Somewhere between the partisan bickering that caused shutdown II in January and Pat Buchanan's fear-mongering in February, Washington flubbed a golden opportunity to enhance the economy's near-term outlook and solidify its long-term future as the world's most competitive economy. The failure of Congress and the White House to reach an agreement on balancing the budget is more than just another sad comment on Washington's ineptitude. It's adding to the risk of a recession.
Never mind that the U.S. government is halfway into fiscal 1996 and still without a budget, or that on Mar. 15, Congress once again must vote to increase the debt ceiling so that the U.S. Treasury will not default on its IOUs. The real problem is the lost opportunity to finally fix the deficit. Back in November, Federal Reserve Chairman Alan Greenspan issued this stern warning: "If for some unforeseen reason, the political process fails, and agreement is not reached, it would signal that the U.S. is not capable of putting its fiscal house in order, with serious adverse consequences for financial markets and economic growth." How could such a blunt message have fallen on deaf ears?
BULL MARKET DANGER. The cost of Washington's pigheadedness now is coming due. Even though the economy is fragile, long-term interest rates are rising, partly because Wall Street is coming to believe that a once-serious effort to eliminate the deficit is now dead. And investors in long-term U.S. securities are once again demanding a premium to cover the potential inflationary consequences of the government's fiscal irresponsibility. If there were a credible budget deal on the horizon, we could expect bond yields on the order of 5.5%. Instead, yields on 30-year Treasuries, which had dropped below 6% in January, are now back up to 6.4%. Fixed mortgage rates have jumped, and the number of mortgage applications is falling.
Back in December, forecasts of a second-half pickup this year were predicated on a budget deal that would cut long-term rates and give the Fed added leeway to trim short rates. But in the absence of a budget compromise, chances for a truly solid rebound probably are gone. That could hurt corporate earnings and even imperil the bull market in equities.
The deficit issue is not just pie-in-the-sky rhetoric about America's future. High interest rates rob the economy of jobs. They cut into demand, and they make private-sector investment, so crucial to U.S. competitiveness, more costly. Workers need assistance, with corporations making wrenching adjustments to compete in a global economy and to bring new technologies online. But the deficit's drain on national savings limits government's ability to invest in human capital and give many workers the skills and training they need to make the transition. That affects future wages and U.S. living standards.
CORROSIVE EFFECTS. Washington dropped the ball on this issue because no one has focused on the human cost of ignoring the deficit's corrosive effects. That's also a shortcoming of every Presidential hopeful in the current crop. Unfortunately, the deficit is one issue in which political considerations seem destined to overtake common sense. Deep down, too many Democrats still believe that we can tax and spend our way to prosperity--just as many Republicans think that we have to slash taxes and dismantle the Federal government to get there.
Pat Buchanan is trying hard to scare the bejesus out of the middle class, and his lock-and-load rhetoric on immigration, foreign trade, and jobs plays well as sound bites. But if you want a fact that's really worth worrying about, consider this: If mainstream Republicans and Democrats don't get back on the deficit-cutting track, their failure will result in very real costs to Americans, both near term and in the future. If the economy falls into recession during the coming months, this will be the first time in a long while that Washington's bungling of fiscal policy will share a big part of the blame.