Viktoria Palushaj, CitrinGroup
However harmful and misguided Congress’s obsession with the pretend “fiscal crisis” has been over the past few years, particularly as the U.S. economy struggles to break out of a tepid recovery and millions of Americans remain jobless, battles over high government spending are not going away. Soon after lawmakers return from their undeserved, five-week vacation in August, they will be forced through another round of budget and debt ceiling talks in order to prevent a government shutdown and default in the fall.
Most immediately, Congress has to pass a budget that will keep the government running through the 2014 fiscal year. The main points of contention are sequestration and taxes. Democrats want to terminate the automatic, across-the-board spending cuts resulting from failed budget negotiations in March to replenish funding for areas such as education, health care, and infrastructure. They also would like to overhaul a tax system they believe unfairly favors wealthier Americans.
Republicans maintain the mandated spending cuts are necessary in reducing the federal deficit and, thus, refuse to put an end to sequestration. Moreover, as part of their ongoing efforts to kill the Affordable Care Act (ACA) - also known as Obamacare - they oppose any budget that appropriates funding to the controversial healthcare program. On taxes, they will absolutely not entertain, let alone be open to negotiate, any proposal which seeks to raise rates. It is highly improbable that these deep-seated differences between both parties will be resolved by the deadline date, October 1.
The good news is Congress can still avoid a government shutdown by doing what is has done since 2009, passing a continuing resolution; funding levels as they are currently earmarked will be temporarily extended. The bad news is Congress can still avoid a government shutdown by doing what it has done since 2009, passing a continuing resolution. The existence of such stopgap measures, in combination with the hyper-partisanship increasingly more characteristic of American politics, creates a disincentive to compromise and allows the can to keep getting kicked down the road.
Then there is the debt ceiling. Earlier this year, lawmakers voted to suspend the federal borrowing limit and allow the Treasury Department to continue spending without Congressional authorization until May, when the debt ceiling was automatically adjusted upward to include the cumulative borrowing during the suspension period. The Treasury Department has since found creative ways to meet its debt obligations lacking additional borrowing power. By late October or early November though, those measures will be exhausted and the debt ceiling will need to be lifted to avoid a government default. Raising the borrowing limit was once just a routine, low-key legislative procedure. It has now turned into another stumbling block for lawmakers and an opportunity to dramatize the nation’s spending habits while practically begging credit rating agencies to consider a new downgrade.
We should be taking full advantage of historically low borrowing costs while they are available. If there ever was a time to borrow more, it is now. And, there is no doubt Congress will ultimately bargain to increase the debt ceiling this fall. Unfortunate to watch will be the political sideshow sure to upset voters and financial markets leading up to a last-minute deal. Moreover, President Obama spent his summer traveling cross country trying to mobilize support for his economic policies ahead of the fall fiscal battles while attempts to court lawmakers on the other side of the aisle and get ahead of the issues were limited and lazy. The same can be said of conservatives’ willingness to collaborate. Lacking in purpose and urgency, it is unsurprising that our extremely polarized and dysfunctional legislature is on track to be the least productive in modern history.
Fortunately the Federal Reserve, the other policymaking institution in the U.S., is taking its job seriously and is focused on what matters most - supporting growth and jobs. The central bank is the only reason why the economy is not tanking right now. If it was all solely up to Congress, we would be in grave trouble. In a recent speech to a group of economists at an economic policy forum in Jackson Hole, Wyo., the head of the International Monetary Fund, Christine Lagarde, said it best when she advised government officials to not waste the “space provided by unconventional monetary policies” by pursing growth-crushing initiatives, such as debt reduction. Regrettably, her words may never resonate with Congressional leaders.
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Viktoria Palushaj is an economist and Market Analyst with CitrinGroup, an investment advisory firm in Birmingham. Contact her at 248-569-1100 or www.citringroup.com.
