Bloomberg News

United States of Crisis Seen Costing Jobs, Wasting Money

January 23, 2013

United States of Crisis Seen as Costing Jobs While Wasting Money

People walk down steps in front of the U.S. Capitol building in Washington. Photographer: David Rogowski/Bloomberg

With the stroke of his pen the day after New Year’s, President Barack Obama extended a $5 billion farm-subsidy program that he opposes and many farmers say they no longer need.

The day before, the U.S. Senate and House -- where there is broad agreement that the direct farm payments program should be scrapped -- both voted to keep the money flowing as part of a last-minute agreement to avert most of more than $600 billion in automatic tax increases and spending cuts slated to take effect this month.

The story of how an agriculture program widely seen as outdated lived to see another day in a capital obsessed with budget-cutting highlights the unintended consequences of the dysfunction that has taken hold in Washington. Obama and congressional Republicans have settled into what economists, government officials and lawmakers from both political parties agree is a damaging pattern of governing by crisis, to the detriment of economic growth, the government’s standing at home and abroad, and the nation’s fiscal health.

“Predictability and the rule of law are the key elements to a successful economy and a successful country, but the new normal is a crisis economy,” said former Defense Secretary William S. Cohen, a Republican, in an interview. “It means that other countries that look to the United States to be the great stabilizing force that we’ve been start to have doubts about that. It’s a crisis in the political structure, and it means you’re on the road to economic decline.”

Not Credible

Obama said in his Jan. 14 news conference that the current pattern is “not a credible way to run this government. We’ve got to stop lurching from crisis to crisis to crisis.”

Congressional Republicans agree that failing to govern unless they are staring down an emergency is no way to do business. “Last-minute deals are just not a way to run the country,” said Senate Minority Leader Mitch McConnell of Kentucky, the Republican to whom it has fallen to broker many of the recent 11th-hour agreements with the White House, in a Jan. 9 interview.

Yet there is little evidence that the pattern will change any time soon. In the coming months, Obama and Congress are facing more crisis-forcing deadlines: the need to raise the nation’s $16.4 trillion debt limit, the scheduled imposition in March of $110 billion in across-the-board spending cuts, and the March 27 expiration of the current temporary measure to fund the entire government.

Uncertainty Threat

“Uncertainty is one of the greatest threats to national security -- fiscal uncertainty,” Defense Secretary Leon Panetta told U.S. troops in Vicenza, Italy, Jan. 17, calling the three looming deadlines -- the second of which could trigger at least $45 billion in defense cuts -- a “perfect storm.”

While House Republicans succeeded today in passing a measure that would delay the debt-ceiling deadline for three months, they have indicated they may use the specter of a future default or government shutdown as opportunities to force spending cuts that Obama has so far refused to countenance.

“Instead of short-term management of self-inflicted fiscal crises, the president believes there is now an opportunity to strengthen the economy by putting the nation on a sounder fiscal path,” the White House said yesterday in its official statement on the temporary debt-limit bill, which also suggested Obama would still sign it.

Cuts, Taxes

Obama and Democrats say they will agree to further budget reductions only if paired with additional tax revenues, which Republicans call unacceptable.

Congressional Republicans “are determined to try to take advantage of what they believe to be the leverage afforded by these deadlines to force policy changes they could not get through normal politics,” said Ronald Peters, a political scientist at the University of Oklahoma’s Carl Albert Congressional Research and Studies Center. “Once the president and Congress begin to think in terms of leverage points instead of policy, the whole system gets out of kilter.”

It also gets costlier. Unable to agree on annual spending bills to fund the government, Congress and the president have settled for stopgap measures -- known as “continuing resolutions” -- that do little more than maintain current budget levels and breed inefficiencies within agencies.

“Imagine managing -- we are a Fortune 250 company -- where you never know your budget from month to month,” Acting U.S. Commerce Secretary Rebecca Blank told reporters Jan. 14 while touring the North American International Auto Show in Detroit. “It’s incredibly destructive.”

Wasted Money

According to estimates prepared by the House Appropriations Committee, the failure to enact a full-year spending measure last year meant, for instance, that the Defense Department couldn’t award a five-year contract for the CH-47 Chinook Helicopter that would have saved the agency $423 million or a multiyear contract for the V-22 Osprey tilt-rotor aircraft that was projected to save $762 million because the negotiated pricing agreements expired in December.

Reforms to an affordable housing program estimated to save taxpayers $300 million were also pushed off, according to the panel, while U.S. Customs and Border Protection was left with a $315 million shortfall for salaries and expenses that could harm efforts to guard the nation’s borders.

In an April 2011 speech at the Heritage Foundation, Deputy Defense Secretary Ashton Carter said the stopgap budgeting “has cost us billions,” adding “a dollop of cost overhead to everything we do. It is like a hidden tax.”

