Discussion (excerpts), Friday am, July 29
Who's talking?
Karen Tumulty, national political reporter, The Washington Post.
David Leonhardt, incoming Washington bureau chief, The New York Times.
Jeanne Cummings, deputy government editor, Bloomberg News.
What happens if the debt ceiling deadline isn't met?
David Leonhardt: There are two questions. There's the political track and there's the economic track. We have something approaching "no idea" what will happen the political track...! On the economic track, August 2nd is not a firm deadline. There is some room to maneuver here. Not long-term, but for some number of days. At some point, the US will have to stop fullfilling its obligations. Now, whether that's to Social Security recipients, whether that is to bond holders -- everyone agrees that bond holders would be last among those whom we would not honor our obligations to because that would probably set off a financial crisis.
Bond holders get preference?
David Leonhardt: We would pay them first. And so one of the questions here politically is what happens when the Treasury starts to announce that it is not going to pay something like Social Security recipients. Does that change the political calculus? Who does the public blame for that? As a result, does that create new pressure? Is there a situation in which the Treasury says, "okay, now we're not going to pay Social Security recipients"? Something similar happened back in the '90's and Congress basically realizes, "okay, wait a second, we as incumbents are going to suffer for this." That creates some real pressure for a deal. But we really aren't leaving any room, in terms of time, to deal with that. And we are already doing economic damage! The uncertainty is already causing economic damage. You can see that most clearly in the stock market.
Take your partisan hand off my trigger!
Jeanne Cummings: One thing that has come up now in these discussions is what, in Washington, they call a "trigger." That's going to be a thorny issue for them to figure out. Essentially what it does is -- if Congress passes legislation where they commit themselves to doing these deep cuts, then they have to put in something to make sure they actually do it. Because we've seen plenty of times when these promises are made, legislation is passed, and then the next Congress or even the current Congress just ignores these targets they've set for themselves. So the Republicans and the White House really want some kind of penalty if Congress does not follow through with the commitment. This is also very important to the credit rating agencies who set our AAA rating that they see there's going to be some kind of automatic back-up plan if they don't meet the cuts. So what we've seen before is you have a target, a spending cap, and then if they don't meet that cap automatic spending cuts go into play -- across the board cuts. ...That trigger is going to be an important part of the final negotiations.
Karen Tumulty: And yet the history of those things, those triggers, is they don't get pulled! The infamous Gramm-Rudman trigger in the 1980's sort of held together for a little while, maybe a year or two, and all those automatic cuts everybody was talking about as though they would be doomsday never really happened!
Has Obama been a key negotiator? Or has he been sidelined?
David Leonhardt: I do, and I think it's true of Speaker Boehner as well. President Obama and Speaker Boehner negotiated something approaching a deal that economically, I think, had a lot to recommend it relative to what we're now talking about. That's for two reasons. One: It did a lot more to cut the deficit. A lot more! With a combination of not only these discretionary cuts but also cuts to Medicare and Social Security and some tax increases on the affluent. Two: It did less to cut the deficit in the short term. And economists say that's actually the combination we want because if you look at the GDP report -- which was terrible! -- what you see is that one of the reasons GDP grew so slowly was that the government was cutting back. And so if we have a situation in which the government continues to cut back when consumers are cutting back as well, it worsens the recession. But Obama and Boehner don't have control over the Congress.
Is Boehner's political position threatened?
Jeanne Cummings: I don't think that this legislation threatens his speakership. I think it's the next piece of legislation. It's the one that follow this. It's the Senate-negotiated piece of legislation that could threaten his speakership because the only way that bill gets through the House is if Boehner gets in bed with the Democrats to bring along Democratic votes. And then it's the Democrats, Boehner, and his stable base of leadership on one side and 87 freshmen on the other side.
David Leonhardt: They show that our economy is in really bad shape, which to some extent we already knew, but these added some new details. They told us that if we weren't downbeat enough, it's even worse than we thought. This had two main things: they told us what happened last quarter (the second three months of the year) and also revised some numbers for earlier on. (The economy grew by 1.3% last quarter, lower than what economists had projected.) It's slightly lower than what economists had projected. What we've now been through is a stop-start recovery twice. We were in this terrible recession in late 2008, early 2009. And then for the second half of 2009, we really started to come out of it. And we actually had some fairly decent job growth by the end of '09 and the start of 2010. Then some combination of things -- the debt crisis, among other things -- seemed to short-circuit growth. Then we got growth going again and a new combination of things this year seemed to do the same. Gas prices. The Arab spring. More troubles in Europe. So what we've now had is 6 months of growth that is too weak to add enough jobs to put people back to work. Once you've dug into the numbers in today's report, what you see is a) consumer spending has stopped growing at all because consumers are still deeply in debt, b) business spending is pretty good, and c) local government has really shrunk. Those are the three main forces in the economy right now.
