Wednesday, October 09, 2013

Comment: Politics, Policy, Deadbeats and Default

by Bill McBride on 10/09/2013 10:13:00 AM

A quick comment: Politics baffles me. I know the prime directive is for politicians is to get reelected, but they do and say the damnedest things.

However if we just focus on policy, the situation is easier to analyze.

First, on the deficit. In 2000 the U.S. had a unified surplus of 2.4% of GDP. Then through a series of bad policy choices (all of which I opposed), the Federal government incurred a large structural deficit - and then with the housing bubble and bust - piled a large cyclical deficit on top of the structural deficit. In the fiscal year starting in October 2008 (Bush's last budget), the U.S. deficit had reached 10.1% of GDP. 

From a 2.4% surplus to a 10.1% deficit in a few years.  Ouch!!!

Since then, the deficit has declined from 10.1% to 4.0% of GDP in fiscal 2013.  Congratulations!  If anything, the deficit has declined too quickly (slowing economic growth).

Based on current policy, the deficit should continue to fall over the next couple of years, and remain in the 2% range for several years.  Then the deficit will slowly start to increase primarily due to healthcare costs.

This suggests we don't need any more fiscal tightening right now or for the next couple of years.  However we need a longer term plan to primarily address rising healthcare costs. 

Shutting down the government just adds to short term costs (pushing up the short term deficit).   Dumb. 

Smart policy would be to eliminate the so-called "debt ceiling" (really just about paying bills already occurred), and pass the Continuing Resolution (CR) that was negotiated between both parties (and agreed to by both parties except the House added an absurd policy rider).

In addition, smart policy would be to think of ways to address the long term issues.  This isn't pressing, and damaging the economy now is not the answer.  Perhaps another super-committee with long term consequences if the committee fails (not more short term cuts like the sequester).   The consequences should be distasteful to both parties - and both cut spending and raise revenue in the long term so there is some motivation for the committee to reach agreement. 

And on deadbeats and defaults:  There are certain politicians who think it is OK to not pay the bills as long as the U.S. makes interest and principal payments on the debt.  This is crazy talk.  There is a name for people who don't pay their bills: deadbeats.  If politicians don't pay their personal bills, they are deadbeats.  But if they stop the government from paying the bills, we are all deadbeats.  And there will be serious economic consequences for not paying the bills on time.  The consequences will build over time, but by November not "paying the bills" will ripple through the entire economy.

How does that reduce the deficit (the goal)?  It doesn't.

It is time to end the shutdown and agree to pay-the-bills.







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