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Magazine / Fiscal Policy

What, Me Worry? (Part 1)

Main Street: We’ve Got Bigger Problems

Main Street: Unhappy about soaring federal debt and uncertain about raising the limit.(Jeff Baughan)

photo of Jim Tankersley
May 27, 2011

PARKERSBURG, W.Va.—In this graying, ex-factory town on the Ohio River, residents worry a lot about what’s coming out of Washington. At the Rotary Club, they worry that new layers of red tape will strangle local banks, reduce credit for small businesses, and choke off their budding economic recovery. At City Hall, they worry that cuts to federal grant programs will blow million-dollar holes in the town budget and possibly require another round of fee increases on residents. In a meeting at the courthouse annex with their member of Congress last week, they worried about federal restrictions on incandescent lightbulbs, attacks on coal mining, and the mounting toll of federal borrowing.

But if you ask people here how much they worry about raising the federal debt ceiling—the battle now raging in Congress—the most common answer boils down to … not much. Even the most politically attuned civic and business leaders don’t know how heavily to weigh the implications of a possible federal debt default. So, instead, they add that risk to a deep bucket of anxieties about dysfunction in Washington and economic struggles at home. Few residents say they’re spoiling for a showdown over raising the ceiling; equally few are panicking over the threat of default. They know it’s an issue, but they’re not sure how dangerous it is. They want federal lawmakers to buckle down, set things straight, and let everyone else get back to the day-to-day challenges of earning a living and raising a family.

(RELATED: Wall Street—Congress Can’t Be That Dumb)

 

“We have enough of our own problems,” said Parkersburg Mayor Robert Newell, when asked about the debt ceiling at the end of a long conversation about the city’s sagging budget. “I don’t dwell on it.”

National polls show a deep split between what most economists and policy experts think about the debt-ceiling debate and what voters believe. The experts, regardless of party affiliation, all but unanimously agree that refusing to raise the ceiling would torpedo the national economy. By contrast, a Gallup Poll this month showed that nearly half of Americans don’t want to raise the borrowing limit; only 19 percent favored it. That should give Wall Streeters pause. In their comments, but even more in the prices they pay for Treasury bonds, investors and money managers make it clear that they see virtually no chance that Congress would actually allow the government to default. Thus far, though, Congress is feeling little if any pressure from Main Street to raise the ceiling—and at least some pressure not to raise it at all.

Infographic

Parkersburg, with a population of 32,000, is West Virginia’s third-largest city. It also happens to be home to the U.S. Bureau of the Public Debt, the department that literally borrows the money to keep the federal government running. Yet even business leaders are confused about the debt-limit tug-of-war. “I just think there’s so much uncertainty” about the impact, said Randy Brooks, executive vice president at Community Bank of Parkersburg. “I really don’t know what it would mean for us.”

The Obama administration hasn’t had much success raising the public’s sense of alarm. Treasury Secretary Timothy Geithner’s increasingly apocalyptic warnings, in letters to Congress and in countless public appearances, haven’t cracked small-town America’s consciousness. In Congress, a growing number of Republican senators and representatives are downplaying the potential consequences of failing to raise the ceiling before August 2, when Treasury officials estimate they will have exhausted the “extraordinary measures” they have been using to keep the government running after it hit the debt ceiling last week.

In some cases, lawmakers appear to be condoning voters’ beliefs that the debt-ceiling debate is a manufactured issue. Republican Rep. David McKinley, a freshman member who represents West Virginia’s sprawling and longtime Democratic 1st District, began a town-hall meeting here last week by lamenting that the federal government is borrowing $4.3 billion a day, the equivalent of the state of West Virginia’s entire general budget for a year. He mentioned that the federal government had hit the debt ceiling a couple of days early.

“I don’t dwell on it,” —Robert Newell, mayor of Parkersburg, W.Va., when asked whether he worries about the risk of a federal debt default.

One resident interrupted McKinley, complaining that officials were now saying that the real deadline was August and suggested that they would probably just move the date again.

