The Daily Blog

Prolonged Government Shutdown Could Wither Confidence And Even Trigger Recession.

An extended federal government shutdown could devastate the U.S. economy by dealing a blow to Americans’ confidence, experts said Tuesday.

If lawmakers cannot reach agreement on a bill to fund the government by April 8, a broad array of federal programs will come to a halt. Although most shutdown plans remain classified, during the last major federal government shutdown in 1995, certain health services were shut down. Court cases were delayed. And federal workers were furloughed. This time around, some fear low-income families will miss crucial government payments. But there is another consequence that could make all of those challenges far worse: The economy could slip back into recession.

Already, Americans face a host of economic woes. The unemployment rate remains high. Home prices are still falling, aggravating a widespread foreclosure crisis. Oil prices are rising, pushing transportation costs steadily higher and tearing precious resources from the economy.

In this context, a prolonged federal shutdown would drain Americans’ confidence in their government, hobbling spending, borrowing and investment — and pushing the economy toward recession, said Mark Zandi, chief economist of Moody’s Analytics.

“Confidence is already very, very fragile,” said Zandi, who has been an economic adviser to both Republican and Democratic lawmakers. “A very short shutdown would be manageable, but the damage that it would do to the confidence in the economy would quickly mount with each passing day.”

After about two weeks, that loss of confidence would “be fodder for a new recession,” Zandi wrote in a report last month. On Tuesday, he said that report remains as applicable as ever.

Republican lawmakers have warned that, if the government does not rein in federal spending, it could incite a crisis of confidence among investors in U.S. debt, which could make financing U.S. debt much more expensive. But economists say public confidence could fast wither if Congress fails to pass a budget for the remainder of the fiscal year, wounding the economy from the inside.

Economic strains at home, the conflict in Libya, and the continuing crisis in Japan have already made Americans worried. Both major indices of consumer psychology plummeted this month: On Friday, Reuters and University of Michigan said their consumer sentiment index fell in late March to its lowest level since November 2009, down from February’s three-year high. On Monday, the Conference Board said its index of consumer confidence fell sharply in March, reversing two months of strong gains.

Confidence has far-reaching economic implications. It affects consumer spending, which drives about two-thirds of U.S. economic activity. Confidence also influences whether an entrepreneur will take out a loan to expand a business, or whether an investor will provide a fledgling company with capital. In the stock market, where trillions of dollars are at stake, investors’ decisions are often influenced by a feeling of confidence.

“Even though the actual direct effects of a two-week government shutdown may not seem like such a big deal, it could trigger a mass panic or sell-off, or other types of market dynamics that could be really hard to predict or control,” said Andrew Lo, professor of finance at the MIT Sloan School of Management.

He added that Americans might “start wondering whether or not government works at all.”

On a short-term basis, the strain from a government shutdown would occur on a micro level, as struggling families would go without payments, and workers would be forced to stay home. But these issues would most likely have little broader impact on the economy during the first few days of a shutdown, said Alec Phillips, an economist at Goldman Sachs.

And not all aspects of government would be affected. Functions deemed “essential,” such as national security, would continue.

Some economists are skeptical that a shutdown would affect the broader economy.

“In many respects it’s the bureaucracy that shuts down — the statistical agencies that collect and report on the state of the economy and commerce, various kinds of permitting and approvals,” said Brian Bethune, chief financial economist for North America at IHS Global Insight. “These shutdowns have happened before, and they really haven’t had that big of an impact on the economy.”

During the last major government shutdown, under President Bill Clinton, confidence dipped. The freeze began in December 1995 and lasted through January. During that period, consumer confidence dropped 10.8 points, which at the time was its biggest monthly fall in nearly four years, according to the Conference Board’s records.

The economic consequences, at that point, were minimal. The Standard and Poor’s 500 stock index, after falling in January 1996, soon rebounded.

But this time around, a shutdown would occur during a period of historic weakness.

