporary Assistance to Needy Families (TANF). It goes out as block grants to states, and the longer the shutdown continues, the more likely TANF will run out. In Washington, benefits will continue through the month, but Arizona halted the payments.

But in today’s America, we don’t care much for the last and the least, for all the theocratic talk. Otherwise, the shutdown’s economic consequences appear to be muted. Not least to avoid a potential Praetorian Guard backlash, the Obama administration made sure “the troops” were funded with no disruption, and last weekend Defense Secretary Chuck Hagel called back almost all of the 400,000 (!) civilian defense workers that had been furloughed. The effect on defense contractors may be similarly softened.

Most analysts are predicting only a limited effect on gross domestic product. Still, it remains to be seen how the stalemate affects, say, housing if federal loans become harder to get. The shutdown is also a serious threat to federal research, which in the past was one of America’s major competitive advantages. And don’t forget the sequester’s ongoing damage to the economy and jobs.

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Comments | More in Debt ceiling debate | Topics: Federal shutdown

October 3, 2013 at 10:32 AM

Default is no longer just a theory

The minority of House Republicans in safe red districts that are holding the government hostage unless it defunds Obamacare — an issue supposedly settled in the last election — do not even believe in the Theory of Evolution. Why should they believe their actions could lead to a catastrophic default on U.S. debt? But this eventuality, which would happen soon after the government hits the statutory debt limit, is no longer just a scary story economists tell each other over campfires. It is barreling toward us. Today’s fall in stock prices is only one of the warnings.

Christine Lagarde, managing director of the International Monetary Fund, said in a speech today, “The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the U.S. economy, but the entire global economy.” The Treasury Department issued a report, The Potential Macroeconomic Effect of Debt Ceiling Brinksmanship. It states, “a default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse.”

House Speaker John Boehner reportedly told Republicans today he won’t allow a default to happen. But Boehner does not control his own caucus, and still seems unwilling to allow a vote in the House where both Democrats and some Republicans could pass a clean budget resolution and raise the debt ceiling (the debt ceiling has been raised 42 times since 1980). Wall Street and big business are learning that they, too, do not have much power over the nihilist, tea party Republicans. Whatever is going on here, it is not conservatism.

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September 30, 2013 at 10:56 AM

Federal shutdowns, then and now

The last shutdown of the federal government, in 1995-96, happened in a very different economic environment than today. In November 1995, when the standoff between President Bill Clinton and the Republican-controlled Congress resulted in major portions of the government suspending operations, unemployment stood at 5.6 percent. Gross domestic product grew at a rate of more than 4 percent. Productivity was strong, and for the first time since the 1970s compensation for all income quintiles was poised to make real gains in the coming years. On Wall Street, the longest bull market in modern history was in high gear. The United States was in the middle of the longest, strongest economic boom of the post-World War II era.

The nation was different then. It was at peace. We hadn’t borrowed heavily to finance two wars.  The. modest Clinton tax increase had prepared the way to leave a federal surplus in 2000. Federal debt as a percentage of GDP was around 64 percent, as opposed to 102 percent in January of this year. That shutdown was felt in National Park closings, not the specter of default. We were recovering smartly from the 1991 recession, which had been brought on by the savings-and-loan scandal and the oil-price spike from Iraq’s invasion of Kuwait. The Conference Board’s Consumer Confidence Index was nearly 102 vs. 79.7 this month. The notion that Americans would come to believe that their children would not enjoy as good a standard of living as they did would have seemed laughable.

The structure and dynamics of the economy were very different, too.

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Comments | More in Debt ceiling debate, Federal debt/deficit

September 27, 2013 at 10:31 AM

Vote: The debt ceiling and the economy

Jonathan Chait offers an insightful look at the politics behind the debt-ceiling fight, including this quote from House Majority Leader Eric Cantor: “The reason this debt limit fight is different is, we don’t have an election around the corner where we feel we are going to win and fix it ourselves. We are stuck with this government another three years.” The consequences for the economy are less examined in the press but serious.

The truth is that the deficit is falling. As University of Oregon economics professor Mark Thoma writes, the real reason the debt ceiling is not being routinely raised, as was done in the past, “is not, of course, a fight about how much government debt we should have.” Rather, it is a battle about “the size and role of government.” But if the dispute isn’t resolved, the Bipartisan Policy Center predicts that sometime between October 18th and November 15th, the Treasury will exhaust its borrowing power. The consequences for the economy, already growing only slowly, will be dire. A default would have world-wide repercussions, as the stock market is already sensing.

What do you think?

Read on for some of the best economic and business stories of the week, and the haiku…

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Comments | More in Debt ceiling debate, Deficit

October 8, 2012 at 10:30 AM

October, beyond the election

Whatever happens in the American electioneering over the next month, here are a few things to watch that touch only peripherally on the campaigns:

1. Slowing in Asia. The World Bank today lowered its growth forecast for East Asia and the Pacific region, chiefly because of China’s ongoing slowdown and lack of effective stimulus. This will have a direct effect on the Pacific Northwest because of our trade dependency on Asia (China is Washington’s No. 1 export destination).

