The largest fiscal policy crisis the U.S. faces will continue into 2014 as overpaid politicians ignore economic problems for personal political gains.
September unemployment numbers show that a mere 148,000 jobs were added during the month, keeping the unemployment rate officially above 7%. More than 11 million people who want to work are idled in an ongoing economic and social crisis. Actual numbers are a lot higher, of course.
Average hourly earnings rose by 3 cents for those who were employed or under-employed. The number of persons employed part time – as involuntary part-time workers – was unchanged at 7.9 million in September. These people were working part time because their hours had been cut or because they were unable to find a full-time job. In September, the number of long-term unemployed, jobless for 27 weeks or more, was little changed at 4.1 million. These individuals accounted for 37% of the unemployed.
The official Bureau of Labor Statistics report, released weeks late because of ongoing Tea Party terrorist actions, showed that the unemployment rate was unchanged at 7.2%. Moreover, the so-called labor-force participation rate – only 63%, and the employment-to-population ratio at 59%, also failed to make any progress from their dismal levels.
September posted the slowest growth rate in a year. More bad news is yet to come since the report does not reflect the negative effects on the economy of the Republican-induced government shutdown. These will show up next month in a report that will also be delayed by one week even though parts of the government, but not the dysfunctional Congress, are working again. Washington’s ineffectiveness and indifference to dealing with the worst recession since the Great Depression is therefore ongoing and a national disgrace.
In September, 2.3 million persons were “marginally attached to the labor force,” down from 2.5 million a year earlier. These people were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.
Testimony of Secretary Lew before the Senate Finance Committee on the Debt Limit (excerpts)
10/10/2013 WASHINGTON – Chairman Baucus, Ranking Member Hatch, and members of the Committee, thank you for inviting me here today to discuss the potential impacts of a failure by Congress to increase the debt ceiling. This is an important moment in American history, and Congress has an important choice to make for the American people. Congress alone has the power to act to make sure that the full faith and credit of the United States is never called into question. No Congress in 224 years of American history has allowed our country to default, and it is my sincere hope that this Congress will not be the first. At the same time, Congress should pass legislation to fund the government and end the standoff.
State of U.S. Economy and Fiscal Position
Since February 2010, private employers have added about 7 and a half million jobs, and over the last year alone they added more than 2 million jobs. Manufacturing is expanding while the housing market continues to improve, posting gains in sales, prices, and residential construction.
At the same time, we have been working with Congress to achieve a sustainable fiscal path. In its most recent estimates, the Congressional Budget Office projected that the 2013 deficit would be less than half the more than 9 percent of GDP deficit the President inherited. The rapid deficit reduction of the past two years is the result of both a stronger economy and the deficit reduction that the President has already signed into law.
Among the risks that we control, the biggest threat to sustained growth in our economy is the recurrence of manufactured crises in Washington and self-inflicted wounds. Unfortunately, we now face a manufactured political crisis that is beginning to deliver an unnecessary blow to our economy – right at a time when the U.S. economy and the American people have painstakingly fought back from the worst recession since the Great Depression.
Private-sector economists have estimated that a two-week government shutdown could directly reduce real GDP growth in the fourth quarter by about a quarter percentage point at an annual rate. Some have warned that a longer shutdown would reduce economic growth as much as 1½ percentage points. These estimates typically do not include the additional spillovers that seem likely: household and business confidence in the government could fall sharply, and other spending that relies on a functioning federal government could be postponed or cancelled. Why would anyone want to do that to our economy?
In addition to the economic cost of the shutdown, the uncertainty around raising the debt limit is beginning to stress the financial markets. Yields on Treasury bills maturing in the second half of October and early November have already surpassed the peaks on similarly affected maturities in July 2011. At our auction of four-week Treasury bills on Tuesday, the interest rate nearly tripled relative to the prior week’s auction and reached the highest level since Oct 2008. Measures of expected volatility in the stock market have risen to the highest levels of the year.
The only way to avoid further self-inflicted wounds to our economy is for Congress to act. I know from my conversations with a wide range of business leaders representing industries from retail to manufacturing to banking that this is a paramount concern for them. That is why it is important for Congress to reopen the government and raise the debt ceiling, and then to work with the President to address our long-term fiscal challenges in a balanced and thoughtful way.