“It could be a nonevent, in which case everybody takes a two-week vacation, and they’re back to normal afterward,” Lo said. “Or it could turn into something much more ugly.”

Social Security Fund Will Be Drained by 2037.

WASHINGTON - Social Security’s finances are getting worse as the economy struggles to recover and millions of baby boomers stand at the brink of retirement.

New congressional projections show Social Security running deficits every year until its trust funds are eventually drained in about 2037.

This year alone, Social Security is projected to collect $45 billion less in payroll taxes than it pays out in retirement, disability and survivor benefits, the nonpartisan Congressional Budget Office said Wednesday. That figure swells to $130 billion when a new one-year cut in payroll taxes is included, though Congress has promised to repay any lost revenue from the tax cut.

The massive retirement program has been feeling the effects of a struggling economy for several years. The program first went into deficit last year, but the CBO said at the time that Social Security would post surpluses for a few more years before permanently slipping into deficits in 2016.

The outlook, however, has grown bleaker as the nation struggles to recover from the worst economic crisis since Social Security was enacted during the Great Depression. In the short term, Social Security is suffering from a weak economy that has payroll taxes lagging and applications for benefits rising. In the long term, Social Security will be strained by the growing number of baby boomers retiring and applying for benefits.

The deficits add a sense of urgency to efforts to improve Social Security’s finances. For much of the past 30 years, Social Security has run big surpluses, which the government has borrowed to spend on other programs. Now that Social Security is running deficits, the federal government will have to find money elsewhere to help pay for retirement, disability and survivor benefits.

“It means that Social Security is increasingly adding to our long-term fiscal problem, and it’s happening now,” said Eugene Steuerle, a former Treasury official who is now a fellow at the Urban Institute think tank.

It’s a bad time for the nation to be hit with more financial problems. The federal budget deficit will surge to a record $1.5 trillion flood of red ink this year, congressional budget experts estimated Wednesday, blaming the slow economic recovery and a tax cut law enacted in December.

A debt commission appointed by President Barack Obama has recommended a series of changes to improve Social Security’s finances, including a gradual increase in the full retirement age, lower cost-of-living increases and a gradual increase in the threshold on the amount of income subject to the Social Security payroll tax.

Obama, however, has not embraced any of the panel’s recommendations. Instead, in his State of the Union speech this week, he called for unspecified bipartisan solutions to strengthen the program while protecting current retirees, future retirees and people with disabilities.

Senate Republican leader Mitch McConnell of Kentucky said he is ready to work with Obama on Social Security and other tough issues.

“I take the president at his word when he says he’s eager to cooperate with us on doing all of it,” McConnell said.

Social Security experts say news of permanent deficits should be a wake-up call for action.

“So long as Social Security was running surpluses, policymakers could put off the need to fix the program,” said Andrew Biggs, a former deputy commissioner at the Social Security Administration who is now a resident scholar at the American Enterprise Institute. “Now that the system is running deficits, it simply becomes clear that we need to act on Social Security reform.”

More than 54 million people receive retirement, disability or survivor benefits from Social Security. Monthly payments average $1,076.The program has been supported by a 6.2 percent payroll tax paid by both workers and employers. In December, Congress passed a one-year tax cut for workers, to 4.2 percent. The lost revenue is to be repaid to Social Security from general revenue funds, meaning it will add to the growing national debt.

Social Security has built up a $2.5 trillion surplus since the retirement program was last overhauled in the 1980s. Benefits will be safe until that money runs out. That is projected to happen in 2037 - unless Congress acts in the meantime. At that point, Social Security would collect enough in payroll taxes to pay out about 78 percent of benefits, according to the Social Security Administration.

The $2.5 trillion surplus, however, has been borrowed over the years by the federal government and spent on other programs. In return, the Treasury Department has issued bonds to Social Security, guaranteeing repayment with interest.

