Budget crisis? No, it's a jobs and growth crisis.
A friend who鈥檚 been watching the absurd machinations in Congress asked me 鈥渨hat happens if we don鈥檛 solve the budget crisis and we run out of money to pay the nation鈥檚 bills?鈥�
It was only then I realized how effective Republicans lies have been. That we鈥檙e calling it a 鈥渂udget crisis鈥� and worrying that if we don鈥檛 鈥渟olve鈥� it we can鈥檛 pay our nation鈥檚 bills is testament to how successful Republicans have been distorting the truth.
The federal budget deficit has no economic relationship to the debt limit. Republicans have linked the two, and the Administration has played along, but they are entirely separate. Republicans are using what would otherwise be a routine, legally technical vote to raise the debt limit as a means of holding the nation hostage to their own political goal of shrinking the size of the federal government.
In economic terms, we will not 鈥渞un out of money鈥� next week. We鈥檙e still the richest nation in the world, and the Federal Reserve has unlimited capacity to print money.
Nor is there any economic imperative economic to reach an agreement on how to fix the budget deficit by Tuesday. It鈥檚 not even clear the federal budget needs that much fixing anyway.
Yes, the ratio of the national debt to the total economy is high relative to what it鈥檚 been. But it鈥檚 not nearly as high as it was after World War II 鈥� when it reached 120 percent of the economy鈥檚 total output.
If and when the economy begins to grow faster 鈥� if more Americans get jobs, and we move toward a full recovery 鈥� the debt/GDP ratio will fall, as it did in the 1950s, and as it does in every solid recovery. Revenues will pour into the Treasury, and much of the current 鈥渂udget crisis鈥� will be evaporate.
Get it? We鈥檙e really in a 鈥渏obs and growth鈥� crisis 鈥� not a budget crisis.
And the best way to get jobs and growth back is for the federal government to spend more right now, not less 鈥� for example, by exempting the first $20,000 of income from payroll taxes this year and next, recreating a WPA and Civilian Conservation Corps, creating an infrastructure bank, providing tax incentives for small businesses to hire, expanding the Earned Income Tax Credit, and so on.
But what happens next week if Congress can鈥檛 or won鈥檛 deliver the President a bill to raise the debt ceiling? Remember: This is all politics, mixed in with legal technicalities. Economics has nothing to do with it.
One possibility, therefore, is for the Treasury to keep paying the nation鈥檚 bills regardless. It would continue to issue Treasury bills, which are our nation鈥檚 IOUs. When those IOUs are cashed at the Federal Reserve Board, the Fed would do what it has always done: It honors them.
How long could this go on without the debt ceiling being lifted? That鈥檚 a legal question. Republicans in Congress could mount a legal challenge, but no court in its right mind would stop the Fed from honoring the full faith and credit of the United States.
The wild card is what the three big credit-rating agencies will do. As long as the Fed keeps honoring the nation鈥檚 IOUs, America鈥檚 credit should be deemed sound. We鈥檙e not Greece or Portugal, after all. We鈥檒l still be the richest nation in the world, whose currency is the basis for most business transactions in the world.
Standard & Poor鈥檚 has warned it will downgrade the nation鈥檚 debt from a triple-A to a double-A rating if we don鈥檛 tend to the long-term deficit. But, as I鈥檝e noted, S&P has no business meddling in American politics 鈥� especially since its own non-feasance was partly responsible for the current size of the federal debt (had it done its job the debt and housing bubbles wouldn鈥檛 have precipitated the terrible recession, and the federal outlays it required).
As long as we pay our debts on time, our global creditors should be satisfied. And if they鈥檙e satisfied, S&P, Moody鈥檚, and Fitch should be, too.
Repeat after me: The federal deficit is not the nation鈥檚 biggest problem. The anemic recovery, huge unemployment, falling wages, and declining home prices are bigger problems. We don鈥檛 have a budget crisis. We have a jobs and growth crisis.
The GOP has manufactured a budget crisis out of the Republicans鈥� extortionate demands over raising the debt limit. They have succeeded in hoodwinking the public, including my friend.
--------------------------
海角大神 has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. This post originally ran on .
