Thursday, July 28, 2011
The threat of a U.S. debt default looms but what does it mean to San Diegans. We break it down and also look back in history to find out how did we get here?
As the threat of a U.S. debt default looms and many San Diegans want to know how it will affect them. And, does looking back in history help us understand what's happening today on Capitol Hill?
Kelly Cunningham, Economist and Senior Fellow, National University System for Institute and Policy Research
Mark Hendrickson, History Professor, University of Southern California, San Diego
CAVANAUGH: San Diego stands to take a big hit if no agreement is reached on raising the debt ceiling. And our town takes a starring role in a new crime show comedy. This is KPBS Midday Edition. I'm Maureen Cavanaugh. It's Thursday, July†28th. Later this hour, we'll tell you about a number of classic rock acts coming to town as part of the weekend preview. And we'll meet the creator and star of NTSFSDSUV, a new spoof on hard hitting crime dramas, which is shot here in San Diego.
We begin with the debate over raising the nation's debt ceiling in Washington. That debate may seem a long way from San Diego. As we get closer to the prospect of default on the nation's financial obligations, the story is quickly coming home. In fact, some economist say our region may be one of the hardest hit areas if the U.S. government has to postpone payments after the August†2nd deadline. With more on the background and consequences of the debt ceiling impasse are my guests, Kelly Cunningham is economist and senior fellow with the national university system for institute and policy research. Kelly, thanks for coming in.
CUNNINGHAM: Thanks for having me.
CAVANAUGH: And Mark Hendrickson is on the line, a UCSD history professor, and good afternoon.
HENDRICKSON: Good afternoon.
CAVANAUGH: Kelly, let me start with you. Why would San Diego be especially if the government can't pay its bills?
CUNNINGHAM: Well, the clear reason is because San Diego is more dependent upon the federal government spending, and that's because of the military and the defense industry that is so big and prominent in San Diego. We have a bigger part of our economy that is due to federal government spending than probably most areas around the country.
CAVANAUGH: And defense based spending ripples out to others who support that economy like contractors, right?
CUNNINGHAM: Exactly. That's all part of our defense industry. It's not just the active duty military and the bases that are stationed here but we have a lot of defense contractors that have a lot of jobs that are civilian jobs that work for defense contractors in the aerospace, of course, ship building. But it really reaches into a lot of things because a lot of that spending then has a ripplesque, and it goes into other types of industry, locally, and so there's a big multiplier impact and it affects a lot of jobs around the county.
CAVANAUGH: I have a little bit of confusion, Kelly, about if indeed August†2nd comes and goes and there is no agreement to raise the debt ceiling, the federal spending doesn't just stop, right?
CUNNINGHAM: Right of the it's not that the -- it would just suddenly stop. The debt ceiling or the ability to pay -- make the payment, the spending, the money is not going to be totally stopped. But it would moon that 40% of the federal government's spending would have to be cut because that's how much is obligated, and we don't have the revenues to pay for it. Consequently, we need the debt ceiling raised to that amount. That was the approach we took is look at what a 4% cut in federal government spending would mean to the San Diego economy, and clearly it would be a devastating cut if that actually happened on August†2nd or any time after that.
CAVANAUGH: One of the guiding lights, one of the underpinnings of your whole over view of what this could mean for San Diego, the flip side of that is that you say that we have sort of have an easier time with the recession because of the amount of government spending here.
CUNNINGHAM: Right. In the last few years, the last decade, San Diego historically was very dependent upon the military, then we diversified away 'cause other industries grew up around it. Then we went through a big downsizing. Since 2001, the big build up in military activity, San Diego actually economically benefited. We saw an increase in personnel numbers and personnel compensation and defense spending. And we've seen a huge increase in defense spending in San Diego over the past decade. At the same time, particularly since the recession hit, and we were hurt by the recession, it wasn't that we avoided the recession. Along with the rest of California we have had a deeper cut in the recession. But the defense and the build up of defense spending softened that blow, and we would have been much worse off if we had not seen this increase in defense spending locally.
CAVANAUGH: Which means now we're more vulnerable.
CUNNINGHAM: That's the other side of the sword, now we're more dependent on it, and certainly subject to cutbacks in that kind of spending.
CAVANAUGH: Before I go to mark, I want to and you to try to calculate this. I don't know if you can even speculate on this, but what specific payments could we see stopping first if no agreement is reached to raise the debt ceiling?
CUNNINGHAM: It's hard to say. The Treasury department has a whole list of all their expenditures. They'd have to start prioritizing what could be cut, reduced, oh, eliminated. So that's the question. Why would be cut? And I would think clearly there's been a movement to down size military spending, and we're going to see that that any case, but that could be even more so and a problem with paying the debt. So that I think would be where we would see these expenditures that are more discretionary that the government could cut back on, and some of the contracts that they've at least initialized that they would spend. They could cut back on those. And certainly San Diego would really be impacted by that.
CAVANAUGH: Professor mark hen district son, we've heard it said that raising the debt ceiling is usually just a procedural vote in Congress, it's not usually a showdown. Has it ever gotten to this point before?