In truth, there wasn’t any political sleight-of-hand: Treasury officials have said for months that they could keep the government afloat for about two and a half months after hitting the official ceiling, essentially by using an array of bookkeeping tricks. But Geithner and others have also said that those gimmicks go only so far, and that real disaster will ensue when the government can no longer borrow more.

Instead of explaining any of that, McKinley nodded his head in agreement. “I don’t understand where they came up with August the 2,” he responded, adding that the supposed day of reckoning would fall a day or two before a scheduled congressional recess. “Am I being cynical here?” McKinley asked. “Is that what’s going on?”

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Make no mistake: If Congress fails to raise the debt limit by August 2, Parkersburg, and towns like it all across the country, will suffer. Once the Treasury runs out of “extraordinary measures,” it has only two options. It can default—meaning, stop paying its creditors around the world. In that case, economists say, prices for Treasury bonds would collapse and interest rates, which move in the opposite direction, would probably soar to record highs. The stock market would almost certainly plunge; mortgage rates would shoot up; and homebuyers and small businesses would have trouble finding loans even if they could afford the sky-high interest rates. The centrist Democratic think tank Third Way estimates that the bond rate increases alone would eliminate nearly 650,000 jobs in the United States.

The Treasury Department’s only other option would be to continue paying creditors but stop any other federal spending above what the government collects in taxes. In effect, that option would require an overnight spending cut of about 40 percent. Such a reduction would be more than twice what the government pays for all domestic discretionary programs, and it could affect everything from NASA and the FBI to congressional salaries and White House operating expenses. Reckoned another way, the cuts would add up to more than the combined total of all military spending, including for troops in Afghanistan and Iraq, as well as all Medicare benefits.

The math nearly dictates that any solution would require deep cuts to the two giant entitlement programs for the elderly, Medicare and Social Security. That would sock Parkersburg. City officials say that a quarter of their economy is based on health care. The share of the town’s population age 65 or older is nearly 50 percent higher than the national average. A sudden slowdown in Medicare or Social Security payments “could have a huge impact” on the city, warns Ann Conageski, the city’s development director. “You’d see things coming to a halt.” Federal furloughs or mass layoffs could drain even more money from the local economy and the city’s tax base, starting with the salaries earned by the approximately 2,000 people who work at the Bureau of Public Debt (the government wouldn’t be borrowing, after all).

Parkersburg spreads thin along the Ohio, where the river makes an abrupt left-hand turn. Like many towns up and downstream, it has struggled for decades to replace lost factory jobs. The economy now runs largely on small businesses; health care for the large elderly population; and local, state, and federal government. In March, area unemployment was 9.6 percent, according to the Labor Department; that’s a drop of 1 percentage point from the previous month but is still above the national average. Realtors and loan officers say that the housing market—although it didn’t bubble as high as other parts of the country or crash as far in the recession—may not have hit bottom yet.

Some signs do point to gradual improvement. Several area car dealerships are expanding. Thanks in part to autos, local advertising spending is rising at Parkersburg’s three television stations, two of them network affiliates, said Roger Sheppard, the vice president and general manager of WTAP-TV. A few developers, city officials say, are moving ahead with new construction, especially of stores that sell things for $1 or less. DuPont, which operates a plant in town, is looking for engineers.

But at a breakfast meeting of the Wood County Rotarians last week, business leaders displayed plenty of lingering anxiety about the economy and about the unrest spreading from Washington. Brooks, the Community Bank executive, expressed frustration at the complexities of new lending regulations under the Dodd-Frank financial-reform bill and at how difficult it now is to secure mortgages for “gold” borrowers who never had problems getting loans before. Business borrowers, he said, are stuck waiting to see whether sales will pick up, if interest rates will rise, and whether new regulations will hamper their operations. “They’re afraid,” he said. “They don’t know what’s going on out there. They’re afraid of making big moves.”

Robert Full, a lawyer who works for small businesses and local banks, said he was feeling the cross-tugs of the budget and debt debates: “I really don’t understand what it means,” he said. “You see what’s happening in some of the European countries, and I worry about that. I’m a grandparent, and I worry about what we’re leaving our grandkids.” But he added, “I’m getting to the age where Social Security and Medicare are suddenly important. I’ve been made a socialist for the last 40 years by my government. Now I’m getting to the age where I’m starting to see the need for the benefits, and, damn it, I want them.”

