FW: Capitol Notes from Chief Economist Diane Swonk: This Town Is Nuts

Good Stuff!!!

This Town Is Nuts...truer words have never been spoken!

John Broussard
State of Louisiana
Department of the Treasury

-----Original Message-----
From: Bill Merritt [mailto:bmerritt@bankers-bank.com]
Sent: Friday, October 11, 2013 8:55 AM

-----Original Message-----

This Town is Nuts

I am in Washington, D.C. for the IMF/World Bank meetings, and all I can say is, being here brings home the reality that we all would like to ignore: this town is nuts.

For years, an unprecedented influx of lobbyists and the money that comes with them made this city and its surroundings immune and somehow untethered from the reality and pain the recession and recovery delivered to the rest of the nation. Home prices were soaring, well ahead of the national averages; construction (especially at the high end) was booming; and, the recovery was good, really good, for some here. Unemployment in the Washington, D.C. metropolitan area recently edged up to 6%, which many consider full employment.

Two Towns: In contrast, the situation has deteriorated fairly rapidly for government workers, which helps to differentiate the 1995-96 shutdown experience from today. And, I have spent a lot of time talking to people, real people, in this town and they are terrified. In the service sector, everyone from cab drivers to restaurant owners, hotel workers and nearly all retailers has felt the blow from the government shutdown. Not only are unpaid workers pulling back more than they had in the past; they are not likely to splurge and catch up on spending once they are repaid. That is because they are legitimately scared about new job cuts and furloughs when they return.

The 2014 sequestration, which is scheduled to go into effect once government reopens, will trigger even larger across-the-board, mandatory government spending cuts of about $110 billion, about half of those in defense. That will be in addition to years of pay freezes and job cuts. In response, government workers, contractors, and those whose business depends upon them, are hunkering down and becoming even less likely to spend as freely as they did in 1996 to recoup what was lost during the 1995-96 shutdown period. The result for the critical holiday spending season could be bad, and compounded further by showdowns over the budget through the winter.

An IMF Reprieve? The only thing helping to stem the losses is the IMF (International Monetary Fund) and World Bank annual meetings, which have brought a lot of business and tourism to town. They are a bit miffed, however, that all the museums and monuments are closed.

The best case scenario I am hearing is that we could see some kind of a cooling off period that kicks the can down the road until November 22. There are many who would like to take the debt ceiling off the table, but they do not make up the majority of the Republicans that House Speaker John Boehner represents. Indeed, it is looking more and more likely that Speaker Boehner will have to put together a coalition with Republicans in his ranks who want to reopen government and Minority Leader Nancy Pelosi, who can deliver the Democratic House votes he needs to send a resolution with a chance of being passed to the Senate. Even then, most are skeptical that an agreement to lift the debt ceiling can be reached before well into next week. That puts the data for the October employment report, and all that builds upon it for the fourth quarter GDP figures, in jeopardy.

Endgame? No one here is exactly sure. Behind closed doors, there is some thawing and a bit of horse trading on a broader budget deal. That said, there isn't anything concrete. We have kicked the can down this road before and, instead of leading to an agreement, it's left us with a shutdown. I want to be optimistic, but collateral damage is real and compounding for the economy.