HENDRICKSON: It has, as a matter of fact. Since 1962, we've altered the debt ceiling 74 different times. And 79 is a really interesting moment where we actually did see a technical -- not just a technical, an actual default. Of the debt ceiling in 79 was at eight hundred and 30 billion. Seems kind of quaint by today's standards. And the debate went down to the wire, and eventually the debt ceiling was raised at the last minute, but not without sequence. About 100 and $20†million, not billion, but million of Treasury bills were not paid out in 1979. And actually the people who purchased those bills, they were compensated in full with interest. But the story doesn't really end this. There were certainly lessons that we could draw from this period because a couple of -- Richard Marcus, looked at the actual cost, and what they found was the federal government paid --
CAVANAUGH: Oh, I see. Okay, we're having a little bit of trouble there. Are you still on the line professor? Let me go to you then, Kelly. We seem to be having a little problem with that line. Some people, as professor hen district son was delineating the whole idea of where we have been here before, at least partially back in 1979, and interest rates began at that point an upward spiral because of that partial default the government made. It's interesting. I have heard a wide range of speculation as to what might happen if we don't raise the debt ceiling, and the government is not able to borrow anymore money to pay its bills after August†2nd. Some people say we'll be cap putted into a depression, other people seem to think that there's -- the consequences of this kind of a thing are being way over blown. Where do you stand?
CUNNINGHAM: Well, the -- what we're -- our budget is, we're spending 40% more than what is being brought in. And clearly we're over spending, and we've obligated ourselves to a lot of things that we can't afford at this point. And that's why we're going into the debt. My perspective is of course San Diego where we've -- as I mentioned, defense spending would be a huge impact. But I knowledge what we're really -- the real problem is what it would do to our credit rating as a nation and seeing interest rates would have to rise. And that would impact us most deeply, including San Diego. We would see the interest rates on mortgages, on car loans, credit cards, student loans, all those things would rise. We'd have to now be spending more to pay for our debts, and that would crowd out other spending, which is vital for our economy and certainly for San Diego, which a big part of our economy is federally related. But I think the interest rate rise would be the bigger impact and clearly hurt business, employment, as companies are not able to do business that on with higher interest rates.
CAVANAUGH: And professor hen district son, that seems to have been the lasting legacy or at least long-term legacy of that partial default back in 1979. Do you think interest rates could be the thing that we really have to watch as this impasse nears? Oh, professor hen district son is not on the line. Okay. Let me continue then. My guest is -- I'm sorry, we -- my guest is Kelly Cunningham, economist and senior fellow with the national university system for institute and policy research. Will a lot of people have been watching this here in San Diego saying what in the world is going on? We're feeling hopeless and frustrated, and is there anything that we can do -- it sounds almost silly, but is there anything we can do to help ourselves or our local economy now?
CUNNINGHAM: One of the problems with this is the uncertainty of the situation. As the private sector, we're standing by, not sure what's going to happen, and what the complications are for it. We would like to see more clarity and certainty for it 'cause we want to plan. If you're a business and want to hire more employees, you need to have at least a reasonable idea of what's going on to happen in that respect, and not knowing that is very detrimental, not knowing how much of our how much taxes will be raised, how much this will impede growth in the future. And I think this represents this happening.
CAVANAUGH: I think as more and more people become aware of this in Washington -- because it's not the thing that's in everybody's front burner. This has been going on since the springtime. And here we are, less than a week away, days away from this happening. I'm wondering what will people be able to take away from this impasse? Is there any way they can hold their government officials believable?
CUNNINGHAM: I've compared this to if you go over to the edge of a big cliff and look over the edge, it's weird because you think, what would help if we actually went over that ledge? You have those ideas, but then you come back to reality and sanity and realize, oh, that's crazy. And let's back away from the cliff. This is what this is. We're looking over a cliff at this huge debt and that we're not able to meet our obligations in spending. And so it's -- and I guess the rhetoric that's coming out is it's frightening to contemplate what could happen, and maybe I'm naive, but hopefully sanity will return to Washington DC, and everyone will back away from the edge and be financially responsible and not actually go into this kind of a debt crisis that potentially is there. But this is certainly a very big wake up call of what could happen. Eventually if we don't get our spending under control, we're going to hit a wall. We can't continue to spend more. Our creditors are not going to continue to lend us money. And we have to control and maybe tain our spending and balance our budgets. At some time your expenses are more than you bring in, you just can't afford to do that.
CAVANAUGH: Everybody knows that. And everybody's learning it on the national level right now. I want to apologize to UCSD history professor ever mark hen district son. We had technical problems, and we lost him, but we hope that he'll come on the show and give us some historical background on this at another time. And I want to thank the person I've been speaking with here, Kelly Cunningham with the national university system for institute and policy research. And I want to let everyone know that we have continuing coverage of the debt ceiling debate on NPR, and you can tell us what you think on Midday Edition Roundtable tomorrow at noon. Thank you very much Kelly.