Housing's New Bottom Makes Mockery of D.C. Debt Ceiling Frenzy

Washington's attention to the deficit is commendable. But doing the right thing at the wrong time means doing the wrong thing.

After the markets close on Tuesday evening, the House of Representatives will reject an increase in the debt ceiling. Everybody on Capitol Hill already knows the outcome. The only reason to hold a vote you know will fail is to use the tally as a symbol, a signal. Stop spending, start saving.

Reducing our debt, slowly, methodically, smartly, is the right thing to do. But sometimes, doing the right thing at the wrong time means doing the wrong thing.

WHAT ECONOMY IS WASHINGTON WATCHING?

It's inauspicious that the House will hold this symbolic vote in the closing hours of the year's worst month. Small business optimism has declined for two months, consumer confidence today, and real income growth is flatter than Kansas. Small businesses and families are still prisoners of economic conditions, and the housing market is the biggest ball and chain. Just this morning, the key home price index for 20 large cities fell to their post-boom low and homeownership has declined to levels not seen since the late 1990s (graph below via NYT).

Housing is an inside/outside crisis. For homeowners inside the industry, values are dropping, families are still falling behind payments, and 4 million homes have been lost to foreclosure since 2006. For those on the outside looking in, families on the move are increasingly looking to rent, which is raising the price of rental units. Eventually, the ball and chain will unfasten. But until it does, the recovery will not feel like a recovery.

Try telling Washington. Even with economic growth under 2%; even with the housing market setting new dubious records by the month; even with the labor market growing barely fast enough to keep up with population growth; even with gas prices, food prices, and rental prices squeezing middle class families; and even with Europe's collapse making it easier for the U.S. government to borrow in the short-term ... Washington has all but abandoned the economy. The Federal Reserve will end its second round of cash infusions for the financial sector. As for more stimulus? Congress has a better chance of accidentally voting to establish Voodoo as an official national religion.

On second thought, that's a redundant vote. Republicans and some Democrats already cling to the dark and magical idea that cutting $100 billion this year will grow the economy. It won't. There are some international examples of deep spending cuts leading to recoveries, but they include small Scandinavian countries using massive currency depreciation to dramatically grow exports, which the United States can't expect. It's a matter of simple math that reducing government payrolls and contracts will eliminate hundreds of thousands of jobs this year.

WHAT DOES WASHINGTON WANT?

The economy still needs help and the international markets are willing to lend us the money. So why is Washington poised to reject help with a vote -- a symbolic vote! -- that could roil international markets?

The word from Capitol Hill obfuscates as much as it clarifies. An aide to a moderate Democratic senator told me he thought Washington needed to "show the market" that Congress had the capacity to cut spending. An aide to a conservative Republican senator told me that holding the debt ceiling hostage to force spending cuts was acceptable because "the real hostage crisis is the political establishment that wants to continue doing what we're doing, and the easiest thing is to keeping borrowing money."

Capitol Hill's means aren't aligned with its ends. Washington wants a strong economy heading into the 2012 election. The solution is ... to force spending cuts that economists agree will hurt the economy. Washington wants the international bond market to trust us. The solution is ... to hold a symbolic vote that raises the specter of defaulting on our obligations to the international bond market.

We will need tax reform. We will need spending cuts. And eventually we will need entitlement reform. But now, we need neither higher taxes, nor lower spending, nor premium support Medicare. None of those things builds an economy strong enough to support the necessary hard choices we'll have to make tomorrow. Sometimes, doing the right thing at the wrong time means doing the wrong thing.

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Update: Goldman Sachs cut its economic growth forecast for the second time in a month last week. It now predicts the economy to have added just 150,000 jobs in April, down from 244,000 in March. [Fortune]