Debt Ceiling Vote, Now What?
The Obama Administration should have seen this coming. Treasury Secretary Tim Geithner should have seen this. The Dow and average citizen knew this was happening.
With the negative vote by the House of Representatives allowing to raise the debt ceiling, both parties are looking to duke it out over an issue that is the heart of the matter: Fiscal Accountability. This issue transcends the political parties, as fiscal accountability is practiced by the average citizen since 2008. The Congress seems to believe that this is still the 1980’s, when deficit spending was acceptable. However, they are applying 1930’s thinking to a 1970’s issue. This new issue is stagflation, and as cost two Presidents their position.
After the Great Depression, stagflation was held at bay by World War II, and the baby-boom spending spree. Stagflation finally occurred in the mid-1970’s, with unemployment up, rising inflation and small employment gains. It was not until Ronald Reagan, with support from Congress, decided to:
- Reduce Income Tax and Capital Gains Tax
- Control the money supply to reduce inflation
- Reduce Government regulation
- Reduce Growth of Government spending
The outcome?
According to William A. Niskanen and the Wall Street Journal, The federal deficit fell from 6% of GDP in 1983 to 3.2% of GDP in 1987. The federal deficit in Reagan’s final budget fell to 2.9% of GDP. The rate of growth in federal spending fell from 4% under Jimmy Carter to 2.5% under Ronald Reagan.
Not since World War II has deficit outlays been higher than 25% GDP, with the White House speculating that it will reach 25.1% in 2011. And again, history is repeating itself. We have a global war on terror with one front, instead of two (1940’s). Now, we have stagflation (1970’s). The reason for the almost instantaneousness of the change is the ability to move information, and a higher dependence on faster computers. Unfortunately, Congress cannot move faster than an Intel 4004 CPU (1970) compared to today’s world, and markets, speed of an Intel® Xeon® E7 Processor (present day).
As President Reagan stated in 1987:
Congress consistently brings the government to the edge of default before facing its responsibility. This brinksmanship threatens the holders of government bonds and those who rely on Social Security and veterans benefits. Interest rates would skyrocket, instability would occur in financial markets, and the Federal deficit would soar.
It is a double-edge sword over a pit of spikes that Congress is currently on. By passing a healthcare bill that accelerated spending, continuing pork and entitlements in other bills, and not acting as Reagan did in the 80’s, this country will default on August 2nd. Although several Congressmen have stated this is a good idea, Wall Street and other financial markets are pressuring the US to prevent this. The markets are looking for a Reagan solution and getting a Carter result.
- Obama to meet with House GOP conference (cnn.com)
- Geithner to the Hill on debt ceiling (politico.com)
- Debt ceiling: GOP’s risky ultimatum (money.cnn.com)
- Debt ceiling posturing will lead to more market volatility (finance.fortune.cnn.com)
- House GOP Puts Dems in a Box With Clean Debt Ceiling Vote (usnews.com)
- Reagan Explains Why Raising the Debt Ceiling Is Necessary (usnews.com)
The Average Joe Economic Show by Brandon Holm (Host) is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.
Based on a work at averagejoeecon.info.
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