Will Tea Party Insanity Cost America $3 trillion and 2.75 million jobs?

Will Tea Party Insanity Cost America $3 trillion and 2.75 million jobs?

October 16, 2013

The budget and debt end games are still playing themselves out on Capitol Hill; and judging by its current behavior, Congress has developed the political equivalent of a brain tumor. A toxic byproduct of an ongoing power struggle inside the Republican Party, the cancer has caused incapacitating seizures that have virtually crippled the national government’s capacity to take care of the most elemental aspects of governance. Even if House Republicans finally agree today or tomorrow to fund the government and raise the debt limit, the tumor they have spawned will continue to damage our economy — and the longer term prognosis is not encouraging.

Congress’s recent reckless behavior may not directly affect those aspects of the economy that make the United States so productive — but it does threaten access to the low-cost capital on which the economy depends. The current fight will not diminish the education and skills of American workers, or erode the technological and organizational assets of the businesses they work for. The rash demands of the radical right also won’t lessen the competitive pressures that drive our businesses to develop new goods and services, and to adopt the innovations of others. And whatever Congress does this week, the United States will remain the world’s largest market. The catch, however, is that all of these strengths also depend on steady streams of low-cost capital, which the House GOP has now put at risk.

For nearly 70 years, the United States has been the world’s number one place to invest and lend to. The economic reason is straight-forward — with considerable consistency, American businesses generate stronger returns than their counterparts in other advanced economies. But  another factor is at play here as well, one especially important to foreign lenders and investors — namely, confidence that the United States will preserve and maintain the political conditions required to protect those healthy returns.

Investors and lenders, both foreign and domestic, have long seen the United States as the most reliable country for enforcing contracts, respecting intellectual property rights, maintaining generally low taxes and light regulation, and applying the rule of law fairly. The result has been an unusually low level of political risk attached to the economic returns expected by lenders and investors. That’s why U.S. Treasury securities have long been the world’s lowest-risk financial instrument. For the same reasons, the political “risk premium” for private-sector loans and investments — the additional return required to offset any risk that political forces will reduce an investor or lender’s returns — has been negligible for decades.

But a country that finds itself unable to fund its government and unwilling to honor its government’s debts has to expect that lenders and investors will demand a considerable risk premium on any future loans and investments. In short, our current war over government funding and the debt limit is raising interest rates — and the costs could be huge. For example, a one percentage-point increase in the interest rate paid on Treasury securities will cost the government (and taxpayers) some $1 trillion in additional debt payments over 10 years — enough to wipe out the savings from a decade of sequester cuts.

A combination of this new risk premium, plus new wariness by foreign lenders and investors, should also push up interest rates on private loans and the required returns on private investments. Interest rates normally rise during booms, when the demand for capital expands faster than its supply. When interest rates rise without an accompanying increase in demand, however, they directly depress demand and growth. For example, a one percentage-point increase in mortgage rates today is expected to depress housing starts, housing sales and demand for related goods and services by 11 percent — and reduce GDP growth this year by 0.4 percent. Across the economy, the same increase in interest rates in the absence of strong demand could take 2 percentage-points off real GDP growth. Even if the House radicals agree to a cease fire this week, it could cost Americans $300 billion in foregone goods and services over the next year, and the 2.75 million jobs required to produce them.

The damage to growth and jobs could be long-lasting. House extremists nearly pushed the economy off the cliff over the same issues in 2011 — and they could be back for another round in a few months, when any agreement this week runs out. Such a sustained pattern of political dysfunction could lower growth for a decade and cost Americans as much as $3 trillion in lost income and wealth. And that assumes that Tea Party Republicans, in the end, will not force the government to default on its debts, a development that would likely cost the American and global economies as much as the 2008-2009 financial collapse.

 



Are Republican Leaders Suffering from Stockholm Syndrome?

October 1, 2013

With a good part of the federal government closed for business, the pathologies driving it are too obvious to ignore. The diagnosis begins with the fact that there is no partisan argument this time about overall federal spending. The White House and congressional Democrats have simply accepted the arbitrary cuts of the sequester process, despite evidence that they’re slowing the economy. So instead, the rightwing of the House GOP is holding normal government operations hostage to a variety of demands tied to the Affordable Care Act.

Now, Obamacare has been a central focus of the Tea Partiers since 2010, when its passage helped elect a number of them to Congress. But three years later, their continuing single-mindedness about those reforms looks like a pathological obsession. Too strong? Their threats to close down Washington unless the President agrees to sacrifice his signature achievement — and their confidence that they can bend him to their will — have been unaffected by not only the 2012 elections, but also the prevailing consensus that their strategy will cost the GOP even more in 2014.

This week, the pathology has spread to the Republican leadership. Since Tea Party members make up less than one-quarter of the House GOP and an even smaller share of the Senate, they always need support from their more moderate colleagues and Party leaders to carry out their threats. Those leaders and colleagues have long argued publicly against the Tea Party strategy — that is, until this past weekend. After months of being held hostage themselves to Tea Party threats of insurrection and primary challenge, House Speaker Boehner, Senate Minority Leader McConnell and most of their associates have now identified with their captors and adopted their worldview. In short, they’re suffering from a political version of “Stockholm Syndrome.” If they don’t recover quickly, much of the national government could remain closed for a long time.