The Sleeper on the Fiscal Cliff

The Congress has gone dark until November 13, when it will return in a “lame duck” session.  Some people had harbored hopes that the lame duck would solve all of our budgetary problems.  That was never on.  (See “What the Lame Duck Can Do” and “Where the Budget Is Going in 2012 for the upside and the downside limits of the lame duck.)  And as difficult as it will be merely to avoid the fiscal cliff, there is one more problem lurking just at the end of the year.

We are going to hit the debt limit again.  As part of the debt deal last year, the statutory limit was increased by just enough to get us through the election.  Well, that’s just about where we are.  The limit is, of course, somewhat malleable.  As the Treasury approaches the limit, the Secretary has certain tools at his disposal to open up additional borrowing authority.  Those tools are limited, and in fact have become more limited over time.  (See Delays Create Debt Management Challenges...” from the Government Accountability Office (GAO), which catalogs those tools and explains how their power has shrunk.)

The criticality of projections of the nation’s debt subject to limit is far greater than those of the budget deficit itself, even though predicting those two numbers is essentially the same task.  The difference is the functional equivalent of the contrast between games of horseshoes and hand grenades.  If budget forecasters one month out predict the ultimate deficit number to within $20 billion, they pat themselves on the back for hitting the target.  On the other hand, if Treasury’s staff at the Bureau of the Public Debt are $20 billion off, the consequence could be an unexpected default.  At this point, the range of uncertainty about the date of our next encounter with the statutory limit is in practical terms enormous.  It is likely that the nation will need to resolve the issue before the turn of the year.  It is certain that the nation will be far better off, with much less uncertainty in the markets, if we do.

This takes us back to the ugly days of last summer, when the Treasury was locked in an unwanted flirtation with default.  The two political parties in the Congress lived in alternative realities.  One side saw a potentially catastrophic threat to the nation’s financial credibility and its ability to borrow at safe-haven interest rates; the other believed that the closer the nation came to insolvency, the more serious about its fiscal troubles it would appear.  One never knows the counterfactual for certain, but when the deal to raise the debt limit finally was cut, we were by all appearances within hours of running out of cash.  Many experts hope we never come that close to perdition again.  (See “Debt Limit Slouches…” from the Bipartisan Policy Center for an authoritative reading of the likely status.)

With enormous tax cuts set to expire and massive automatic spending cuts ready to trigger on, there will be many big chips on the table in the coming lame duck session of the Congress.  But the debt limit will be yet another part of the stakes in that big-money poker game.  With the amount of the debt highly unpredictable, especially around the turn of the year which involves some large internal federal government transactions, this encounter with the limit will be another dangerous element of the contest.  Many experts would say that this issue should be resolved quickly and quietly, given the already fraught financial environment.

 

 ADDENDUM: THE MONTHLY EMPLOYMENT SITUATION REPORT

 There has been much noise in the blogosphere about this month’s employment situation report, and particularly the drop in the unemployment rate.

Background:  The monthly employment report is based on two surveys, one of employers, and the second of households.  The employer survey yields each month’s “new jobs created” number.  The household survey provides the figures for the unemployment rate.  Years ago, attention focused on the unemployment rate.  However, given considerable statistical variability and the vagaries of households’ responses to fairly complex questions, the press has begun to focus on the employers’ survey and its number of net new nonfarm payroll jobs as the more reliable indicator.

There are complications, however.  The Bureau of Labor Statistics’ sample of employers is updated only once a year for new firms that were created, and old firms that went out of business.  From month to month, therefore, the employer survey is adjusted for an estimate of business creation.  In theory, however, the household survey should identify the individuals who went to work for new businesses (and others who lost their jobs in failed businesses), and so should be immune to that source of error.  There remains, however, the inherent variability in the household survey.

In my experience, the two surveys diverge the most when the economy is at cyclical turning points or otherwise in periods of transition.  At those times, economists scratch their heads and sort through the statistical entrails to try to discern the true meanings of the data.

What knowledgeable economists do not do, however, is question the honesty and integrity of the consummate professionals at the Bureau of Labor Statistics.  That agency has been tested by political pressure in the past, and has proven impervious.  In fact, those who have tried to influence the numbers have invariably come off much the worse for their efforts.

But those episodes date back 40 years or more.  Presidential administrations long ago learned their lesson, and do not attempt to use the BLS for their own purposes.  Those statisticians might suffer from a bum sample or from incorrect answers from survey respondents who did not read the instructions carefully.  But that is the limit of the inaccuracy that the public can expect.  Statements to the contrary are uninformed.

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