Here’s a shocker about the financial standoff between Democrats and Republicans in Washington: They’re both right.
That’s not to say that the House and the Senate are right when they won’t pursue a settlement, or that the president is right to keep repeating that he won’t negotiate. What is right, though, is that Democrats are looking at the annual federal deficit and the national debt as unimportant short-term issues we need to get past. Republicans see these same issues as not-so-distant threats to our economy that are serious enough to require a course change.
Anyone familiar with labor-management or other negotiations would see resolving this dispute as a piece of cake. If you can keep the parties focused on resolving the time-line issue, and away from the poisonous invective that keeps them apart, each side gets most of what it wants and you get an agreement.
Almost all analysts and politicians agree that the debt ceiling is a serious issue — certainly more so than the government shutdown and its play-to-the-balcony theatrics.
The federal government’s bumping into its legal borrowing limit does not have to mean instant default. Think of it as your credit card limit. If your credit card bounces at the coffee shop because you have hit your limit, that doesn’t necessarily mean that you can’t or won’t make your installment payment. It just means that you can’t borrow more to make it.
Of course, when you are running a deficit as large as the federal government’s, not being able to borrow in order to make interest payments or refinance debts coming due can create a cash crisis and possibly a default.
The Treasury Department estimates that on Oct. 17 the government will reach the point where it cannot borrow any more to meet its obligations. There is always some uncertainty about forecasting the precise date with a financial system as large and as complex as the federal government’s, but the date is almost upon us.
Whether the warnings from financial markets and our big-time creditors like China and Japan will prompt a settlement of some sort is far from certain. What is virtually certain, though, is that even if the budget and debt limit issues are settled temporarily there is a large, perhaps even larger, financial threat that will not be addressed: interest rates.
The math of this threat is simple. As we all know, it costs money to borrow money. It costs about $415 billion a year in interest payments to keep the federal debt afloat these days, which is a substantial amount of cash, especially in view of the very low interest market interest rates we are still paying.
With a federal debt totaling $16.699 trillion, the current ceiling, a 1 percent increase in interest rates would eventually mean adding $169 billion to the annual cost of running the government. The impact of an interest rate increase (or decrease) is not felt immediately on the entire debt amount. It only affects debts as they are financed (or refinanced) in the market.
Interest rates will rise gradually, almost certainly, as the U.S. and European economies recover. Our short term rates have been running considerably below the historical average rate in our country, which for Treasury Bills has averaged about 6 percent over the past forty years.
If rates rise rapidly, as they sometimes do, the cost of new and refinanced debt can overwhelm a government, leading first to a financial crisis and then the messy political fallout from it. By all accounts it is not an enjoyable experience.
It is also possible, even likely, that the more we dither over our financial issues, our implicit credit rating will deteriorate and we will have to pay a higher rate to borrow.
The ultimate effect of both sides being right is that the U.S. economy will not benefit from a “win” by either side. We have to stop using limitless government spending programs as election campaign weapons. Unaffordable government spending has to be addressed with a commitment to change, but the economy as such does not need immediate, drastic action and would probably react badly to it.
The issue will not be resolved by increasing the amplitude, frequency, or venom-content of the rhetoric. But it can still be resolved.
Certainly, lessons in civics and in manners would be a good starting place. Congress, not the president, has the constitutional responsibility for government spending. The members, when we agree with them and when we don’t, represent the voters in their districts and their states, very few of whom likely chose to elect extortionists, terrorists or hostage-takers. A little more respect and a little less calumny would go a long way to resolving this financial crisis.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.