The recession all along was far worse than we thought
David Leonhardt: We just have an incredibly big hole to dig ourselves out of. That is not unusual for a financial crisis. In a financial crisis, the unemployment rate typically rises for four or five years after the crisis begins. By that timetable, we should still be getting worse. We're doing better than that, thanks to really aggressive action by the Fed, aggressive action by the Bush administration in its final months, aggressive action by the Obama administration and by Congress. But now we're not seeing aggressive action by the government to deal with the recession. If anything we're seeing the opposite. And so not only does the economy have an enormous amount of ground to make up, but it's facing some pretty stiff headwinds.
Will lifting the debt ceiling, finally, have any impact on growth?
Jeanne Cummings: That's certainly the hope. And that's certainly the promise we're hearing from the business community and Wall Street. They've said they need some clarity. They need uncertainty removed. And Washington is creating more uncertainty with this gamesmanship. ...[If legislation requires more action on the debt ceiling in 2012] it could create another debt ceiling crisis at Christmastime, which typically is a good time for the economy. Economists are saying that if there were another debt ceiling crisis on Capitol Hill, that would be a negative. Economists are saying that if they don't do it, things will get a lot-lot worse. If they do do it, things won't a lot-lot worse. ...
David Leonhardt: Businesses made a big point about the uncertainty that's holding back the economy. There is a lot of uncertainty. People disagree about what the sources are. But one thing to keep in mind about this debt ceiling is that it adds to the uncertainty. So not only are we now facing the prospect of doing it all over again in December, as Jeanne mentioned, but we're also going to have a new budget fight on the continuing resolution later this fall. We really are looking at the prospect of Washington continually going through, every few months, these kinds of debates in which there is gridlock, paralysis and potential government shutdowns. That is another reason to be really worried about the medium-term state of the economy....
Do we have government still able to respond to any crisis? to deal with big problems? ... to act?
Jeanne Cummings: I might reframe that question just slightly and ask whether our politics are able to respond to any crisis. We've all talked for over a decade about "Congress is broken" and "Washington is broken." What seems to have happened even more recently is that there is no political reward for fixing a problem -- for even putting forward a solution to fix the problem! There's only pain. I think that has become a real problem in and of itself.
What happens if a deal isn't reached? Are there contingency plans?
Jeanne Cummings: We don't know a lot of the details. They do have a plan. ...Bloomberg did find out yesterday things that confirm what David has said: bond holders come first. ... After that, it's a series of choices. You can bet Social Security recipients are very close behind bond holders and so are soldiers. ...Then the question becomes, do you pay farm subsidies? which offices do you shut down? It could lead... to certain offices being closed that are deemed "non-essential." The government is going to have about 56% of the amount of money that it had the day before....
It appears American people want a big deficit
David Leonhardt: ... You couldn't say this and run for office but I don't have to run for office! I think part of the paralysis in politics stems from public opinion. I think the American people are deeply in favor of a big deficit right now. I understand that if we went out and asked them in poll "what do you think of the deficit?" people would say "I'm against it." But they don't want their taxes raised. They don't want Medicare changed. They don't want Social Security changed. And they don't want the military cut, or at least not cut by much. That combination means you're in favor of a big deficit. So the problem is that politicians who want to go do what might be called "the responsible thing," and in the long term cut the deficit (setting aside the short term), don't really have a place to go politically! They know if they do it, they will get hammered by the other side (whatever the other side is!). And the other side will have popular opinion on their side. The big political question is how do we get out of that really difficult situation.
Will members of Congress get paid if the debt ceiling isn't raised?
Jeanne Cummings: Well, the really fun thing is that the Treasury Department gets to decide! They could decide that the budget for the legislative branch is one of the ones to take a hit. And finally, I think members of Congress, if it comes to it, should raise their hands and say whether or not they are willing to forego their own paychecks while this crisis goes on. I'm certain that our colleagues will them that question if and when we get to that...
What about the economy? What about the stock market? Are we looking at deep trouble?
Karen Tumulty: It's worth pointing out that there are a few conservatives -- tea party people -- are arguing that if there's a default it's no big deal, at least for a while... But as I've been trying to figure out for myself what this really means when we find ourselves in this uncharted territory, I was struck by a Credit Suisse estimate this week that if the US defaults, stocks will fall 30%. And GDP will drop 5%. That is a pretty big hit.
David Leonhardt: We don't actually know what's going to happen and I think it's important to say that. I think the US not honoring its debt obligations strikes me as being a very significant economic event. If you were to run down the list of problems and advantages our economy has right now, at the very top of the list of advantages -- and it's not that long a list -- is the fact that international investors remain very willing to lend us money at incredibly low interest rates. The idea that we would voluntarily risk and, in all likelihood, give up that advantage would be economically a very bad thing, according to all the people who have tried to estimate it.
