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Originally published July 30, 2011 at 9:00 PM | Page modified July 31, 2011 at 2:33 PM

Jon Talton

August starting with a humdinger of an event in debt-ceiling gridlock

The affair has raised questions that merely increasing the debt ceiling won't answer. America doesn't face an immediate debt or deficit crisis. Constitutional crisis is closer to the mark.

Special to The Seattle Times

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August looms, a traditionally slow month for business news. This time might be different.

This time of year is also when calamities commence, most notoriously 97 years ago when a war began that would sweep away empires and set the course for the bloody 20th century.

Our August danger starts with a debt-ceiling gridlock. Beyond that, the economy is in more dangerous territory than anytime since the Great Recession officially ended in June 2009.

As I write, deals and rumors of deals make it impossible to predict the outcome of the debt-ceiling conflict. Don't trust the latest claim of a breakthrough.

Whatever happens, the lasting result may be doubt about the stability of the government of the world's largest economy and reserve currency.

The reality is that soon the Treasury will be unable to meet its obligations unless Congress carries out this routine procedure. (The debt ceiling was raised 18 times during Ronald Reagan's presidency.) The consequences of default would affect every household and business.

The markets are unsettled. Never before has the full faith and credit of the world's largest economy been put at risk.

Some may dismiss the possibility of a downgrade in the United States' AAA rank by the credit-rating agencies, especially after their sleazy performance in ignoring the risks leading up to the financial panic.

But no one knows how the powerful capital markets will react. So far: Not good. Stock indexes fell most of last week.

But even if some kind of deal emerges, the affair has raised questions that merely increasing the debt ceiling won't answer.

America doesn't face an immediate debt or deficit crisis. Constitutional crisis is closer to the mark. And a broken government is just what the economy doesn't need.

Two years after the official end of the Great Recession, 14 million Americans are officially unemployed; the number rises to 24 million when we add in the underemployed and discouraged workers.

Millions have been financially ruined, especially among the middle class and working poor. By virtually any measure of well-being aside from corporate profits and — until lately — stock prices, this has hardly been a recovery.

Remember back in the good times, when people mused about "the end of the business cycle?"

One thing that can be said with more certainty now is that we're in a deeply wounded cycle, different than most living Americans have ever seen.

The traditional rebound of post-World War II recessions isn't happening. In fact, growth decelerated this year.

Second-quarter gross domestic product expanded at 1.3 percent, after rising only 0.4 percent in the first quarter. This growth rate won't fix the unemployment crisis, much less provide the revenues to lower the federal deficit.

Most economists were looking for improved growth in the second half. But are these forecasts valid?

The debt-ceiling deals in Congress, including one embraced by the White House, rely entirely on cutting trillions in federal spending.

This will slow the economy, from the investments in infrastructure that never happen to the greater burdens placed on Social Security and Medicare recipients.

Private businesses depending on federal contracts will be affected. So, too, will thousands more government workers laid off.

This is hardly a fearless prediction in the dark. It happened in 1937, when President Franklin Roosevelt tried to balance the budget, and it's happening now in places such as the United Kingdom, which are implementing austerity in a time of economic weakness.

Meanwhile, the dysfunction in Washington will not be resolved this month. More fiscal showdowns are guaranteed. What will our overseas creditors think? What will be the consequences of gambling with the dollar and Treasury securities as the world's investment safe haven?

In a prescient article in the March/April 2009 issue of Washington Monthly magazine, the economist James Galbraith wrote: "The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return."

He went on to criticize the then-new Obama administration's focus on saving an insolvent banking system pretty much as-is, and the weakness of the proposed stimulus.

It took the private banking system much longer to recover from the Depression than other parts of the economy.

Meanwhile, the relatively modest part of the stimulus aimed at employment was aimed at "shovel ready" projects rather than longer-term initiatives that could have created more jobs and addressed such pressing issues as climate change and a high-cost energy future.

Neither the economic conventional wisdom nor most leaders in Washington understood the situation for what it was: "An integrated, long-term economic threat — rather than merely a couple of related but temporary problems, one in banking and the other in jobs," Galbraith wrote.

There will be no return to the old normal. Our policymakers are unwilling to make an effective response.

A double-dip recession is no longer unlikely. Even that terminology may be outdated for the future we risk.

You may reach Jon Talton at jtalton@seattletimes.com

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About Jon Talton

Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
jtalton@seattletimes.com

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