William D. Johnston

Chairman

Economic Commentary

The news has been dominated lately with the topic of raising the United States’ debt ceiling. It is hard to call the process of doing so, new. In fact, 90 different times in our country’s history Congress has agreed to raise the debt ceiling, which Congress previously established so that the United States doesn’t default on its outstanding debt obligations. From 1962 through 2011, Congress has authorized higher debt limits 74 times and from 2011 through 2019 four more increases were agreed upon. The obligation of the party in power is to get the debt ceiling raised to avoid defaults and the resulting dire economic consequences of not doing so. Conversely, it remains the obligation of the opposition party to exact some political benefit of agreeing to facilitate the increase in debt limit. This time around is no different. It is easy to see the process as hypocritical. In 2017 and 2019, then majority leader McConnell stated that Congress had a moral obligation to raise the debt ceiling, and that it was unconscionable to even think that the US would default. Flash forward to October of 2021 and the very same Senator, now the minority leader of the Senate, is blocking the debt ceiling increase by insisting that the Democrats “go it alone” without any support from Republicans. Don’t think for a moment that this seemingly political hypocrisy lies in bed with only one political party. In 2003, 2004 and 2006, President Biden, then Senator Biden, did not join Republicans in voting to increase the debt limit. Each politician will provide sound bites as to why this time is different, but the evidence is clear. Debt ceiling increases are essential to the continuation of uninterrupted economic activity cycles, and each time legislative action is required to raise the ceiling whichever party that is not in power will exact whatever leverage they have, right up until the deadline, to extract whatever political capital they can in the process. Senate majority leader Schumer and minority leader McConnell agreed to move legislation forward to raise the ceiling by $480 billion, which will be enough to avoid a default and allow government obligations to be paid until December 3 of this year, and thus the default is temporarily avoided but the focus on future defaults remains intact.

The letter written by Treasury Secretary Yellen to Congress on the critical importance of raising the debt ceiling is no different in tone or verbiage than Secretary Mnuchin’s letters to Congress in 2017 and 2019 during the Trump administration. To be certain, there have been 49 Republican Treasury Secretaries and 25 Democratic Treasury Secretaries authoring precisely the same letters to Congress during the last 74 debt increases that have occurred. While it is easy to observe that the process is political and that both parties engage equally in the political theatre, it is also debilitating and takes energy away from addressing the real issue of national debt growth now totaling $28.4 trillion, which is an increase of $6.2 trillion since 2017.

As we have written previously, at current budget levels we are adding $2.0 trillion to the deficit annually, which is the natural result of spending more than we produce in revenue. Without question, the expenditures necessary to combat the COVID-19 pandemic and maintain our economy, while supporting wage earners and private enterprise, have increased debt levels beyond forecasted levels. The economic and financial price paid to endure and then defeat the current pandemic is simply more evidence why we need to be better prepared to combat and prepare for future pandemics. It is not a matter of if they will occur, but rather a matter of when and how better prepared we are as a nation to minimize both the human and economic cost that results from them.

The fractious political divide in our country and the willingness of our political parties’ leadership to use that divide for political capital gain seems without bounds. We have successfully politicized science, vaccines, booster shots, quarantines, masks and established public health protocols and so it isn’t easy to assume that we will make substantial progress in investing against future pandemics, but yet we can keep hope alive. The dichotomy of making phenomenal scientific and technological progress, while simultaneously increasing rigidity against using it through political division is stunning as well as foolish.

As has been the case in previous years our current President is finding that governing with a majority, albeit very slim majority is not easy. Nearly ten months into his term, President Biden, though having a House and Senate majority, has not enacted his keystone policy platform legislation and his roadblock is as much from his own political party as it is the entrenched opposition. We must get used to the notion that there are no longer political cycles that surround Congressional, Senate and Presidential elections. It has now evolved into one continuous cycle that impact all that is done in the body politic. Legislative content and public policy is not looked at in terms of what is best for our country, but rather what is best for a political party. The divide is deep, and controlled by the extreme ends of political thought, and thus the lens used to assess the value of policies proposed is by necessity viewed as a zero sum game. If it is proposed by one party then as a member of the other party I must oppose it and bipartisanship is a rapidly fading political art form.

The Delta variant of COVID-19 seems by the data to have peaked and begun an incremental fade. Booster vaccines have been introduced and vaccines for those twelve and under are close to being approved. Vaccination rates above 50 years of age are very high and among working age adults (ages 18 – 64) are now approaching 67%. New vaccination progress has been most noted in Hispanic and people of color adult populations and the previous gap in vaccination rates that had been observed has dramatically narrowed. The majority of deaths and prolonged hospitalizations continues to be for those not vaccinated. At current inoculation rates it seems unlikely that we will achieve the targeted 80% vaccination rate of our population that public health experts held out as the target necessary to eradicate the COVID-19 virus. The largest hurdle to be achieved that will positively change our pandemic condition seems to be vaccination adoption in K-12 education and particularly K-8 education. This interruption in vaccination progress is heavily integrated with limited child care availability and with employment opportunities yet unfilled in the $15 – $20 per hour range. Unemployment stands at 4.8% as of September and will fall grudgingly from there as opportunities for employment are among demographics most impacted by limited child care both before and after school, which represents the largest segment of unvaccinated children and registers the highest concerns/reasons for not returning to work in employment surveys.

The New York Fed Weekly Economic Index that measures real time economic activity around consumption, production and labor continues to show robust economic activity with the October 7 reading at 7.78, which is a reduction from the previous weeks reading of 8.03. This reduction is not unexpected, as our economy adjusts to more normal levels of consumption and lower levels of pent-up demand for goods and services. Logistics interruptions continue, though pace of recovery among commodities has improved as evidenced by lower commodity prices. Automotive production continues below the demand pace due to microchip production delays with little line of sight for improvement through December of this year.