Debt Stalemate Looks Even Worse from Inside

David Wessel has talked to insiders who say the situation over the debt ceiling in Washington is even worse than it looks. He compares Speaker of the House John Boehner to a union boss negotiating with management without the full support of rank and file members. Some Republicans in Congress are so mistrustful of the negotiations with the Obama Administration that they believe either the real deadline for default is August 10th and not August 2nd or that the whole issue was fabricated by Obama to begin with.

My take: The issue is real and if the debt ceiling is not increased, the US will slip into a double dip recession in which unemployment will rise higher and stocks will sink lower than in 2009. Voters now see this as a predominately political issue. The intransigence has cost everyone credibility as parties who are only interested in the deficit, especially the Republicans as I said it would. But it has cost Obama too. Cantor and Boehner must be aware of this. It is unclear how knowing that a political toll has already been taken will influence their negotiating strategies.

I will be on BBC World News at 215ET to discuss this issue.

  1. Rick Clark says

    I wouldn’t disagree in spirit, but don’t you think a double dip is inevitable anyway due to stimulus effects wearing off with nothing to replace it? Also with all the many sources of risk (much of it of the sovereign variety) out there, it would be surprising if one thing or the other didn’t spook the stock market before the year is out anyway.

  2. Edward Harrison says

    Rick, nothing is really inevitable where policymakers have huge latitude on discretionary spending. So, while I think we are likely to get a double dip by 2012 or 2013, the potential increases and the timetable accelerates with a debt ceiling impasse. We could even see a 2011 double dip under the right circumstances.

  3. Rick Clark says

    Thanks. Actually we’re very similar on our outlook in this regard.

  4. Chaos says

    Don’t you think we are closer to a depression than anything else? How can central banks stop an other wave of household defaults? People would go nuts, I don’t think there is political space for it.

    I know you have to be careful about predictions, but this is looking truly bleak from Spain! Things are going to get bad, and a combination of situation going in a downward spiral BOTH in USA and Europe could be catastrophic.

    1. Edward Harrison says

      No, I don’t think we are close to a depression. I believe we are in one right now:

      A recession would trigger a lot of carnage which would make this plain. So regarding predictions, I am not ‘predicting’ another recession now although I see it as a certainty if the debt stalemate continues and the US defaults or has to do a selective default. I AM predicting a recession by 2013, however.

      1. Chaos says

        It looks like the slowdown is here already. Last news from ECRI indicators are showing this, I guess you’ve seen this.

        Indeed, while technically we are not in a recession (nominally), in real terms we may be already in a lot of places. With all the stimulus effect gone, and fiscal contraction, there is little space for automatic stabilizers working (or at least not a good one, except unemployment, which is not good).

        I see pain and agree with this: “A recession would trigger a lot of carnage which would make this plain.” (Agree too that we are in a great depression, but I mean technically it isn’t yet, while it is structurally).

  5. john newman says

    The capitalist “Great Leap Forward”,of which we are on the brink, like its communist predecessor is an attempt to impose on reality an ideological systems claims to universal truth, regardless of the underlying reality. The Maoist conceptions of “collectivization” and “industrialization”, with perfect knowledge of how humans will behave in the communist utopia to come, were uninterested in the realities of how millions and millions of Chinese actually got their daily rations. Somewhere between 20 and 50 million people had to die to kill this vision.

    The capitalist conception of “efficient markets” and “rational expectations”, with perfect knowledge of how humans will behave in the “free market” utopia upon who’s brink we teeter, are uninterested in the realities of how millions and millions of Americans and Europeans get their daily rations. So committed to their utopia are mainstream economists that ( they take it upon themselves to scold the reality based community for it’s sinful insistence on reality.

    Shut down the government, cut off social security, medicare, medicaid, food stamps and other income supports. These all offend the free market utopia. How many will need to suffer how much to prove the insanity?

    1. Edward Harrison says

      I recently wrote a post on psychology and ideology based on the backfire effect. What I said was that the policy decisions made now based on ideology will be proved right or wrong in the course of time. At that point, those who were on the fence will move en masse to the position that has been affirmed.

      But we will not get to that resolution until we have the wrenching downturn that makes plain which path leads to better outcomes. Unfortunately that will mean a lot of economic pain and hardship first. I believe the ultra free market ideology as practiced will always lead to cronyism and kleptocracy because government is a natural check against corporatism and the private sector dominance of large actors.

      When you remove that check, things run amok and when downturn hits people recognize this. Eventually I believe the pendulum will swing in the other direction.

      1. john newman says

        I read that post and thought it summed up some really complex human interactions in a convincing way. It has affected how I look at things as deeply as Ian Morris’ conception of “energy capture” in Why the West Rules for Now. Morris conceptualization dovetails with my belief that it was cooking, the original “energy capture” that set our species apart by allowing our brains to grow while our guts shrank as we pre-digested nutrients by cooking them. Our relationship to energy as a species is central to our existence.

        Similarly, the confirmation bias, like the Spinoza’n nature of our minds, on which you wrote a great post a while back, first drew me into your blog, explains so much about group dynamics: we embed in socially constructed functional relationships without looking under the hood and when a hose bursts or a belt breaks our first impulse is to look in front of us at whatever we were dealing with for the origin of the problems rather than pop the hood and figure out what went wrong. Looking under the hood entails arguing with those closest to us while blaming external causes sustains group cohesion.

        Looked at from this perspective you can say that most wars are probably the result of confirmation bias and that conflict, tragically and ultimately on a large scale is probably necessary to progress. Paul Kedrosky had this up I think last week:

        It essentially proposes that trial and error experimentation is the only hope for change without conflict, but ends by pointing to the lack of space in politics for uncertainty which denies any political space to trial and error. FDR’s unique genius was that was able to find and occupy political space for trial and error.

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