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The Shutdown, the Debt Ceiling, and Our Credit Rating

12:00 AM, Oct 5, 2013 • By IRWIN M. STELZER
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Two stories were prominently featured on the front page of the Wall Street Journal a few days ago. America either is, or in a few months will be, the world’s largest producer of energy, “a new era of opportunities,” says Adam Sieminski, head of the U.S. Energy Information Administration. And feuding politicians have temporarily shut down a part of the government that accounts for about 10-12 percent of federal spending. Guess which is more important to the U.S. economy in the long run.

US Capitol Building at night Jan 2006

The president says that the shutdown and the impending fight over the debt ceiling are “catastrophes,” the mot du jour of the White House and the Treasury. Warren Buffet says, “The markets are not gonna fall apart. We will go right up to the point of extreme idiocy but we won’t cross it. ” Three-quarters of the businesses in his widely diversified Berkshire Hathaway empire (stock market valuation  around $260 billion) are doing better. “Our furniture stores are up 8% or 9%….Our railroad carried 207,000 cars last week. That’s the highest this year. September is about 5% to 6% over last year.”  It is not unreasonable to ask whether you want to bet on Obama or Buffett in deciding about the longer-term outlook for the American economy if you have some spare change to invest. 

And worry not about default if Congress and the president can’t agree on raising the debt ceiling before another of the standoffs that precedes some deal. You can take with a bag of salt warnings by bankers, all subject to government regulation and some under investigation, who emerged from a White House meeting dutifully echoing the “catastrophe” line. As the Lindsey consulting group puts it, “incoming revenue has interest payments covered ten times over. Social security checks, pay for the troops and other high priority items would easily be covered…. Hardly a default in the usual meaning of the term.” Some costs would have to be cut if the government is forced to live on the trillions flowing into its coffers from tax receipts, rather than rely on more borrowing, largely from the Chinese. But a government that admits to employing 800,000 non-essential workers (some of whom do valuable chores) and is spending over $3,500,000,000,000 per year surely can find some savings somewhere.

The Treasury claims it does not have the technical ability to prioritize payments so as to assure that interest obligations are met, despite the fact that even the tiniest business does this regularly. The absence of an ability to prioritize might be why the president is predicting disaster if the ceiling is not raised. Or it might be because Obama sees political advantage in tarring Republicans with the “default” brush and its alleged “catastrophic” effects. I report, you decide. 

While considering the direction of policy, don’t forget an institution celebrating its 100th anniversary—the Federal Reserve System and its board. If there were any doubt that the Fed’s monetary policy gurus will continue to print money in an effort to accelerate the recovery, the latest brawl in Washington should dispel it. Chairman Ben Bernanke has made two things clear: One is that he views it his job to offset the headwinds blowing from the nation’s capital, and the other is that the most important bits of data on which he will base policy are the unemployment rate and associated readings of the labor market’s temperature.

Since Bernanke is breathing what the Lindsey Group describes as “the foul air in the swamp that has become the nation’s capital,” he has to know that the headwinds he now has to offset are blowing at gale force. As for the labor market, we are at a bit of a loss to get a clear reading: The numbers-crunchers at the Department of Labor are classified as not essential to the safety and health of the realm, and so are on temporary furlough (a de facto vacation, since they will eventually collect back pay for the days they didn’t work). As a result, yesterday we did not get the employment data traditionally issued on the first Friday of each month. The “data driven” Fed will have to do without some of the data that it says drives its decisions. But is a safe bet that nothing in those data would have shown such a marked fall in the unemployment rate, and/or rise in the labor-force participation rate to prompt Bernanke to dust off the aborted taper.

I have always felt that we should leaven all data with anecdotal evidence. So here are some recent events in the labor market.

·     Builders from Phoenix, Arizona to Washington, D.C. tell me they are having difficulty finding skilled construction labor.

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