How Much Did Politics Play Into The Debt Deal?

The debt deal is done, but how big a role did politics play? We take a look at what raising the debt ceiling means to San Diego.

GUEST

Dr. James Hamilton, Professor of Economics, UCSD

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CAVANAUGH: I'm Maureen Cavanaugh. It's Tuesday, august†2nd. Later this hour, we'll hear about a new initiative in San Diego giving free internet access to three housing communities. Residents are being introduced to what computers can do for them. And then one Southern Californian city at its whits end boo coyotes authorizes shooting permits.

First, the deal to raise the nation's debt ceiling has been passed and signed in Washington. This allows the government to pay its bills and not be thrown into default. Now that the crisis is over, many people are asking if this really was a crisis to begin. Did the issue of raising the debt ceiling really have to come down to a last minute vote? My guest, Dr. Hamilton is professor of economics at UC San Diego. Dr. Hamilton, welcome, thank you for coming in.

HAMILTON: Thank you for inviting me.

CAVANAUGH: I want our listeners to know that if they'd like to call us and give us a grade on their congressional rep during this debt ceiling debate, you can call at 1-888-895-5727 or comment on twitter at KPBSMidday. Mr. Hamilton, you have said the debate was about politics, not the debt. How do you think our leaders In washington did?

HAMILTON: I'm pretty disappointed, as i think a lot of people are. The immediate crisis we were facing was whether the government could meet its bills this month. Whether the social security checks are going to go out tomorrow. We've solved that problem at least. And so we can be thankful i guess for that much. But it took a lot of pain, and i think it did a lot of damage to get to that point.

CAVANAUGH: Is this -- do you come down on the side of this being a real crisis or a manufactured crisis?

HAMILTON: Well, there are several dimensions to this. There's the immediate challenge i just mentioned of can the government meet its bills this month, and that's very much an artificial crisis. What happened was congress said here's how much we want to spend, here's how much we're going to collect in taxes, the plan was to spend more than the taxes would bring in. You'd think that would mean you have to borrow to make up the difference. But congress also said, no, we're not going to borrow. So you have inconsistent legislation, the social security checks are supposed to go out, the money isn't there to pay for them. What's going to happen? It's entirely an artificial crisis. The logical thing to do once you've decided on the spending, once you've decided on the taxes is to say, okay, well, we'll borrow for now until we can get the spending and taxes in order.

CAVANAUGH: We do have a caller on the line. We are taking your calls on this subject at 1-888-895-5727. Jeff is calling us from la mesa. Welcome to midday.

New speaker: Thank you very much. I just wanted to make a couple comments and take my answer off the air. I agree with the person on the show. It was completely manufactured, crisis. And it was also i think a manufactured crisis by a very, very small minority because the last election when people were claiming that the tea party had -- it was the lowest voter turn out in years. A very small amount of people elected these tea party members who are willing to just crush the economy for political gain. A lot of these people in congress right now want to see a bad economy because like Mitch McConnel said, his goal is to make obama a one term president. The best way to do is to keep the economy in shambles.

CAVANAUGH: Jeff, fu for that comment. And let me get a reaction to that. And also ask a further question, if indeed jeff is right about a small number of people in congress holding this debt ceiling bebait hostage, does that reflect a larger dysfunction at in our system do you think?

HAMILTON: Well, i think it certainly. The minimal thing you expect of government is to keep its logistical operations going to make those social security payments, it pay the soldiers in the field, to pay the debt it's owed along with interest. And we weren't able to even do that minimal sort of functioning on the part of government. And i do agree with the caller that i think it was inappropriate to tie in what should have been a simple logistical question of approving borrowing with these other longer term goals. You can debate whether there was a mandate from the election to achieve those goals or not. But i think there's a proper way to pursue them, which is through the spending and tax legislation. That's where this decision was really made. But as i say, once you've got the spending, once you've got the taxes, of course you have to borrow. If the spending is more than the taxes.

