On July 5, two governments were hurtling towards the ends of their fiscal leashes. In Washington, the US federal government had already hit its Congressionally-imposed $14.3-trillion debt ceiling and was burning through its last few weeks worth of cash. Meanwhile, in the Yukon, our government was about to use up the spending authority MLAs granted it before their summer break began in March.
The consequences of a fiscal leash-yank are serious. In the US, the government might have to furlough employees and stop Medicare, Social Security and veterans’ cheques. The US would also default on its debt, since it wouldn’t be able to borrow more money to pay off old bonds coming due. And since US Treasury bonds are the bellwether of the global money market, this would cause an even bigger crisis than Lehman. Banks would fail, global interest rates would go up and we might be plunged into a real depression.
If the Yukon government ran out of money, equally calamitous events would result. OK, maybe not quite so calamitous. But at the very least a minor unpleasantness would occur.
The good news for the Yukon is that we have “warrants.” While Washington politicians are sweating up three shirts a day in the capital’s muggy summer heat bickering over the US debt ceiling, we haven’t even had to call our MLAs back from the lake. Yukon Commissioner Doug Phillips just signed a $46-million Commissioner’s Warrant, which is a kind of “get out of jail free” card when premiers run short on pocket money.
He may have gently chided the government for bad planning. After all, how did they run out of spending authority when they just had a legislative session in March? But if he did, he kept it quiet. No drama, unlike Washington where the representatives of the people have puffed up a full-blown crisis for themselves.
Democratic purists may deplore commissioner’s warrants. In our system, the principle of having spending approved by the people’s representatives is fundamental and goes back to the English Civil War and beyond. But let’s face it, if we’d called the MLAs back we all know they would have passed more spending authority. And if anything untoward happens over the summer, MLAs could do something about it when the next session occurs in the fall.
In truth, Barack Obama, the global bond markets and about 300 million Americans would be very happy if Doug Phillips could give the US government a warrant too.
The funny thing about the US debt ceiling crisis is that it is an artificial crisis. When the worrywarts at the Eurasia Group, a respected firm of risk analysts, put out their list of the top 10 things that could ruin your summer, it was heavy on European debt crises, cyberattacks and the usual geopolitical suspects: China, Pakistan and North Korea.
This is because the US debt ceiling is a self-imposed limit, set by Congress itself to remind presidents of who controls the purse strings under the US Constitution. Markets are happy to lend more money to the US, so far at least. The US debt-to-GDP ratio was only 61 per cent in 2010, a respectable figure and more than 50 points better than countries like Greece, Japan or Italy.
The other weird thing about the debt ceiling crisis is that the spending has already been approved by Congress in various budget bills. Just not the borrowing to finance it.
This is sort of like you and your spouse agreeing on a $5,000 renovation to the kitchen. The bank OKs your loan. But when your spouse goes to Home Hardware to spend the money you freak out because you don’t want to go any further into debt.
All it would take is a quick vote in Congress to make the crisis go away. The long-run problem of reducing the US deficit would remain, but risks of a major global economic calamity when the US cash runs out on August 2 would be eliminated.
The problem is the Tea Party, personified by around 50 newly elected Republican congressmen. Think of them as duller and less telegenic versions of Sarah Palin. They have very strong convictions and are not very interested in data. To make it worse, they are inherently suspicious of “elites” and “experts.” They instinctively want to disagree with anyone with a lot of experience or fancy economic research.
Obama has presented a very reasonable package to cut the deficit by $4 trillion over 10 years, with most of the savings coming from spending cuts. In my view, it may even be too heavily weighted to spending cuts instead of tax increases. But the Tea Party congresspersons won’t accept it because it includes new tax revenues. They want all or nothing, and are willing to risk a global crisis over it.
They claim to care about jobs, but don’t mind killing thousands of jobs with government spending cuts in the hope that lower taxes will create more jobs in the future. They hold up Ronald Reagan as an idol, but ignore the fact that he raised taxes many times to fix budget deficits.
It’s hard to avoid the conclusion that they care only about rich Americans, or want to destroy a Democratic presidency even if it causes misery to millions of Americans.
In the past, our American friends have usually managed to avert disaster at the last minute. As Winston Churchill said, “The Americans will always do the right thing … after they have exhausted all the alternatives.”
We have to hope the Washington politicians manage to make a deal before August 2. Because if they don’t, not even Doug Phillips can save us.
Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.