Time to Panic About the Federal Debt Limit

Average citizens will pay the price for political dithering in Washington -- as usual

Is anyone else getting as nervous as I am about this debt-ceiling debate? Don't get me wrong; my view has long been that we would endure some stomach-churning days on the way to a deal. Ultimately, though, I believed that the adults in both parties would prevail and lift the debt ceiling sufficiently to get the country through the 2012 election without default.

Now I'm worried, because too many politicians on both sides of the aisle and at both ends of Pennsylvania Avenue are happily taking potshots at each other to score political points, with little regard for the stakes involved. Who knows how much patience the stock and bond markets have or when they might decide to panic at the prospect of Washington failing to come to a deal in time?

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Tom Gallagher, a political economist with the Scowcroft Group, likens the U.S. economy to an airplane with engine problems, just barely maintaining altitude above the tree line. Although the plane is holding its own, if almost anything else goes wrong, it will crash. Recent reports on initial unemployment claims show just how close to the treetops we are. Back in February, as The Fiscal Times pointed out last week, first-time claims had held at 400,000 or less for seven of nine consecutive weeks. Now the number has been running above 400,000 for 12 weeks. That is a pretty dramatic downshift that matches the uptick in the overall unemployment rate and the decline in the growth of the gross domestic product.

The Great Recession technically began after December 2007 and ended in June 2009; it was the longest recession in duration and the largest in terms of relative decline of GDP since the end of World War II. But polls show that many Americans believe that it's not over. A May 2011 study conducted by Northeastern University's Center for Labor Market Studies examined the GDP, employment, hourly earnings, and productivity data and found why so many people feel that way. The 23-page report, "The 'Jobless and Wageless' Recovery From the Great Recession of 2007-2009: The Magnitude and Sources of Economic Growth Through 2011 I and Their Impacts on Workers, Profits, and Stock Values," concluded that "aggregate employment has not increased above the [second] quarter of 2009, and real hourly and weekly wages have been flat to mostly negative."

After a thorough walkthrough of the sobering mound of data, the study concluded that the only major beneficiaries of the recovery have been "corporate profits and the stock market and its shareholders. Most holders of savings and money-market accounts also are net losers due to declining real interest rates which have been in negative territory for many interest-bearing and money-market accounts."

The point is not to play the class-warfare card. Most major companies came out of the financial crisis of 2008 relatively unscathed, but the experience scared the heck out of most of them and prompted many to stock up on cash to be on the safe side. Lack of confidence in the durability of the recovery and in the political leadership in Washington has also made business owners cautious about expanding or hiring. Much of companies' postrecession investment has gone into machinery to make them more productive with fewer employees.

All of this explains why the glass looks half full to some people and half empty to others. For those who see the U.S. economy through the prism of the stock market and their monthly investment statements, the economy has come back from the trauma of the financial crisis reasonably well. Despite ups and downs, it has headed back in the right direction.

But people who base their assessment of the economy more on a pay stub and a monthly checking-account balance have seen little improvement -- and they wonder whether they ever will. This year's slowdown adds to their anxiety.

An economy this fragile can scarcely afford the damage that could come from partisans on the left and right playing chicken in debt-ceiling increase negotiations. It's not hard to imagine the roller-coaster ride, the likely plunges in the markets, and the moments of sheer terror that we could face over the next month.

No one would benefit from having a repeat of September 29, 2008, the day the House voted down the Troubled Asset Relief Program and caused the stock market to drop 777 points and lose $13 trillion in shareholder value.

The U.S. economy is fragile; at best, growth is anemic. The economy badly needs a new round of stimulus, but that seems extremely unlikely. Whereas "stimulus" used to have eight letters, it is now a four-letter word. The Federal Reserve Board's second round of quantitative easing has concluded, and anxiety about the deficit means that there is little support for new spending stimulus. Worries over the long-term deficit and debt issues are trumping fears about the weakness of the economy and the lack of job growth. But as weak as the economy is, a sharp market sell-off might be all it would take to send it plunging downward into a double-dip recession.

Image credit: Brendan McDermid/Reuters