The Shutdown, the Debt Ceiling, and Our Credit Rating
12:00 AM, Oct 5, 2013 • By IRWIN M. STELZER
· Makers of toilets tell the Wall Street Journal that to shift production from China they are trawling the labor market for workers with the strength to lift heavy bowls and the skill to produce smooth surfaces -- the strength of a football player and the hands of a sculptor”, according to the president of one manufacturer of plumbing products. Not much luck.
· Mike Miller, CEO of Artex, tells the New York Times that he would like to shift even more of his firm’s production of textiles from China, but “The sad truth is, we put ads in the paper and not many people show up” to fill the openings in his Minneapolis factory, even though wages are up in real (inflation-adjusted) terms by over 13 percent since 2007. Perhaps benefits have risen faster than wages, perhaps factory life is unappealing to the younger generation.
· The geographic mobility that is a reflection of the strength of the labor market is rising. More Americans moved from one state to another last year than at any time since 2010, good news, but fewer than were willing to chase jobs in pre-recession years.
Of course, conditions in the labor market might be beyond the ability of the Fed to affect. American Enterprise Institute economist John Makin, in a soon-to-be published comment, argues “that there exists little evidence that monetary policy can produce a sustained impact on the rate of unemployment… the sustained impact is by no means assured.” No matter: Bernanke believes he can affect the unemployment rate with an easy monetary policy, and his likely successor, Janet Yellen, believes that even more strongly. If there is to be a trade-off between unemployment and inflation, Yellen has made clear that she views inflation as the lesser evil.
Economists seem to agree—or at least those at Goldman Sachs and at Standard& Poor’s agree—that each week that the shutdown continues will shave 0.3 percentage point off fourth quarter GDP. But then they part company. Unless the current shutdown becomes more protracted than its predecessors, warn analysts at Goldman Sachs, the shutdown “would have modest macroeconomic effects.” Economists at Standard & Poor’s are a bit more nervous. They predict that the shutdown, combined with a battle over the debt ceiling “could significantly hurt consumer sentiment, as well as the economy.” But in a separate report by S&P’s credit analysts, the rating agency says, “The debt ceiling debate is unlikely to change the AA+ U.S. sovereign debt rating.” That prognosis differs sharply from the one floated by the White House: a global recession is likely unless Republicans cave, and soon.
It is important to note that even the negative forecasts refer to the impact of the shutdown on fourth quarter GDP. But much of any loss will be made up soon after the shutdown ends; defense contracts held up will be authorized, furloughed workers will get back pay. Looking further into 2014 the positive signs we were seeing before the politicians put the “political” back into “political economy” remain. Gasoline prices are softening, the equivalent of a tax cut for consumers; the auto market remains strong; the housing recovery seems to be on track despite a slowing in the rate of price increases and in pending home sales; rising commercial and residential property prices are strengthening bank balance sheets; and the reaction among most businessmen to the Washington follies seems more bemused annoyance than protracted gloom. But never underestimate the ability of our politicians to turn gold into dross.
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