Social Security supporters are adamant that the program will be repaid, just as the U.S. government repays others who invest in U.S. Treasury bonds.

“It’s an IOU that is backed by Treasury bonds and the faith and credit of the United States government,” said Sen. Bernie Sanders, I-Vt. “It is the same faith and credit that enables us to borrow from rich people and from China and from other countries. As you well know, in the history of this country, the United States has never defaulted on one penny owed to a creditor.”

Federal Budget Deficit on Track to Hit Record $1.5 Trillion.

WASHINGTON — A continuing weak economy and last month’s bipartisan tax cut legislation will drive the government’s deficit to a record $1.5 trillion this year, a new government estimate predicts.

The eye-popping numbers mean the government will continue to borrow 40 cents for every dollar it spends.

The new Congressional Budget Office estimates will add fuel to a raging debate over cutting spending and looming legislation that’s required to allow the government to borrow more money as the national debt nears the $14.3 trillion cap set by law. Republicans controlling the House say there’s no way they’ll raise the limit without significant cuts in spending, starting with a government funding bill that will advance next month.

The CBO analysis predicts the economy will grow by 3.1 percent this year, but that joblessness will remain above 9 percent this year. Dauntingly for President Obama, the nonpartisan agency estimates a nationwide unemployment rate of 8.2 percent on Election Day in 2012.

The latest figures are up from previous estimates because of bipartisan legislation passed in December that extended Bush-era tax cuts, unemployment benefits for the long-term jobless and provided a 2 percent payroll tax cut this year.

That measure added almost $400 billion to this year’s deficit, CBO says.

The deficit is on track to beat the record of $1.4 trillion set in 2009. That figure reflected huge outlays from the Wall Street bailout. The nonpartisan budget agency predicts the deficit will drop to $1.1 trillion next year.

“The fiscal challenge confronting us is enormous. To solve this problem, it will require real compromise and a great deal of political will,” said Budget Committee Chairman Kent Conrad, D-N.D. “We need to have both sides, Democrats and Republicans, willing to move off their fixed positions and find common ground.”

The chilling figures come the morning after Obama called for a five-year freeze on domestic agency budgets passed by Congress each year. But those nondefense programs make up just 18 percent of the $3.7 trillion budget, which means any upcoming deficit reduction package - at least one that begins to significantly slow the gush of red ink - will require politically dangerous curbs to popular benefit programs, which include Social Security, Medicare, the Medicaid health care program for the poor and disabled, and food stamps.

Neither Obama nor his GOP rivals on Capitol Hill have yet come forward with specific proposals for cutting such benefit programs. Successful efforts to curb the deficit always require active, engaged presidential leadership but Obama’s unwillingness to thus far take chances has deficit hawks discouraged. Obama will release his 2012 budget proposal next month.

“Somebody is going to have to bite the bullet and get this process going,” said Maya MacGuineas of the Committee for a Responsible Federal Budget, a bipartisan group that advocates fiscal responsibility. “And that somebody has to be the president.”

Obama has pointedly steered clear of the recommendations of his deficit commissions, which in December called for politically difficult moves such as increasing the Social Security retirement age and reducing future increases in benefits. It also proposed a 15 cents a gallon increase in the gas tax and eliminating or scaling back tax breaks - including the child tax credit, mortgage interest deduction and deduction claimed by employers who provide health insurance - in exchange for rate cuts on corporate and income taxes.

“I find the president moving in the same directions as (the deficit commission), certainly the same goals,” said Sen. Dick Durbin, D-Ill., who served on the panel and voted for its controversial findings. “Stay tuned.”

CBO predicts that the deficit will fall to $551 billion by 2015, down to a sustainable 3 percent of the size of the economy.

But under its rules, the CBO assumes that recently extended cuts in taxes on income, investment and people inheriting large estates will expire in two years. If those tax cuts, and numerous others, are extended, the deficit for that year would be almost three times as large.