Potential Economic Impact of Failure to Raise the Debt Limit
The Treasury Department recently released a report examining the potential macroeconomic effects of political brinksmanship in 2011, and the potential risks of waiting until the last possible moment to increase the debt limit in the current economic environment. It points to the potentially catastrophic impacts of default, including credit market disruptions, a significant loss in the value of the dollar, markedly elevated U.S. interest rates, negative spillover effects to the global economy, and real risk of a financial crisis and recession that could echo the events of 2008 or worse.
If interest rates rose, it would have a real impact on American households. The stock market, including investments in retirement accounts, could tumble, and it could become more expensive for Americans to buy a car, own a home, and open a small business.
These additional costs of borrowing could not easily be undone and our actions would impact Americans for generations to come.
Failing to raise the debt ceiling will impact everyday Americans beyond its impact on financial markets. For example, doctors receiving reimbursements under Medicare would likely continue to provide services on a timely basis, but they would be operating with significant uncertainty about when they would be paid by the government for their services. For millions of low-income Americans who rely on Medicaid for their healthcare, the federal government’s payments to states for the federal contribution would likely also be impacted. These providers still have to pay their doctors, nurses, and staff, but absent timely federal payments, many could face real liquidity challenges. And for those waiting on benefits who need those funds in order to refill their refrigerator – if that money doesn’t flow, they won’t go to the grocery store to shop, creating ripple effects that would be felt throughout the economy. The bottom line is that failing to raise the debt ceiling creates a very difficult and unfair situation, and one that is completely avoidable if Congress acts.
It is also important to note that the federal government has numerous large payments that are due shortly after October 17, when we will have exhausted our borrowing authority and will only have cash on hand to meet our obligations. Between October 17 and November 1, we have large payments to Medicare providers, Social Security beneficiaries, and veterans, as well as salaries for active duty members of the military. A failure to raise the debt limit could put timely payment of all of these at risk.
We need to look no further than 2011 for evidence of what just an extended debate on the merits of raising the debt limit can do to our economy. In 2011, U.S. government debt was downgraded for the first time in history, the stock market fell, measures of volatility jumped, and credit risk spreads widened noticeably; these financial market effects persisted for months. To be sure, other forces both at home and abroad also played a role, but the uncertainty surrounding whether or not the U.S. government would pay its bills had a lasting impact on both markets and the economy.
History of Bipartisan Support for Increasing the Debt Limit
Republican and Democratic Presidents and Treasury Secretaries alike have universally understood the importance of protecting one of our most precious assets – the full faith and credit of the United States. President Reagan wrote to Congress in 1983: “This country now possesses the strongest credit in the world. The full consequences of a default – or even the serious prospect of default – by the United States are impossible to predict and awesome to contemplate. Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and on the value of the dollar in exchange markets.”
Employers across the country also understand the importance of what is at stake if we default on our debts for the first time in American history. Last week, 251 business organizations, including the Chamber of Commerce, National Association of Manufacturers, and National Retail Federation wrote in a letter to Congress: “We urge Congress to act promptly to pass a Continuing Resolution to fund the government and to raise the debt ceiling, and then to return to work on these other vital issues.”
No credible economist or business leader thinks that defaulting is good for job creation or economic growth. Henry Paulson, Treasury Secretary under President George W. Bush, said last month, “it is unthinkable that Congress wouldn’t live up to our commitment to make good on past spending commitments and obligations.” Chairman of the Federal Reserve Ben Bernanke said recently, “a failure to raise the debt limit could have very serious consequences for the financial markets and for the economy.” And Warren Buffett said last week that “it makes absolutely no sense” for some in Congress to use the debt ceiling as leverage, saying “it ought to be banned as a weapon . . . . It should be like nuclear bombs, basically too horrible to use.” They understand that Congress choosing not to pay the government’s bills is unacceptable and could do irrevocable harm to our economy.
If Congress fails to meet its responsibility, it could be deeply damaging to the financial markets, the ongoing economic recovery, and the jobs and savings of millions of Americans. I have a responsibility to be transparent with the American people about these risks. And I think it would be a grave mistake to discount or dismiss them. For these reasons, I have repeatedly urged Congress to take action immediately so we can honor all of the country’s past commitments.
James Baker, Treasury Secretary under President Reagan, made this point to Congress in 1987, saying, “Running out of cash means that the United States would default on its obligations both domestic and foreign, with all the negative financial, legal and moral consequences that implies. Our Founding Fathers regarded the full faith and credit of the United States as a sacred trust, and for over 200 years the United States has upheld this fiduciary duty. The United States has never defaulted on its debt obligations. To do so would be unthinkable and irresponsible. We would seriously erode this country’s premier credit position and break faith with our citizens.”