This article first appeared in the St. Louis Beacon, July 26, 2011 - As high temperatures continue to roast much of the nation and the saga over raising the debt ceiling grinds on in Washington, financial analyst Juli Niemann heard a saying that ties the two together:
"It's not the heat, it's the stupidity."
Stupidity, Niemann says, is the kindest thing she can say about the protracted D.C. debate as next Tuesday's deadline for increasing the debt ceiling approaches. The issue is not one that most Americans fully comprehend, she said, but if politics prevent the standoff from being resolved, they will feel the effects.
"Most of the American people don't understand we're not talking about balancing the budget by taking the debt ceiling off," said Niemann, a financial analyst at Smith, Moore in Clayton. "We're talking about paying bills that have already been incurred. This has nothing to do with the budget. It has everything to do with paying your debt."
With some observers saying that whatever the outcome is in Washington, it could be a lose-lose-lose scenario, the Beacon talked with people in various sectors to see what they thought the effect of a default might be -- and what they thought of the political theater now playing in Washington. Here's what they had to say.
Efforts to get a business perspective from Civic Progress, the Regional Commerce and Growth Association, Missouri Chamber of Commerce and Industry and other sources were not successful.
Steve Fazzari, Department of Economics, Washington University
Fazzari doesn't even see the reason that the federal government should have a debt ceiling, and he certainly doesn't think that the posturing between the White House and congressional leaders is the best way to make policy.
"I was reasonably confident a month ago that this was all a tempest in a teapot," he said. "Now, I'm less confident, and I'm curious about how it will all come out.
"I think there are some genuine misunderstandings. I don't know if it's political blather, when you hear people say it would be good for the government to cut its spending as much as would be necessary to balance its budget next week. I think it's naive, and it does not recognize how the system works. Government programs are supporting people's incomes and creating incomes in some cases. Any economy would have problems absorbing these kinds of cuts, and an economy as weak as ours would have an even harder time."
Even with the drama of last Friday evening, with dueling news conferences first by President Barack Obama, then by House Speaker John Boehner, Fazzari said the markets were taking the whole drama in a pretty calm manner.
"Today, they're down marginally," he said Monday. "The bond market is pretty calm. The expectation seems to be there probably will be some kind of a deal. I don't know that we're looking at market disaster even if there is no deal this week. Somehow, the U.S. government is going to make good on these securities.
"The markets are not our main concern. The main concern is what happens to the economy if no deal goes through and the government is forced to reduce its spending to the amount of revenue coming in. Will we actually even default? Nobody knows. There's enough tax revenue coming in to pay interest, so the government can cover the interest, but it would have to cut its spending elsewhere. The cuts we're talking about are huge and would be economically disastrous."
They would be especially painful, Fazzari added, because the economic recovery is so fragile. Cutting $1 trillion in spending in one year, he explained, would result in lower personal incomes for Americans.
"Once you cut," he said, "you see incomes falling and tax revenues coming down. It would create not just another recession but a pretty nasty recession. We might go into a double-dip recession anyway. Anyone who thinks this would be good for the country would be misguided. I find it very frustrating that this scenario is even out there."
Talking with students, Fazzari told them he wasn't sure what he would do if he was in Obama's position "with my back pushed against the wall -- either cut $1 trillion in spending in a few days or cave in to some long-term spending thing without any revenue enhancements. Divided government can only function if there is some willingness to compromise, and that doesn't seem to be the case with some of the Republicans."
Do the students worry about the long-term debt they might have to pay off or about the possibility that Social Security won't be there for them when they retire decades from now? Those concerns aren't foremost in their minds, Fazzari said.
"What they are more concerned about is getting jobs," he said, "not what happens over the next 50 years but what happens over the next one or two or three years, when they graduate into a weak economy."
Jericah Selby, president, student body at University of Missouri-St. Louis
She and more than 100 other student body presidents sent a letter to Obama last week, headlined: "Do we have a deal yet?" It was followed-up by a conference call with the White House Tuesday morning that left Selby impressed and encouraged by the determination in Washington to come up with a deal but still frustrated with the realization that government doesn't always work the way the textbooks say it should.
In the letter, the student body presidents -- representing schools from Stanford to Penn, from Mizzou to Western Illinois -- noted the serious consequences the nation faces if no agreement is reached.
"Without an immediate increase in the debt ceiling and a long-term reduction in budget deficits," they wrote, "our weak economy will suffer even more. That means higher interest rates, fewer jobs and more debt. And trust us, we already have too few jobs and too much debt....
"While you may disagree over which party shoulders more blame for our current situation, one thing is certain -- young people will shoulder the consequences of gridlock during a time that requires bold action."
Selby is concerned that political expediency may overtake the need for comprehensive reform.
"If they try to do a really quick fix," she said, "I don't think that's going to be sufficient. I'm a long-term thinker, and I'm looking for more long-term effects. I'm not content to just put a Band-Aid over it. It needs a lot more attention than that."
A criminology major with a minor in political science, Selby plans to go to law school after graduation, so employment may not be an immediate concern. She understands that officials in Washington have an over-stuffed agenda, but she hopes they can draw up the proper list of priorities.
"I don't think less of them," she said. "It's more of a realization. They're handling a lot right now. But politics plays a huge role in what they do, and it's kind of disheartening in a sense. It's not discouraging, but it definitely is an eye-opener."
So does she think the powers that be will let the deadline pass and put the U.S. government into default?
"I would like to be optimistic and say no," Selby said. "I think they're going to come up with a compromise. I really don't think they will let our country default. If they do, I would be entirely disappointed with them."
Juli Niemann, financial analyst, Smith, Moore
Looking at the situation from a stock market point of view, Niemann can't believe that the entire debate even has come this far.
"These freshman Tea Baggers are so shockingly, stunningly ignorant of the process of financial markets," Niemann said. "The risk-free rate off of which all financial instruments are priced is the U.S. Treasury bill. The assumption is that that is one piece of paper that will never default, never be late, is solid as a rock. If that promise is broken, if it cracks even a little, where do you go to get a risk-free rate? They talk about how you can always make a late payment, but the U.S. cannot be late with a payment. We're the risk-free rate.
"You would be talking about repricing all financial assets period, and any Treasury bill that comes out will automatically have a higher price, because you're going to have to pay a higher risk premium. All Wall Street is astonished. Wall Street cannot possibly believe that anybody can be this stupid."
Ideally, she said, Boehner "would sit everyone down and say, 'All right, boys and girls, open your readers and we're going to learn the first lesson about economics.'"
Niemann also can't understand why an issue that in the past has been relatively routine, raising the debt ceiling, all of a sudden has taken on such dire importance.
"For 60 years we've done this," she said. "Now, they're using it as a cudgel, just to make it a budget issue. This should be a non-event, but stupidity is turning it into an event, and the world is looking at us as if to say, what in the world is going on? Everybody is collectively shaking their heads. It seems so inconceivable. This is such a huge issue. It boggles the mind."