Roughhousing in Washington : Much Ado, But Where’s the Crisis?

Nothing is more embarrassing than anticlimax. House Speaker Newt Gingrich (R-Ga.) and President Bill Clinton drove the government over the cliff last week--”like two kids playing chicken,” as the headline writers had it--but the cliff turned out to be a little sand hill.

Tourists couldn’t get into Alcatraz or the Statue of Liberty. The toilets were closed in the national parks. Social Security offices stopped processing new applications. But the checks went out on time. Medicare payments were made as usual. The military, the FBI and the air-traffic controllers were all on the job.

Gingrich and Senate Majority leader Bob Dole (R-Kan.) will probably move legislation this week to clear up any residual inconveniences of the “great government shutdown,” such as missed garbage collections in Washington and those closed Social Security offices. Most important of all, Treasury Secretary Robert E. Rubin carried on the federal government’s normal financial-market operations, selling new federal debt as needed to pay off issues that were falling due.

The confrontation emerged when Clinton vetoed two separate pieces of Republican legislation. The first was a continuing resolution to allow the government to keep operating in the absence of annual appropriations, which were supposed to have been passed by Oct. 1. The catch was that the continuing resolution incorporated the GOP budget-balancing plan, which Clinton objects to. The reverse catch is that the most important things the government does, including paying Social Security checks and maintaining the military, don’t require annual appropriations, anyway.

Aside from petty annoyances, the biggest economic effect of the “shutdown” is that restaurants and hotels are hurting from all those federal employee conferences that have been put on hold. The 800,000 federal employees who have been furloughed, of course, are also losing pay, but everyone expects Clinton and Congress will make them whole. Federal employees, after all, are an important voting bloc.

Far more serious than furloughed bureaucrats was the implied threat that the government would default on its debt, for Clinton also vetoed legislation raising the debt ceiling, since it contained what he said were unacceptable GOP conditions.

Because the government has been running deficits for many years, it must continually raise the legal ceiling on its total authorized debt in order to carry on borrowing to meet its cash needs and to pay off old debt falling due. Total outstanding borrowings were scheduled to bump against the current ceiling of $4.9 trillion last week.

Without new borrowing authority, presumably, the government would have defaulted on its interest and principal repayments. That would have been truly cataclysmic. U.S. Treasury obligations are still the backbone of investment portfolios around the world. Even a short delay in meeting federal debt obligations could raise interest rates everywhere--and an extended delay could create financial chaos.

But the biggest lender to the federal government is, believe it or not, the federal government. About 40% of all outstanding federal debt is owned by federal agencies of one sort or another, mostly by 160-odd trust funds, starting with the mammoth Social Security and Medicare trust funds and the Civil Service and federal employee retirement funds. Since almost all those agencies are under the Treasury secretary’s direct or indirect control, no one ever really doubted that he could work his way around the debt-ceiling limitations.

Last week, the retirement funds simply sold back some of their treasuries for cash--thus automatically reducing the national debt enough so Rubin could continue his refunding operations. The retirement funds would normally suffer the loss of interest earnings by increasing their cash balances, but there is legislation on the books to make up their interest losses after the debt ceiling is raised again--this “crisis” was planned for years ago. The valid criticism of Rubin is that, by loyally making the confrontation sound worse than it is, he may have contributed to a slippage in the overseas value of the dollar.

The Republicans seem to have been gambling that the default threat would sufficiently scare the financial markets so that Clinton would be forced to back away from a confrontation. Even in the absence of a credible default threat, the financial markets might have been expected to react negatively to the implication that Clinton is “soft” on budget deficits. Republicans probably don’t have the votes to pass the programmatic cuts over a presidential veto in hot-button issues like Medicare. Shoehorning their budgetary priorities into continuing resolutions would be a way to enact their program wholesale, and through the back door.

But there seems to be little market anxiety over the current level of government budget deficits, and it’s not hard to figure out why. Budget deficits are supposed to be bad for the economy, because government borrowing sops up private savings and “crowds out” private borrowers. The cost of raising money--that is interest rates--is forced up, private investment collapses and the economy wallows in the shallows.

The U.S. economy is supposed to be particularly sensitive to deficits. Private savings are lower than almost anywhere else, and the country is supposed to suffer from a chronic capital shortage.

But, in fact, it’s hard to find any evidence to support that conventional picture. The cost of raising new capital in America is the lowest it has been for decades. Tens of billions of new money is pouring into mutual funds each month. The stock and bond markets are roaring to new highs almost weekly. This is not overseas money--the Japanese have been withdrawing their capital for years to deal with their financial crisis at home. This is money being pulled out from American mattresses.

In all likelihood, the impression of the low savings rate is simply a counting phenomenon. The government does not count realized gains in real estate or in the stock and bond markets in its “savings” figures, and leaves out a host of other large numbers, such as contributions to state and local pension funds. Adding these factors moves the U.S. savings rates into very respectable territory. Whatever the right counting conventions might be, it is very hard to argue that there is a shortage of investment capital in America.

GOP budget-balancing rhetoric would be far easier to swallow if they were not, at the same time, pushing a big tax-cut program that is disgracefully skewed toward upper-income taxpayers. It is easy to forget that, years ago, top-bracket tax rates were more than twice what they are now. It is hard to find other examples of a single class of taxpayers being treated so well by their government, and booming capital markets make a mockery of the argument that more tax cuts are needed to improve the investment environment.

So far, the financial markets have shrugged off last week’s histrionics--and they are right to do so. While one should never underestimate the mischief that a Congress and the President can do if they really set their minds to it, a good bet is that this confrontation will end with a whimper; that federal employees will dribble back to their jobs, and that government life will get back to normal without anyone admitting he’s backed down. Then the Congress and Clinton can get back to their real job of passing the budget bills for the current fiscal year that are now so grossly overdue.*