US debt limit is no political toy
When US politicians get back to business after the Memorial Day weekend today they will resume a debate that is fascinating, urgent, passionate, stubborn, and potentially highly dangerous both for the American economy and for the country's political reputation and standing in the world.
It is a tragic measure of the purblind failure of leaders of both parties that they are playing a game of chicken just when there are so many doubts about the recovery and whether the US can any longer be trusted as a global leader.
The argument is over whether to raise the US$14.3 trillion ceiling on US federal debt, a level that was reached on May 16. Unless and until Congress raises the ceiling it means that the US government cannot borrow any more money. Treasury Secretary Timothy Geithner has said that he can juggle with the accounts until August 2, but that is the outside limit.
It should be a simple matter, since after all Congress has raised the debt ceiling 10 times since 2001. Surely, no one really believes that Congress would expose the country to the awful unthinkable consequences of not raising the ceiling - do they? Over the weekend a Republican presidential candidate, Tim Pawlenty, suggested that the consequences might not be as dire as the White House claims. 'Catastrophic' is the expression that Geithner and Ben Bernanke, the chairman of the Federal Reserve Board, have used. President Barack Obama has said that failure to raise the ceiling would send the world spinning back into recession.
If it arrived at August 3 without the ceiling having been raised, the US would not be able to pay its military and would stop paying interest to owners of government bonds, and that would trigger disaster: credit markets would seize up, stock markets would plunge, interest rates would soar, and the talk would probably not be of recession but depression. The US would hasten its own decline, since who would trust Washington, US debt, the dollar?
Even now it is a dangerous game. How close do the politicians want to go to the cliff edge to see whether investors might be tempted to stop buying US debt in spite of its liquidity because they cannot trust the competence of Washington?
Prince Alwaleed bin Talal, sometimes known as the Arab Warren Buffett because of his massive investments, warned this month on CNBC that the United States was not giving 'much care and attention to this time bomb that you have right now here'.
Republicans in Congress are holding up any deal because they want to cut trillions of dollars from government spending over the next 10 years, part of a concerted effort led by so-called 'tea party' members on the Republican right.
The Republicans are not prepared to see any compensating tax rises. Some of them, led by the darling poster boy of the right, Congressman Paul Ryan, have proposed savage cuts to Medicare, the government health care programme for Americans aged 65 and above.
All this is coming at a dangerous time for the US economy. The recovery has been described as both jobless - because unemployment is still 9 per cent - and a 'McJobs recovery' because the job that are on offer are low-paid ones. Indeed, on April 19, McDonald's, the burger chain, hired 62,000 new workers nationwide - which was more jobs created in a single day than the net job creation of the US in 2009. But a million people applied for those jobs, which pay about 55 per cent of the US average national wage.
Some economists see the US entering a period of what Tyler Cowen described as 'the Great Stagnation' because the great productivity gains from innovation of the 20th century are rarer now; others hold out great hopes from the internet and the digital revolution.
But in Washington, both in Congress and in the myriad think tanks, there is no meeting of minds. The Heritage Foundation tried to underpin Ryan's savage budget proposals - to cut spending by US$6.2 trillion, reduce the deficit by US$4.4 trillion over the next decade while reducing the top rate of income tax from 35 to 25 per cent - by claiming that it would create a housing boom overnight, a huge spurt in growth and unemployment of 2.8 per cent by 2021. In the face of ridicule from economists, Heritage backtracked on the unemployment figures.
David Rosenberg, chief economist at the Canadian wealth management concern Gluskin Sheff, and one of the most thoughtful and level-headed economists, last week warned that the United States 'may touch quicksand if it does not get its fiscal act together soon'.
He cited the experience of Canada in the 1990s to advocate a mixture of tax rises - which the US Republicans refuse to countenance - and spending cuts - which the American Democrats have begun reluctantly to accept - as the correct recipe. But Rosenberg warned it would be painful.
In 1993, Canada had a deficit to gross domestic product ratio of 5.6 per cent, better than the US today, and federal debt to GDP of almost 70 per cent, about the same as the US today. Canada had the political will, Rosenberg noted: 'Taxes were raised, spending was cut, government operations privatised, social contracts rewritten, and what at one point would have been deemed 'untouchables' [like means testing and claw backs for social security] were not just touched, but squeezed.'
For the US too, 'the process will be contractionary, deflationary, and very bullish for the bond market as supply recedes, and ultimately pave the way for more sustainable economic growth, including the return of capitalism.' Rosenberg estimated than a Canadian-style US$1 trillion restraint over five years would clip real GDP growth by 1 per cent a year.
Today, Canada's debts to GDP are 34 per cent, the envy of the developed world, the deficit has swung into surplus, and Canadian assets are in high demand. It is tough, but it is tougher still if politicians are not talking to each other and playing with neo-voodoo economics.
The average hourly earnings, in US dollars, for all employees in the United States on private non-farm payrolls last month, an increase by 3 cents, or 0.1 per cent