Raising the debt ceiling has been a routine function for every president and every congress in recent history. How did it suddenly get to the very last hour and come down to what seems like a complete stalemate?
Once again, I decided to get the answers from someone who understands economics and economic policy better than I. Dr. Memo Diriker, Director of the Business, Economic and Community Outreach Center and professor at Salisbury University's Franklin P. Perdue School of Business has been watching very closely as the process has unfolded and spent some time with me to share his observations about the state of the debt ceiling negotiations, the consequences of continued inaction, and about those he feels are responsible for the impasse.
How did we get here to the brink of the United States government defaulting on its debt obligations?
Diriker: There are two different issues that, because of an accident of history, have been jumbled together for the first time. One issue is the debt ceiling itself. In the scheme of things it's not that big a deal. It happens all the time. You heard the President's speech: 18 times under Reagan, 7 times under Bush. It's not that big a deal. Now, everybody is in agreement that we need to do something about the size of the debt. Everybody agrees we need to do something about the size of government spending. There is no disagreement there. The accident of history that brought us here is that the freshman Republicans, who come from a 'no tax increase' mantra, are not listening to their own leadership, frustrating the ability of the leaders of both parties to come to an agreement on the debt ceiling which is something they have done many times.
On the debt itself and government spending, as we heard, there are two different approaches. One side wants cuts and cuts only and very deep cuts very quickly. The other side says we need to do the cuts a little more slowly because we don't want a double whammy on the economy itself when there are tremendous problems with jobs and we need everybody to share a bit. If the middle class and the others who use the system are going to be hurt in the process, maybe the rich should also participate. So these different ideological solutions would ordinarily find a solution in the middle because the leaders would come down behind closed doors and with a little give and take would reach an agreement and everybody would follow. The problem is the freshman Republicans are not inclined to follow the decisions of their leadership.
In your opinion, do they seem willing to let the country go into default to prove that point?
Diriker: Well a number of the freshman Republicans are on record demanding such a default, because some believe it's not going to happen and that government will pay the bond obligations and cut everything else. Others are saying that if this is the price to pay to get these cuts, we will pay. It's as dangerous a game of brinkmanship as we've ever seen. Leaders of both parties are surprisingly close in their approaches to this. With a little bit of elbow grease and midnight oil they should be able to fix this. The problem is that when the freshmen Republicans say absolutely no, it doesn't matter what the leaders think. I'm very afraid that everybody believes default is not going to happen, but every day and every hour it gets closer and closer to happening. It's too dangerous an economic risk we're taking because there are so many bad scenarios. It's a question of how difficult it's going to be and for whom.
What if President Obama and congressional leaders give in to the Tea Party and freshman Republican demands?
Diriker: The very thing they are complaining about, that there's too much government spending makes it a very high percentage of the GDP. Any time you take that much spending out of the economy, whether it's individuals spending money, which is the biggest driver of our growth in the past, or the government taking that money out, you're going to have an impact. Add to this a complete unknown, but a very, very difficult time in Europe, you might have a global panic.
I've been doing trend forecasting for 25 years now, and I've never seen a situation where it's so difficult to predict, and there are really no good scenarios out there. You are trying to pick from very bad and very, very, very bad situations and see which one is going to happen.
So, in either of the outcomes that are being driven by the freshman Republican Congress, a default and a large interest rate increase or a rapid withdrawal of money from the economy by the removal of government spending, both of those seem to be very bad for the businesses and job-creators that the freshman Republicans say they are trying to defend --
Diriker: Here's the funny thing, ideologically it's one thing, but let's look at it economically. Economically, what the freshman Republicans say they want, in the long term, is a good thing. There's no argument by practically anyone about that. The end result they are seeking is a good thing, but their preferred process of getting to that end result, might create more problems than even they are prepared to handle.
If you look at the profile of these freshman Republicans, they are new to government and they are of the opinion that the government should act like a business or, in some cases, like us. I don't care how much we want to say, you know, I wouldn't run my household like this, or I wouldn't run my business like this, but nowhere in the world is government either a household or a business. It's a whole different entity. It obeys different economic rules.
Given that, what they want is good, but how they want that to happen, I have not seen a way in my deliberations, and my colleagues and other people who study these things, nobody has been able to come up with a scenario that says, in the short run, what they are proposing to do is going to give the outcome they want without creating all sorts of new problems in between.
So here's a group of over 200 members of the House of Representatives who, presumably, have access to economic reports and economists, who must be telling them the same thing that you're saying: there's no good outcome. Do they not understand this or -- ?
Diriker: This is what I find very interesting. In management science, many, many years ago a researcher coined the term "groupthink." I'm wondering of that groupthink phenomenon is happening here. What happens with groupthink is that a group of individuals would come together and convince themselves that a certain path is the right path, and any information, any thought, any indication to the contrary is dismissed as coming from the outside and they don't know what we know.
I'm familiar with groupthink, also in politics, in general, it's very fashionable and it gets you votes to champion something like this, as long as there is no chance of it ever actually happening --
Diriker: That's exactly right. That's exactly the dilemma here. I can say, and look I've been tracking these things for 25 years, other people like me have been tracking, and not a single one of us, regardless of our political views, has come up with a positive outcome for this. So, they try to say "How can you know, it's never happened before?" They're right, I cannot know, but I cannot imagine, or hypothesize or model any scenario that is going to be any kind of positive. To be honest, there is something called forecasting. There is something called modeling, and we've been very successful in the past predicting what is going to happen. So, if you give us a tiny little bit of credit, that at least some of our prognostications are likely to come true, then you need to do your contingency planning accordingly.
You cannot take one particular outcome in the future and bet the farm on that outcome when the rest of the world is telling you that is not likely to happen. It's like going to the casino and betting on double zero to come up three times in a row and expecting all three times to win.
Specifically, with regard to the debt ceiling and default, is that something they're going to hold up every six months because it has such power?
Diriker: If it's not taken care of now, of course. If they take that six month delay option, by that time, it's the elections. It's going to be even more vicious.
A six month delay helps in the very short term, in that we are not immediately defaulting, but it leaves open the uncertainty. Is that uncertainty, in and of itself, enough to cause an increase in interest rates?
Diriker: Absolutely, because credit rating agencies look at the future and gauge the risk of an investment. If a six month option is not sufficiently declaratory about what's going to happen, if I'm a credit rating agency, I'm going to say "If anything, I'm even more uncertain now." It is entirely possible for them to lower the credit rating and for us to have to deal with higher interest rates. You know what, maybe that's what they need '" a kick in the backside.
Author's Conclusion
While some congressmen unrealistically call for us to run the government as we'd run our own household budgets, perhaps they should think about what would happen if the average American just decided to stop paying their bills. Things don't get better. Things get dramatically worse as utilities are shut off, bill collectors start exerting pressure, our ability to access funds is reduced for years, and the other consequences of that decision not to pay our bills mount.
The United States economy is in a difficult period right now, just starting to climb out of a recession. Yet, to make a point and keep ill-conceived and poorly thought out campaign promises, one group of congressmen is willing to let the lights go out on the American economy and the American people. That is decidedly not how we'd run our own households, and certainly not how we would teach our children to handle their obligations. It is bad policy at any level.
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