Politico asked 8 of us for a prognosis on US growth in the new year. This was my response –
Something important will get better in 2014: Fiscal policy will stop hurting the economy. The results should show up as expansion in such service sectors as health, education and construction.
The biggest impediment to economic expansion over the last three years has been destructive budget policy coming out of the Congress: misguided fiscal drag in the short term (crude cuts in spending, especially under the sequester; the expiration a year ago of Obama’s payroll tax holiday); repeated unnecessary disruptive and uncertainty-maximizing political crises (debt ceilingshowdowns and government shutdown); and little progress on the genuine longer-term fiscal problem, which is the 40-year prognosis for U.S. debt (a result of projected rapid growth in entitlement spending). These fiscal failures have together probably subtracted well over a percentage point from U.S. growth in each of the last three years.
October 4 is the first Friday of the month, the day when the Bureau of Labor Statistics routinely reports the jobs numbers for the preceding month. Is the havoc created by our current political deadlock over fiscal policy showing up as job losses? We have no way of knowing. On October 1 the BLS closed for business, like many other “non-essential” parts of the government. There will be no more employment numbers until the shutdown ends.
Last week, Wall Street economic analysts responded to the usual surveys as to what they thought the upcoming employment numbers would be. (These surveys are what the media refers to each month when they tell you that employment rose or fell “more than economists expected.”) The median forecast in last week’s Bloomberg survey, for example, was a prediction that the BLS would report that “Payrolls increased by 175,000,” the biggest gain in four months. But there was no word on how many of the respondents recognized that there would in fact probably be no number at all on October 4, because the Labor Department would have been closed by the government shutdown.
Needless to say, the US has a long-term debt problem. The problem is long-term both in the sense that it pertains to the next several decades rather than to this year. (Indeed, the deficit/GDP ratio has been falling since 2009, despite the weakness of the economy.) The problem is also long-term in the sense that we have known about it for a long time; it was clear in 1991 and should still have been clear in 2001.
It should be almost as needless-to-say that the approaching debt ceiling bomb is not helpful in solving our fiscal situation, any more so than were previous standoffs: the January 1, 2013, fiscal cliff; before that, the August 2011 debt ceiling standoff, which led Standard and Poor’s to downgrade the credit rating of US debt for the first time in history; and before that, the 1995 shutdown of the government, which largely discredited Republican House Speaker Newt Gingrich.
The current debt ceiling bomb is, of course, another attempt to hold the country hostage under threat of blowing us all up. The conflict is usually phrased as a question of ideological polarization, a battle between fiscal conservatives and their opponents. This familiar frame does not seem right to me. There is in fact no correlation or consistency between the practice of federal fiscal discipline and the political rhetoric, either across states or across time.
Arithmetic and history. Two of my favorite subjects in school. I covered some history two posts ago (the Whisky Rebellion). Let’s do some arithmetic now.
Attention is currently focused on threats of a government shut-down, either when a continuing resolution is required from Congress in March in order to keep the government operating, or a few months later, when an increase in the national debt ceiling is required. The common description of this showdown as a high-stakes game of chicken has it right. But some of the Tea Partiers say that their goal is literally to avoid an increase in the debt ceiling – not just as a bargaining ploy nor as an abstract goal, but in the sense that they want to cut spending so sharply that there is no need to borrow any more after this spring. Similarly, Senators Mike Lee (Utah) and John Kyl (Ariz.) have revived the proposal for a constitutional amendment requiring a balanced budget. And of course they all want to do it without raising taxes, and in most cases without cutting defense, Social Security or Medicare. Oh, and don’t cut farm subsidies either.