Tax revenues, which dropped significantly in 2009 because of the recession, have stabilized. But revenue growth will continue to be constrained because of the slow pace of economic growth and the extension of Bush era tax cuts passed by Congress in December. The CBO projects revenues to be 6 percent higher in 2011 than they were two years ago, which will not keep pace with the growth in spending.As a share of the economy, tax revenues in 2011 are projected to reach their lowest levels since 1950. The CBO projects that tax revenues will be 14.8 percent of GDP in 2011, which would be 0.1 percentage point lower than in 2009.

“The United States faces daunting economic and budgetary challenges. The economy has struggled to recover from the recent recession, which was triggered by a large decline in house prices and a financial crisis - events unlike anything this country has seen since the Great Depression,” the CBO report says.

Separately, almost a dozen Republican senators endorsed a proposal by Orrin Hatch, R-Utah, to amend the Constitution to require a balanced budget. The version is stricter than a bipartisan balanced budget amendment that fell one vote short in the Senate in 1997. It requires a two-thirds vote in Congress to raise taxes, among other provisions backed by tea party activists. No Democrats have signed on to the measure.

Obama’s economic agenda: Boost US competitiveness.

WASHINGTON -Under pressure to energize the economy, President Barack Obama will put job creation and American competitiveness at the center of his State of the Union address, promoting spending on education and research while pledging to trim the nation’s soaring debt.

Obama hopes this framework will woo Republicans as he searches for success in a divided Congress and will sway a wary private sector to hire and spend money it’s held back. The economy is on firmer footing than when he took office two years ago, and his emphasis on competitiveness signals a shift from policies geared toward short-term stabilization to ones with steady and long-term growth in mind.Obama’s challenge will be to find the money and political will to spend it, even as he’s pledged to reduce spending and tackle the mountainous debt. Aides say the president is reviewing the recommendations of his bipartisanship fiscal commission and will emphasize cost-cutting measures.

Some House Republicans have promised to cut $100 billion from the budgets of domestic agencies. They plan to vote next week on a resolution setting appropriations for the rest of the year at 2008 levels, in place before Obama took office.

The White House isn’t saying how much lower spending Obama will call for or where the cuts could come. Still, it’s almost certain that his figures won’t reach the level demanded by the GOP lawmakers.

Obama is expected to frame the competitiveness issue in historical and patriotic terms, calling for a new Sputnik moment — a reference to the Soviet Union’s 1957 launch of the first satellite, ahead of the U.S. He intends to say the U.S. is again facing challenges from abroad, this time from fast-growing economies in China, India and throughout Southeast Asia.

In his travels to Asia and during Chinese President Hu Jintao’s recent trip to Washington, Obama has said he’s been struck by the rapid rise of the region and the laser-like focus on competing in the global economy.

“They are thinking each and every day about how to educate their work force, rebuild their infrastructure, enter into new markets,” Obama said in November, after wrapping up a 10-day Asia trip. “We should feel confident about our ability to compete, but we are going to have to step up our game.”

As part of that effort, Obama announced a restructured presidential advisory board Friday that will focus on increasing employment and competitiveness. He named Jeffrey Immelt, the top executive at General Electric, to it.

The White House sees competitiveness as an issue that can win broad support from business, labor and Republicans.

GOP lawmakers traditionally have backed the types of trade deals and research and development efforts that Obama is promoting. Senate Minority Leader Mitch McConnell, R-Ky., appeared to give the president an opening when he said last week in a speech that “my advice to my colleagues is if the president is willing to do what we would do anyway, then we should say yes.”

The White House has tried to court business since Democrats’ defeats in the November elections, and competitiveness is a priority for that sector.

Jay Timmons, president of the National Association of Manufacturers, said concrete action must back up the rhetoric from either party before businesses would commit to stepping up spending and hiring.

“Ultimately the proof of whether this is merely positioning for elections or is a true commitment to long-term growth and competitiveness will be in the details,” he said.