Just as I suspected, the nonsensical debate over the US debt ceiling looks like going down to the wire.
From the New York Times today:
WASHINGTON — Negotiations over a broad deficit reduction plan collapsed in acrimony on Friday after Speaker John A. Boehner suddenly broke off talks with President Obama, raising the risk of an economy-shaking default.
The latest turn in the summer’s epic clash between the White House and Congressional Republicans came little more than a week before the government hits its borrowing ceiling, and set off accusations from both sides about who was to blame…
Mr. Obama said Mr. Boehner had stopped returning his calls when it became clear that rank-and-file House Republicans would not agree to raise revenues on wealthy Americans as part of a debt-reduction deal, despite Mr. Obama’s concessions on reducing future spending for Medicare, Medicaid and Social Security. Both sides have sought a deficit-reduction agreement as part of the essential vote to raise the government’s $14.3 trillion debt limit, which will be reached Aug. 2.
So we have a little over a week to go, and we are nowhere near a deal. This shouldn’t come as much of a surprise, however, if you think about the incentives faced by the Republican Party.
As Ezra Klein argues:
No deal struck before the last minute will be credible as the best deal Republicans could possibly get, because in this negotiation, time is leverage, and if the clock isn’t one minute from midnight, that means there’s leverage Republicans chose not to use.
Until we hit that point, there’s just not enough incentive for the House GOP to say “yes” to anything, not enough pressure to force them to say “yes” to anything, and there’s an argument, popular among some conservatives, that it would in fact be a mistake to say “yes” to anything.But what no one quite knows is what the House GOP will accept when the clock is one minute from midnight, or, in more pessimistic tellings, the Dow is 1,000 points below whatever it was at the day before … the bigger the deal, the tougher it is to pass quickly.
And so if it is the case that we can’t strike a deal until the markets are beginning to bottom out or the debt ceiling is about to cave in, it’s a pretty good bet that we’re not going to strike a big deal, and it’s very hard to predict what sort of small deal the politics will permit at that point. Which is worrying.
Worrying indeed. Perhaps Congress is competing with the Europeans for a Nobel Price in economic idiocy. After all, as even the ratings agencies have conceded in their recent warnings, the issue is not the ability of the US to “finance” its deficit. It is simply the willingness of its politicians to get their act together.
Meanwhile, barely a day has passed in the last week or two without a large US company announcing new rounds of layoffs. The jobs market is going from bad to worse.
Naturally, this has completely escaped the attention of the deficit obsessed politicians. Larry Summers, the former economic adviser to President Obama (who is making much more sense since he left office), put it well in an interview this week:
Look, I think the biggest problem the country has right now is not the budget deficit. The biggest problem the country has right now is the jobs deficit. Yes, there’s a risk that we will misplay things and make the mistakes of the 1970’s, and have inflation and have excessive borrowing. But far and away the larger risk is that we will make the mistakes of 1937, and that we will not have a recovery that is sustained, that we will make the mistakes that Japan made, and that we will have a decade or two of stagnation. The right question to be focused on is how to stimulate demand.
Look out there, guys. The Treasury bond rate, Treasury note rate for ten years is 2.85 percent. Nobody is failing to invest because 2.85 percent is too much. They are failing to invest because there are no customers in their store. They are failing to invest because their factories are sitting empty. They are failing to innovate because they’re not sure how large the market for the product will be.
That is the problem that we need to address. By the way, an extra percent a year on the growth rate for the next five years will do more for the budget than any amount of the entitlement-cutting that’s under discussion.
Summers is absolutely right. Unfortunately, nobody is listening. Meanwhile, it’s looking increasingly like a replay of TARP as we stagger towards the August 2 debt ceiling deadline. As Larry Summers says in the interview above (paraphrasing Winston Churchill) Americans will always do the right thing, but only after exhausting all of the alternatives…
That’s enough for today. I’m going to be taking a bit of a break from blogging as I will be traveling the next couple of weeks and then moving halfway across the world.
I’ll be back late August. Let’s hope the world doesn’t blow up in the meantime.