CAVANAUGH: I want everyone to know and reiterate what Dwane Brown said in his newscast a few moments ago. The breakdown of the votes for san diego's congressional delegation, of course our two senators voted yes on the debt ceiling deal, representatives Issa, Bilbray, and davis voted to raise the debt ceiling. They voted for the deal. But conservative republican duncan hunter and democrat Bill Filner both voted no. And i'm wondering what is in this deal that would make both a conservative and a progressive democrat vote no?

HAMILTON: Well, the progressives didn't like the fact that tax increases were off the table. They felt that addressing the deficits in a responsible way was going to require tax increases. And some of the conservatives were posed in particular representative hunter, because part of the trigger mechanism that may come into play that cannot reach agreement on the next phase of the project would involve a significant cut in defense spending, and that's something that representative hunter is not anxious to see. So people on both the left and the right were disappointed with this agreement. But it seemed to be the best that could be forged at the last minute. And most of the moderates from either parties did steam go along with it.

CAVANAUGH: What about the political fallout? How will this play out politically?

HAMILTON: I think it's hard not to have a little less faith in our elected representatives. I think we saw a real lack of leadership in washington from the top on down. This should have been the kind of thing that responsible groups could say, all right, we disagree on this, but let's at least make sure that social security checks go out. And if we can't even do that, it culls into question a lot of confidence people had. Not just westbound our country but around the world. A year or two ago, nobody would have questioned the security of u.s. debt. When the u.s. government said it was going to do something, people took it at its word. Now, there are more and more doubts. And i think some of those doubts were really a self inflicted wound here.

CAVANAUGH: We have heard conflicting reports as to whether or not the idea that this debate came down to the wire the way it did actually did something to the u.s. credit rating. Once this is your specialty, what is your take on that?

HAMILTON: Well, the credit rating involves both the immediate question of were people who have loaned the government going to get paid back this month, as well as the longer term issue of what's going to happen over time to the deficits. The two things were interacting here. And where i think the danger was in terms of regular people starting to be concerned about this, i had questions from some ordinary folks who normally don't pay that much attention to politics or to the economy were anding me, gee, are my twills safe? What should i be doing with my money and if ordinary people in the street are having that kind of anxiety, that kind of uncertainty, you know you have a real problem.

CAVANAUGH: I am speaking with doctor james ham identity, a professor of economics at UCSD. Of and we're taking your calls on the fallout, really, from the debt ceiling debate. Of course of the deal which has now been agreed upon and signed by president obama. Our number if you'd like to comment is 1-888-895-5727. Or you can comment by way of twitter at KPBSMidday. Joe is on the line from point loam a. Good morning, joe. And welcome -- hi i'm doing great.

New speaker: The reason i called or wanted to comment about the whole process, and it really does have to go down to the wire. But before i make my comment, i'd also like an opportunity to and the professor after he comments a follow-up question. But i think that a lot of it is theatre, and a lot of it has to be done this way. Because each side has to give up something. And you can't go back to your constituency, they could have had the same deal two weeks ago, a month ago, but they couldn't present it two weeks or a month ago because each side would then have to say -- would be subject to their constituency telling them you didn't negotiate hard enough.

CAVANAUGH: Can you give me an idea of the follow-up question, joe? Can you give me an idea of what your follow-up question would be?

New speaker: Yeah, i'm not so sure that the credit rating or people were really worried about it because the people have actually put their money into bonds were still buying treasuries. If you look at the interest rate, if people really felt that the credit rating of the united states was at risk, then the interest rate on treasuries would have gone up. And i'm interested to hear what mr. Hamilton thinks is a reason why people were continuing to buy bonds.

CAVANAUGH: Great, joe, i will ask that question. Thank you so much for calling. First the idea that it has to go down to the wire, just to basically i guess prove to the focuses at home that you're working.

