It's Only Going to Get Worse

Economists, politicians, and citizens alike were stunned with the economic news that came from the labor department’s job numbers as well as the private sector growth figures.  I’m not surprised at all and no one else should be either.  On May 16th, the United States government hit the debt ceiling.  We’re now in a “spending freeze,” which means that, although we can still pay for things, it costs a lot more to pay for things than it would have if we had simply raised the debt limit.  There’s also been an averse reaction to GDP by the market and by big business.  As Bill Maher put it on Friday, “if McDonald’s hadn’t hired 60,000 people last month, we would have seen know job growth whatsoever.”

He’s right, outside of one company, the U.S. actually lost jobs last month.  Yet, the market won’t react as bad as it should on Monday because the amount of public sector job losses were not as bad as previously expected.  All of this is tied in to the really frightening aspect of being unable to finance the deficit (which is what happens when we run out of creative accounting methods in early August.)  All told, the initial reaction is going to be the strongest.  We’re going to see a negative jump in GDP by about 2.3%, but between now and then we’ll still see that negative movement in GDP, just in more subtle ways.

Take America’s borrowing power, for instance.  As I noted on Friday, public sector jobs are declining, but not in direct correlation with budget cuts.  The majority of public sector jobs that have been lost have been lost at the local level, the second most at the state level, and the third most at the federal level.  This runs counter to the actual spending cuts and newly allocated budgets that have been approved for this year.  The federal budget contained the most rigorous cuts in public employee’s, the state budgets came second, and the local budgets third.

So why aren’t we cutting federal jobs the most, state jobs second, and local jobs third?  Because jobs aren’t related to spending.  Jobs are linked more directly to borrowing power.  Because the federal government has better borrowing power than state and local governments, they get to keep their jobs.  Because the state government has better borrowing power than local governments, state workers keep their jobs and because local governments have the least borrowing power and the least political influence, their jobs are going quickly.

What all of this means is that people aren’t feeling the full effects of the budget cuts.  They’re feeling the effects of the market perception of the jobs market and that hasn’t been good for awhile.  The reason that the economic data from May looks so bad is because everyone had to borrow money in the last couple weeks of May at a higher interest rate than they would have normally had to because the U.S. has already hit the debt ceiling.  When Republicans say that there’s no risk of us hitting the debt ceiling in the future, they’re right because we’ve already hit it.

Going forward, there’s one graph that should be sitting on the floor of Congress until some decision is made in terms of what we’re going to do to address the debt ceiling and it’s posted below.

The latest trick that Republicans are trying to pull is to say that even if we don’t raise the debt ceiling by August, the U.S. won’t default on it’s debt.  That is the biggest lie you could possibly tell right now.  We’re already positioned to lose our credit rating and sink our potential buyers markets for the next 6-8 months, that’s really bad news.  When we default on our debt and have to essentially mortgage off the United States government, we’ll see an economic calamity that will make the Great Depression look like a good thing.  The graph above makes note of what will happen in two months as compared to crisis that occurred over a time period three times as long as the one we’re anticipating.  That means the damage will probably be worse than we’re predicting and for anyone who’s seen the analysis of the U.S. economy going forward, that shouldn’t be something that we want to increase in magnitude.

The other interesting part of the debt debate that has been unfolding is the rhetoric vs. the action of the Paul Ryan-minded Republicans.  When Paul Ryan unveiled his budget earlier this year, he did so on the basis of the “Ryan-Rivlin deficit reduction proposal.”  That’s interesting because today on “Face the Nation,” Rivlin fundamentally disagreed with Ryan’s premise that we needed major cuts to federal spending in the short term if we are to have any success in the long-term.

“We don’t have to cut near-term spending too much — we shouldn’t do that, because it would endanger the recovery,” she said. “If you just slash spending right now, or raise taxes right now, it would be a very bad thing to do.”

This sets the stage for the rationale and reasoning behind the act of raising the debt ceiling.  Both Republicans and Democrats have said that it will get done, but the two sides have said that they’ll be raising it for fundamentally different reasons.  For Democrats, the question of raising the debt ceiling revolves around the question of ‘how?’ whereas the Republican question of raising the debt ceiling revolves around the question of ‘why?’  Democrats are trying to negotiate an end to the hostage crisis, Republicans are trying to figure out if they should even bother giving up the hostage at all.  The stakes get scarier if the hostage takers aren’t just okay with, but are actually encouraged to shoot the hostage.

It appears as if no amount of consequences-based realities are going to be acceptable solutions for Republicans, which raises the question of whether or not we should continue negotiating at all.  If someone is intent on destroying something just to see what the aftermath will look like, someone has to start talking about how the clean up is going to work and it seems like Democrats should be preparing for that as opposed to encouraging the taking of more hostages.  It’s better to prepare for what you know is coming than to negotiate for something that isn’t worth having.  Republicans understand this, Democrats will never understand this and this is the real political problem we have.  One side is willing to sacrifice everything, while the other side is unwilling to sacrifice anything and it’s in this area that the real problem exists.

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