PhillyDeals: What happens if there is no debt deal?

Liberty Bell on view at Independence National Historical Park. If Congress fails to reach a deal to raise the national debt limit, national parks and labor inspection offices might close.
Liberty Bell on view at Independence National Historical Park. If Congress fails to reach a deal to raise the national debt limit, national parks and labor inspection offices might close. (GEORGE WIDMAN / Associated Press)
Posted: July 13, 2011

What if President Obama can't cut a deal?

Before an Aug. 2 deadline for getting Congress to boost the government's borrowing power above the current $14 trillion, Republican leaders are holding out for deeper budget cuts and no new taxes.

Obama says the Republicans would cut too deeply, stalling the economy, as 25 million are already jobless or working part time.

Just what happens if August brings no deal? Some possibilities:

The federal government will likely keep paying interest on $13 trillion it owes investors from here to China.

"The risk of not paying would turn the U.S. into Argentina," where interest rates spiked when the government stiffed its bondholders, slowing the economy even more, says Mark Luschini, chief investment strategist at $54 billion-asset Janney Montgomery Scott in Philadelphia.

The government will keep paying Medicare bills and military suppliers, but close national parks, labor inspection offices, and other services. "It would amount to a partial government shutdown," Sen. Pat Toomey (R., Pa.) told colleagues in a Capitol speech.

"We don't have to [default]," said Rep. Michele Bachmann (R., Minn.), who is running for president. Government funds would still be "sufficient to pay for the interest on the debt, [which would] take that issue off the table," she said.

But hitting the debt limit and shutting offices "would put a doubt in some investors' minds. It's a situation I would urge policymakers to avoid," said Joe Davis, chief economist for $1.3 trillion-asset Vanguard Group, the Malvern mutual-fund company.

"The economy, the financial markets, the equity markets would come under increased pressure," stalling job growth, he said.

In the short run, Davis says he isn't worried about America's ability to pay its bills. "Tax revenues should rebound with the modest increase in economic activity," he said. The recession is slowly ending, as recessions do.

Davis is more worried about the long-run impact of the nation's yawning deficit, the gap between what it raises in taxes and what it spends, and the growing cost of paying interest, even at record-low rates, for what we owe.

But why now? Government layoffs in New Jersey and other states have already slowed the recovery. If it took the entire last decade to build up today's deficit, does it have to be fixed this summer?

Obama wants to boost taxes on millionaires and start projects such as a National Infrastructure Bank that would make it easier for private companies and governments to borrow and put people to work rebuilding highways, bridges, railways, ports, and communications systems.

That would make it easier for the president to get reelected next year, one reason for cynical Republicans to say "No."

"If unemployment remains high, that's not favorable to the sitting president," Luschini said.

Mismatch

Not everyone believes last week's weaker-than-expected jobs report. "The labor market did not fall apart in June," writes bank analyst Richard X. Bove, no friend of Obama's tax and regulatory policies.

Pulling apart the two reports that fed the numbers, Bove finds the Census Bureau's dismal survey of residents less credible than the Bureau of Labor Statistics' survey of bosses, "which shows employment growing almost four times faster."

Some employers can't find enough workers. Josh Kopelman, partner at Conshohocken-based First Round Capital, one of the nation's busiest venture-capital firms, says more than 500 mostly technical positions advertised on his firm's website remain unfilled.

"It's competitive, to find talented people," agrees Paul Boni, chief executive at Safeguard Scientifics, which says employment at the biotech and software companies it owns has risen to 1,500, from 900 at the start of the recession. Boni says employers want to recruit software Ph.D.s - scarce in the United States but hard to import, with today's anti-immigrant mood in Washington.

This imbalance between Americans who want jobs and the jobs American companies create raises deep questions that won't get solved by politicians daring one another to stop the government.


Contact columnist Joseph N. DiStefano at 215-854-5194 or JoeD@phillynews.com.

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