HAMILTON: Well, let me, if i could, combine the two questions because i think they're related. And one of the issues is that i don't think there was a last minute with this deal. The treasury ran out of borrowing authority in may, and they have been playing accounting games since then. They might have gone on with other accounting games if we hadn't seen the deal today. But going to this point, i think, was already too long. And let me give another example of that, apart from bond yields which the caller was talking about. In july we saw a plunge in consumer sentiment. Why was that? Is may have been just a temporary problem with the data. That's possible. But it's also possible that there was a lot of concern on the part of consumers about this whole deal going on in washington. What do consumers do when they're that concerned? They stop spending. And we also see consumer spending starting to dry up the last few months. So i think we didn't wait until the last minute, in my opinion we went way past the last minute. We should have solved this problem months ago. And i believe there are real economic recur cushions that we're suffering right now as a result of letting the process go on as long as it did.

CAVANAUGH: And let me and you about interest rates 'cause i know a lot of people are very concerned about that. We reason learned in one of the programs that we did a couple of days ago on the debt ceiling crisis that interest rates -- the rice in interest rates was the fallout from the one time that the government did go into a default back in 1979. Are we about to see interest rates creeping up because this went so long?

HAMILTON: Interest rates for the u.s. government tonight are certainly quite low. And that means we didn't have an immediate problem in being able to find lenders apart from the self imposed debt ceiling. Now, some people take comfort from that and think we never have to worry about this. I'm not in that camp. I could imagine those interest rates going up over the next few years. When they do get higher, that could be a significant drain on the u.s. treasury. And also, attitudes can change pretty quickly. When you look at these crises in europe, for example, with the peripheral countries, greece, portugal, italy, spain, those interest rates moved very quickly when people lost confidence. And i'm troubled by the fact that we're nibbling away at the edges of confidence in the u.s. as a part of this process, along with the other issues. And i think that was a costly thing to play with. I think that was a costly asset to have given away for no good reason as a result of this whole debacle.

CAVANAUGH: Let me try to squeeze in a last call here. Shane calling from chula vista. Hi shane.

New speaker: Good morning. Or afternoon.

CAVANAUGH: Yes. We have just a few minutes. Actually, could you tell us what your question is?

New speaker: What are the costs to government for each percentage that unemployment goes up? 'Cause it seems like jobs should be the key to fixing our economy.

CAVANAUGH: Jobs, a mass of government support for job system what shane says. Is that something that you expect to see given the debate we just had, doctor hamilton?

HAMILTON: Well, again that's an issue that i think got confused quite a bit in the public discussion. In terms of the goal of controlling the deficit, i see that as a long-run challenge. I don't think we want to be drastically reducing the deficit in 2012. And the reason is when you cut government spending you're taking away the income of somebody, a government worker or somebody who contracts with the government. And that is something we variable need to deal with. But i think we want to do it in a situation when there are private sector jobs for those people available to go to. I am not in the camp that thinks a big cut in immediate spending would somehow boost the economy. I just don't see how that would upon ha. Fortunately in the agreement they just signed, there are very limited cuts in the near term. But i don't see any way that this process or the outcome is going to be helpful for us in terms of getting through the next year in term it is of employment. And the caller makes an excellent point that that really should be our top priority right now.

CAVANAUGH: We have one last question from a caller, and i'm just going to and it for her if she doesn't mind. Why was this such a hard decision?

HAMILTON: It really shouldn't have been. It should have been a clean issue. We decided to spend, we don't have the taxes, we're going to have to borrow more. I think the republicans were looking for leverage out of this. It would be such a disaster if we hadn't raised the debt ceiling. They thought they could get an agreement on other issues out of it. But as i say, i think that's a very unfortunate way to try to reach a consensus in the country about what we're going to do with some very significant challenges.

CAVANAUGH: I have been speaking with UCSD professor of economic, doctor James Hamilton. Thank you so much for coming in.

HAMILTON: Thank you.