2. The eurozone. Yes, this is getting old, but it’s not getting better. Greece is still in the monetary union, barely. Germany continues to resist more aggressive measures to restart growth. Austerity is causing a deep recession in many eurozone nations. It’s amazing how far they can kick the can down the road. But the best outcome on this trajectory is a long downturn complete with social unrest. The worst: A sudden crisis that causes all the dominoes to fall down.

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Comments | More in China economy and business, Debt ceiling debate, Dollar, Eurozone, Federal Reserve, Interest rates, Macro/Big picture, Oil prices, Outlook, Pacific Northwest economy, Politics and the economy, Stock market

August 30, 2012 at 10:00 AM

Five things to watch for this fall

Europe is back from vacation, American economic growth remains weak and the presidential campaign will suck all the oxygen from the room. Here are five things to watch for in the economy in the weeks ahead:

1. The European recession and political crisis will get worse. It begins with the need for the Greek parliament to approve another 11.5 billion euros in spending cuts or risk losing its lifeline from the European Central Bank and International Monetary Fund. As I’ve written before, the only real answer is an “orderly” exit mechanism for the euro or a complete write-down of the debt.

2. Europe’s recession will spread. The EU accounts for 20 percent of U.S. trade and is a huge trading partner with Asia. The slowdown there is already affecting global commerce. The big unknown: The danger to “counterparty” U.S. banks (Mr. Dimon, call your office).

2. The danger of a new bubble popping. Will it be student loans or food futures?

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Comments | More in China economy and business, Debt, Debt ceiling debate, Deficit, Eurozone, Income/living standards, International Monetary Fund, Jobs/Unemployment, Trade

August 6, 2012 at 10:00 AM

Racing toward the fiscal cliff

I haven’t written about the so-called fiscal cliff because, against increasing evidence, I hold to Abba Eban’s quote, “When all else fails, men turn to reason.” But maybe not in today’s America.

The fiscal cliff is the set of budget cuts and tax increases that would automatically kick in next year. That is, unless Republicans and Democrats, the Congress and the White House, can agree to new tax and budget provisions, especially the shape of extending the Bush tax cuts. If we fall off the cliff, according to the Congressional Budget Office, the total effect could mean a 3.9 percent contraction in the growth rate of gross domestic product next year.

The fiscal cliff is replacing the eurozone crisis as the big deal facing the U.S. economy. As the New York Times reports, businesses are reducing their investments for fear that reason won’t prevail. “Executives at companies making everything from electrical components and power systems to automotive parts say the fiscal stalemate is prompting them to pull back now, rather than wait for a possible resolution to the deadlock on Capitol Hill.”

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Comments | More in Debt, Debt ceiling debate, Deficit, Lindsay Lohan, Politics and the economy

November 22, 2011 at 9:40 AM

Super committee #fail and the economy

The failure of the so-called supercommittee’s economic implications have very little to do with U.S. sovereign debt. We don’t have an immediate debt crisis, as is happening in Eurozone countries. America can borrow in its own currency, a huge advantage, and the dollar is the world’s reserve currency. With historic low interest rates, we can also borrow very cheaply. The crises we do face: Unemployment, slow growth, state fiscal problems and the huge demand hole left by the Great Recession.

Draconian spending cuts is the last thing we should be doing. This nearly guarantees a double-dip recession and pain for millions of average Americans. While the “failure” seems to portend such cuts, they were already the mandate of the committee. President Obama was on board from the beginning, buying into the Robert Rubin/Larry Summers wing of his party on austerity (which is doing such a great job of wrecking the U.K. economy right now).

As is well known, FDR throttled back government spending in 1937, seeking to balance the budget. The result: Severe recession. Been there, done that. So if there was no serious economic (as opposed to political) argument to be made for cutbacks, why did the market react so badly yesterday?

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Comments | More in Debt, Debt ceiling debate, Deficit

November 21, 2011 at 9:26 AM

At Washington Trade Conference, a push for new deals

“Washington’s Global Competitiveness in the 21st Century” is the theme of the Washington Trade Conference at the Westin in downtown Seattle today. The market fall seems far removed from this ballroom, for better or worse. The first panel included Lou Ventino of Microsoft, Richard Wynne of Boeing, Michael Collins of REI and Steve Appel of the Washington State Farm Bureau. One big focus is the Trans-Pacific Partnership regional trade agreement. Support is strong, even though the U.S. has bi-lateral trade agreements with many of the TPP members.

A few highlights so far: Rep. Jay Inslee talked of improving freight infrastructure, developing clean tech industries and strengthening education in opening remarks. On the panel above, we hear that 97 percent of Washington’s produce is sold overseas. Getting Russia in the TPP and WTO could provide Boeing with another big supplier with titanium, especially important for composite planes such as the 787. Russia has the 10th largest economy but is America’s 37th largest trading partner.

Reading between the lines: TPP is a manifestation of the failure of the Doha round and the WTO in general. Would it really mean more jobs for most of America? That’s a different conversation. This is a pro-trade crowd. Right now a Canadian minister is cautioning against “protectionist” measures such as buy American policies. He’s also pushing the tar sands pipeline.

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Comments | More in Debt ceiling debate, Environment, Housing, Trade

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