Ironic Outcome

“The irony of this is that we’re in this situation because people say they want to reduce government spending; this has the impact of increasing government spending,” Democratic Representative Robert E. Andrews of New Jersey said in an interview. “If you’re operating on a three-month-to-three-month budget, you can’t spend for the long haul. You’re always buying for the short term.”

The persistent uncertainty about tax and regulatory policy, as well as federal spending levels, has hindered economic recovery, according to analysts who have studied it. Steven J. Davis, an economist at the University of Chicago Booth School of Business, built an Economic Policy Uncertainty index to gauge the impact. In a Jan. 1 paper, Davis said, based on his index, that higher levels of policy uncertainty since 2006 have corresponded with as many as 2.3 million fewer jobs created and 2.3 percent less in gross domestic product growth.

“High levels of uncertainty, including uncertainty associated with fiscal policy and other policy matters, tend to slow investment, economic growth and consumer spending,” Davis said in an interview. “We don’t think it’s too surprising that this has led to lower employment growth, lower investment and lower output.”

Policy Distraction

In a time of emergency legislating, substantive policy making is starved out, making it difficult to see how Obama can make any progress on the major issues on his second-term agenda, including immigration and gun control, that require congressional action.

In addition, the practice has taken its toll on the government’s reputation. In a Gallup poll of 1,011 adults conducted Jan. 7-10, 18 percent of Americans named dissatisfaction with government as their top concern -- the third most commonly cited problem, outpacing unemployment. That level of frustration is the highest recorded by Gallup since the Watergate era of 1974.

“This is a distraction from everything else, and it undermines basic capacity to believe in the system,” said Douglas Holtz-Eakin, a former director of the Congressional Budget Office and chief economic adviser to 2008 Republican presidential nominee John McCain.

Bond Buyers

U.S. Treasury bond investors -- who most directly bear the risk of a government default yet have not shown alarm about the potential for a debt-ceiling confrontation -- are suffering from “beaten bond market syndrome,” Holtz-Eakin said. “We’ve been beating them so hard that they’ve acquiesced to the violence and have come to expect that there will be an 11th hour deal, so they are fine until the 11th hour,” he explained. Still, he added, “the failure to resolve the fiscal side of things prolongs the inability to accomplish an exit from extraordinary monetary policy.”

The debt limit has been periodically raised since its creation in 1917, when Congress and President Woodrow Wilson authorized the Treasury to issue long-term securities to help finance entry into World War I. Since 1960, Congress has raised or revised the limit 79 times, including 49 times under Republican presidents, according to the Treasury Department, noting the U.S. never has defaulted on its obligations.

Lower Yields

Yields on 10-year Treasury notes, a benchmark for everything from mortgages to corporate borrowing costs, were at 1.84 percent at 3:32 p.m. Washington time, down from more than 5 percent in 2007 before the worst financial crisis since the Great Depression and compared with the average of 6.79 percent since 1980.

Lawmakers in both parties say it’s not the way to make policy either, as the extension of the farm subsidies illustrates.

In the absence of a broader rewriting of the five-year farm bill, Congress moved Jan. 1 to simply extend the old one -- including payments that farmers acknowledge are no longer politically palatable with commodity prices high and the government starved for revenue. The program, created in 1996 to help keep farmers in business in times of low commodity prices, pays them regardless of whether or how much they produce.

Farm Subsidy

Farmers “recognize that we have taken enough bludgeoning in the press that they are no longer possible,” Mary Kay Thatcher, a lobbyist for the American Farm Bureau Federation, said of the direct payments. The group supports a revamped farm law that would “put some of that money toward deficit reduction,” she added.

That prospect was pushed off with enactment of the New Year’s Day deal, which extended farm programs through Sept. 30. Also postponed was what came to be known in agriculture circles as the “dairy cliff” -- a threatened sudden increase in milk prices to $7 a gallon that would have resulted from expiration of current agriculture law.

While the U.S. Department of Agriculture could have held off the price-increase at least temporarily, the current dysfunction incentivizes interest groups, lawmakers and agencies to manufacture emergencies to increase their chances of getting priorities addressed, said Ryan Alexander, president of the anti-government waste group Taxpayers for Common Sense.

“It just goes to show you that governing by crisis affects everything,” Alexander said. “The evidence suggests that we will continue to do crisis-management, so if you want to get something done, create a crisis -- or at least make it look like a crisis.”

To contact the reporter on this story: Julie Hirschfeld Davis in Washington at   or Jdavis159@bloomberg.net.

To contact the editor responsible for this story: Jeanne Cummings at jcummings21@bloomberg.net


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