Debt Ceiling Stalemate Raises Risk of Double-Dip Recession

Last Updated Jul 28, 2011 9:53 AM EDT

A new poll reports that nearly 7 in 10 Americans say they are all for a compromise that breaks the debt-ceiling stalemate as soon as possible. But neither that nor a dire warning from the CBO -- highlighting the possible $130 billion cost of a debt downgrade -- seemed to light any fires under D.C. power brokers on Wednesday, as there was still no deal in sight.

If Congress doesn't want to listen to its constituents, maybe it will be swayed by economic news out Wednesday that suggests the recovery is inching ever closer to a backslide. Granted it takes a bit of self-awareness for Congress to realize its behavior isn't exactly helping matters, but let's keep our fingers crossed that they finally start to connect the dots here. Wednesday's 2 percent sell-off on Wall Street might "help" as well.

Is Helicopter Ben Revving Up His Engine?
The Federal Reserve released its Beige Book yesterday, which provides anecdotal feedback from the 12 Fed regions on how local economies are faring. The news for June and July? Not too well. Eight of 12 Fed regions reported slower economic growth. In its previous report, just four of eight districts reported slower growth.

The First District (Boston) has a growing economy, but businesses are clearly antsy about the debt ceiling and the bigger long-term issue of deficit reduction:

"Outlooks are generally positive, but most contacts express concern about current and future negative effects of increased uncertainty, attributable in part to failure to resolve the U.S. debt ceiling dispute promptly and the associated unclear future course of federal expenditures and taxes."
For the record, this latest Beige Book includes reporting only through July 15th. You can just imagine the level of uncertainty those businesses are feeling right now.

We also got word from the Commerce Department that durable goods orders, which have been a major cog in the economic recovery, stalled out in June, declining 2.1 percent. Though durable good orders have rebounded strongly since the end of the recession, we're still more than 20 percent below the level of growth before the recession. It's one thing for Congress to play politics amid a robust economy, but what it is doing now could in fact be the tipping point -- a wholly avoidable tipping point manufactured by Washington -- that sends a weak recovery into double-dip territory.

The Nation's Objective Financial Advisor: This Is a Mess
The Congressional Budget Office (CBO) is a non-partisan organization that is sort of an unbiased financial advisor for Washington. Whenever the White House or Congress proposes new fiscal policy, the CBO crunches the numbers and issues a report. (It was CBO that told Speaker Boehner and Senate Majority Leader Reid that their dueling debt plans didn't generate the savings they suggested in their proposals.)

Yesterday, CBO director Douglas Elmendorf took to his official blog to weigh in on what's at stake. Here's what he said:

  • U.S. borrowing costs could rise $130 billion, or more. Elmendorf stressed that with the lack of historical precedent, it's impossible to know the impact a default or credit-rating reduction would have on the economy and federal fiscal policy. But he did some number crunching on what the cost would be if bond rates were to merely rise one-tenth of a percentage point because of a default. His calculation: an extra $130 billion in debt service payments over 10 years. And that's just for a mere 10 basis-point increase.
  • Our budget can't finance the status quo. Elmendorf also states a ridiculously simple but hard-to-accept truth: "Putting the budget on a sustainable trajectory in the face of an aging population and rising health costs cannot be achieved by repeating policies that may have been acceptable in the past; rather, we will need to make significant changes relative to the experience of the past several decades in popular programs, people's tax payments, or both." (Emphasis is his.)

This is, of course, at the heart of much of the current political discord. The Republicans would be happy to make deep cuts to entitlement programs (e.g. Paul Ryan's plan that would eviscerate Medicare), while Democrats would rather see increased tax revenue. But what we've got now -- a do-nothing Congress that refuses to come to any kind of compromise deal on our long-term spending and deficit issues -- isn't a viable third option. It's just delaying.

Elmendorf also provides a laundry list of economic issues that you'd think would be (and without question, should be) on Washington's front burner:
  • Three-and-a-half years after the recession started, roughly 10 million fewer Americans have jobs than if employment had continued to expand at its pre-recession pace.
  • The total output of the economy this year will be about $700 billion less than would occur with greater use of our labor and capital resources.
  • 44 percent of the workers who were unemployed in the first half of this year had been out of work for more than 26 weeks -- an unprecedented percentage in the post-World War II era. CBO expects that the lingering difficulties of the long-term unemployed in finding jobs, combined with the loss in business investment during the slump, will weigh on the nation's economic output for years to come.
Yet instead of debating policies to address those most pressing economic issues, we're stuck in this manufactured political crisis. "We are on the brink of harming the budget and the economy, possibly undermining the international financial system, and doing significant damage to the credibility of legal commitments made by the U.S. government," Elmendorf writes.

Elmendorf does, however, go on to engage in some non-partisan cheerleading for a Grand Bargain:

"At the same time, an increase in the debt ceiling that was accompanied by enactment of an effective plan for significantly reducing future deficits could have substantial positive effects on the budget and the economy over time."

But that would require Congress to finally get with the program and make hard choices. We'll likely get the debt ceiling figured out in time. But it's serious long-term deficit reduction that's the incredibly expensive wild card right now.

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