Others at the Rotary breakfast worried about the nation’s oil dependence, health care expenses, and the rising costs—and debt loads—necessary for a college education. They wondered if America’s foreign entanglements are worth the money. “We’re not leaving Iraq, we’re not leaving Afghanistan,” said Bryen McHenry, a Realtor. “It’s Libya today. It’s Syria tomorrow. Is there an end to it?”

Later in the day, Chad Mildren walked through the echoing lobby of the downtown branch of United Bank, which has grown from its roots in Parkersburg to a major regional chain. Mildren, the bank’s regional president, wore a crisp white shirt with a pen in the pocket, a blue tie, and black circle-rimmed glasses. He stopped to chat with a customer, asking about her family and her retirement, and ushered a reporter to his office. Echoing almost everyone who sat for an interview in Parkersburg last week, he wondered why Democrats and Republicans in Washington can’t work out a budget agreement together.

Businesses are “afraid.… They don’t know what’s going on out there.” —Randy Brooks, Community Bank of Parkersburg

“We’re kind of in control of our own destiny now,” Mildren said. “Obviously, we can raise the debt ceiling, but we’re going to have to deal with this. Some tough decisions need to be made. Some tough love.”

When faltering business tax receipts failed to keep pace with their city expenses over the last few years, Parkersburg officials made tough choices. They decided not to fill 25 open city positions, laid off a few workers, froze pay, and forced municipal workers to pick up a larger share of their health insurance costs. They also imposed the city’s first user fee, which costs anyone who works in Parkersburg $2.50 per week and goes to pay for the city services they use. Newell, the mayor, says that Parkersburg had little choice. Demands for services such as trash collection and snow removal are as high as ever; city pension obligations are rising; and costs are climbing for new requirements coming down from D.C., such as a Transportation Department order to replace the city’s street signs with ones that reflect light better. Still, belt-tightening was not popular.

If residents like Full feel the contradictory pressures of austerity and retirement security, so does McKinley, the 64-year-old, white-mustachioed, freshman member of Congress. Having been elected in part by tea party fervor to cut government, McKinley found himself under attack at his town-hall meeting for defending Medicare in its current form. An older, all-white, deeply conservative crowd chastised him for voting against the Republican budget authored by Rep. Paul Ryan of Wisconsin. When a man accused McKinley of siding with “Nancy Pell-ossi” on the budget, McKinley replied that he didn’t support Ryan’s proposal to convert Medicare to vouchers. “The adult conversation has to begin,” McKinley acknowledged. “But it’s not this piece of legislation…. We’re not going to do it on the backs of our seniors.” Later, his staff said that constituents in McKinley’s senior-dominated district overwhelmingly oppose the voucher plan, 80 percent to 20 percent.

In the course of the meeting, McKinley fielded as many questions about coal power, abortion, and a pending phaseout of incandescent lightbulbs as he did about the debt ceiling. A questioner railed against U.S. aid to Egypt, and McKinley responded by touting his efforts to cut foreign aid, an area that accounts for only a small fraction of the federal budget.

In an interview afterward, McKinley said he would not back a debt-limit increase without major spending cuts and other reforms attached to it. That’s a common refrain from Republicans and conservative Democrats in Washington, and it has resonance here. The local newspaper, The Parkersburg News and Sentinel, voiced it in a recent editorial that supported the political brinksmanship in Washington. “That stance is one of the few tools fiscal conservatives have available to pry deficit control concessions out of Obama and his liberal cronies,” the paper’s editors wrote. “Irresponsible, says the president…. [But] what about continuing on our current path? Is that not dangerous and wrong too?”

As he walked to his car, McKinley suggested that the government could reach the end of its extraordinary debt measures and still not, technically, default: “Default,” he said, “is a very defined word.” If the government did default, he said, “nationally, it would be a problem” for the economy.

“I think we can avoid that,” he said.

How?

“Last minute,” he said.

Then he added: “You have to have a crisis level before people move.”

(Click here to read Part 2.)

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