Economic Commentary
Daniel Laufenberg, Ph.D.

Numerous economic data series are released between the publication dates of the Laufenberg Economic Quarterly (LEQ). Therefore, this page is designed to provide commentary on the more recent data and their implications for the economic outlook.


Furloughed! (October 25, 2013)

You may not have noticed, but I decided to take a self-imposed furlough in recent months. Only essential activities were performed, which include updates to the LQ Indicator and the third-quarter issue of the Laufenberg Economic Quarterly. Non-essential activities, such as updates to the commentary and perspectives pages of my website were put on hold. As silly as that may sound, it isn't any sillier than the self-imposed government shutdown and the furloughs that followed.

Actually, I didn't comment on the shenanigans in Washington for several reasons. First, the situation was very fluid, with new developments reported daily. Second, I have never been very good about predicting what politicians will do. The closest I came was to suggest in an October 11 note to a client that "the debt ceiling deadline would be avoided,", if only temporarily. "I am very doubtful that a 'grand' bargain of any sort will be reached, which means that we most likely will have to go through this again." Third, I didn't think I had anything to say that hadn't already been said by others. Finally, I was extremely frustrated by the egregious behavior of policymakers because it was all political—it was not a question of our ability to pay but rather our willingness to pay, which seems to be going around these days. What ever happened to honoring contractual obligations if you can?

As many of you know, I have long believed that the debt ceiling should be abolished. Some argue that it serves a valuable service because it prevents the federal government from overspending. Really? I disagree. The federal debt ceiling, which has been in effect in one form or another since 1939, has never stopped federal spending as evident by the huge structural deficit that the U.S. currently faces. Policymakers simply raise it whenever necessary. It is like a self-imposed curfew—it appears to work but only if it doesn't interfere with anything. In fact, in most cases in the past, it has simply provided Congress an opportunity to enact several less popular spending proposals by attaching them to the debt ceiling legislation. Moreover, the debt ceiling, to the extent that it may threaten the safety of the U.S. debt outstanding as it did this time, may be unconstitutional. This refers to Section 4 of the 14th Amendment, which dictates that the "validity of the public debt of the United States ... shall not be questioned." The bottom line is that we need to make Congress accountable for new major spending programs earlier in the process and not wait until it is time to pay for them.

There have been several suggestions floated to reform the federal budget process—some good and some bad. The one I saw that makes no sense to me is passing a biannual budget rather than an annual budget. The only thing that would do is require Congress to pass a continuing resolution less frequently—maybe. It would do nothing about the political fraud of a debt ceiling. On the other hand, one of the proposed changes that I like is to require an explicit source of funding for any new entitlement program. The logic is that you do not redistribute income that you do not have to redistribute—pay as you go only, please!! In this case, it would address the funding issue early in the process rather than ignoring it until it is time to make payments.

I have been asked repeatedly in recent weeks what the impact of the government shutdown will be on the economy. The honest answer is that I don't know exactly but my guess is that it is worth about a quarter of a percentage point on fourth-quarter real GDP growth at an annual rate. Much of the real output that was probably lost during the month of October will be gained back in November but not all of it. Some of it will be lost forever—both on the income and the expenditures sides of the ledger. In addition, the so-called deal was not a permanent agreement, suggesting that much of the uncertainty of the last few months has not dissipated as much as many claim, since we most likely will go through this whole ordeal once again early next year. The implication is that economic activity still could be curtailed a bit in anticipation of fiscal and monetary policy uncertainty in the months ahead.

For the most part, financial market participants are indifferent to this concern. It seems that the constant flow of liquidity from the Federal Reserve more than offsets the potential drag coming from fiscal policy uncertainty. Indeed, one could go as far as to suggest that the overly accommodative policy of the Federal Reserve has gone a long way to facilitate the fiscal follies in Washington. After all, the artificially low level of interest rates makes it possible for the federal government to continue to borrow because the cost of servicing more debt is less onerous than it would be otherwise. In other words, there is no pain to taking on more debt if the cost of servicing that debt continues to fall (see Chart 1).

chart 1

Of course, this cannot continue forever. At some point, the level of debt outstanding will become so high that it will start to offset any further service-cost saving from lower rates. We may be closer to that point than widely appreciated by the general public. period



For the current economic forecast, as well as other analysis and commentary, please visit the Stonebridge Capital Advisors website.

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The views expressed here reflect the views of Daniel Laufenberg as of the date referenced. These views may change as economic fundamentals and market conditions change. This commentary is provided as a general source of information only and is not intended to provide investment advice for individual investor circumstances. Past performance does not guarantee future results.

2013 Commentary

(current article)
-- October 25, 2013

Doomsday forecasts: Honest people can disagree
-- April 26, 2013

Making sense of the February jobs report
-- March 10, 2013

Growth gyrations continue
(current article)
-- January 28, 2013

2012 Commentary

Optimism, not irrational exuberance
-- October 15, 2012

Disappointing but far from disastrous
-- July 31, 2012

Assessing the recent weak economic data
-- June 8, 2012

Consensus too pessimistic about everything
-- April 16, 2012

Risks to the forecast
-- March 7, 2012

A good finish to 2011 but still not good enough
-- January 27, 2012

2011 Commentary

More evidence of a strong finish
-- December 22, 2011

Finishing Strong
-- October 14, 2011

Living in interesting times
-- September 8, 2011

A not so pleasant surprise!
-- September 2, 2011

-- August 16, 2011

Debt ceiling politics
-- July 25, 2011

Q2 growth: Another disappointment likely
-- July 14, 2011

Interpreting the ISM manufacturing index and the employment situation report for May
-- June 4, 2011

A slower start to 2011 than anticipated earlier
-- April 14, 2011

Is the dollar's status as the reserve currency at risk?
-- March 21, 2011

More trouble in the Middle East
-- February 26, 2011

Searching for the next debt crisis
-- January 13, 2011

2010 Commentary

What's going on?
-- October 15, 2010

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