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MN2020 - Federal Default Dwarfs State Budget Fiasco
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Federal Default Dwarfs State Budget Fiasco

July 13, 2011 By Lee Egerstrom, Economic Development Fellow

Never has the morning coffee shop banter in the countryside been more accurate. “How’s it going?” one asks. “Could be worse,” another responds.

Minnesota's July state budget madness is about to turn much worse come August if Congress doesn’t raise the federal debt ceiling to allow the federal government to keep current on its bills.

The state shutdown would seem like a mere inconvenience compared to a federal failure to meet debt obligations, which would be almost certain to toss the U.S. and global economies back on the brink of recession.

Despite magnitude differences of these two legislative failures, it seems the nation is more aware of Minnesota’s July shutdown of government than aware of consequences looming at the federal level. It is easier for media to depict and the public to grasp the significance of freeway rest stops being closed than to heed complicated warnings from economists, political scientists and financial market analysts about what’s at stake with a potential federal government default.

Right now, Minnesota lawmakers beholding to special interests and unwilling to compromise on budgets are simply soiling our own nest. Far greater impacts wait if federal lawmakers, beholding to most of the same special tax-avoidance interests, follow states like Minnesota down the path of fiscal irresponsibility.

Let’s look at ways a federal default would affect Minnesota as well as the entire nation.

Agriculture
The state’s farm economy is currently one of Minnesota’s strengths, assuming that the delayed planting season still produces a good to great fall harvest for most crops. Not only are commodity prices high for most farm crops, interest rates on short-term farm operating loans and on land mortgages have remained at historical lows from Federal Reserve efforts to stimulate the economy.

But almost all market watchers are warning that interest rates will explode, regardless of Federal Reserve policies, should Congress fail to raise the debt ceiling by Aug. 2. Interest rates are especially important to capital-intensive agriculture.

The national recession of 1981-1982 spilled over and became a farm depression, more commonly called the Farm Financial Crisis of 1982-1987. While thousands of Minnesota farm families lost their land and homes, hundreds of rural communities never recovered from the loss of businesses and banks that went down with the farmers.

The Kansas City Federal Reserve Bank has warned that skyrocketing interest rates would burst a farmland bubble just like the housing bubble that exploded almost four years ago. Economists at the U.S. Department of Agriculture, meanwhile, have observed that farm balance sheets are currently healthy. That might buy time before future crops and livestock cycles become squeezed by higher debt costs. But the 1980s still offer vivid reminders that a day of reckoning will be coming for agriculture.

Housing
There are modest glimmers of hope that the depressed housing market here and across the country is trying to make a rebound. Federal programs are about to take effect that would help homeowners stay in their homes while looking for work. But such efforts, while commendable, won’t shore up the housing market against state and federal policy failures.

States like Minnesota are undermining the housing market now by laying off teachers and public employees and scaring mortgage lenders. Any big jump in interest rates stemming from federal default and responses in the bond market will block even more people from qualifying for mortgage loans.

Still to be determined is whether a genuine, broad-based economic recovery can occur without recovery for the depressed housing market. 

Military Spending
No one offering quick fix proposals for federal debt is calling for a retreat in defense spending. Our economic problems stem largely from waging a decade of two wars on credit since the privileged class resisted sacrifice for the war effort and paying war expenses. In fact, the burden of these wars was made greater when tax breaks were expanded and extended even as public costs for wars piled up public debt.

The political science lessons behind such reasoning are simple though not widely understood. Not all the billions of dollars spent on Iraq and Afghanistan end up going into those countries. Much of it is spread around military bases and with defense contractors here at home. For Minnesota, that means a transfer of our federal tax dollars to states with a heavy military presence.

Historical Perspective
The nonpartisan Congressional Budget Office notes that Congress has raised the federal debt ceiling 74 times since 1962. It was an annual practice during George W. Bush's eight years while current fiscal conservatives were hibernating on debt issues and made the economy worse by granting greater tax concessions to wealthy and corporate interests.

More frustrating, we have state lawmakers falling into this well-orchestrated trap, willing to shut down state government and deny state residents equal access to public policies and services.

“Could be worse” comes close to being a forecast. We, in Minnesota, are contributing to make things worse.

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