The Government Shutdown and the U.S. Government’s Credit Rating

The political observers I am hearing from are saying that it is almost certain that the House of Representatives will not be able to pass a stopgap spending measure and the U.S. government will shut down on Friday afternoon. As evidence, they cite White House preparations for a shutdown and a statement from the House Speaker that the deadline for avoiding a shutdown has already passed. They are split over the question of whether the shutdown will last only until Monday, or for weeks, perhaps running through the end of the fiscal year in September.

The United States might not have been formally downgraded by the credit rating agencies, but the failure of governance that the current situation represents has already unofficially harmed the country’s credit rating. This, not incidentally, is bad news for the federal budget, as it increases the amount the government must spend on interest payments — the exact scenario that got Greece and Ireland into financial trouble.

In theory, the United States could avoid that slippery slope by addressing the most urgent matters in a separate bill that could be just a page or two in length. By political convention, though, the government’s fiscal health and continuity can’t be addressed without a comprehensive spending plan. Constitutionally, spending plans have to originate in the House of Representatives. There is no mechanism for breaking a deadlock in the House beyond the House members’ own sense of duty.

The economic statistics that go with a federal government shutdown could easily look like a depression, with whole sectors of the economy thrown into suspense. For example, the real estate market would be on hold, with sellers not eager to sell during a period when many home mortgages are unavailable. Emergency budget adjustments by states would add to the economic slump. Households that spent their tax refund in advance would have to make similar emergency spending cuts when they realized the tax refund check is not on the way.

A Reminder that Email Is Not Secure

Word is trickling out about an email server break-in that might have allowed criminals to obtain email addresses for half of the people in the United States. The potential scale of the leak is so large because the server in question delivered mass email messages for dozens of large online business-to-consumer brands. If you shop online regularly, it is fair to guess that your name and email address are no longer a secret.

That, like it or not, is the nature of email anyway. Even in the best of times, email messages are passed around willy-nilly from server to server, with no systematic way of keeping track of all the parties involved along the way. That is the main reason it so important not to put sensitive information such as account numbers and passwords in email messages.

It is also important to have relatively obscure passwords for your Internet accounts, and especially for your email account. You’ve likely heard about passwords before, but I’ll repeat some of the most basic points here: A password should not be a word or phrase that appears in a dictionary. It should not be personally identifiable information, such as your name or birthdate. It should not be a favorite song or book or anything else that you might write about online. All of these are relatively easy to guess. But you’re doing reasonably well if you combine two separate things to form a password. Also, you should change passwords from time to time. If you’ve been using the same email password since 2002, that is probably too long.

Email passwords are especially important because a person who has your email password can use your email account to gain access to many of your other online accounts. If you’re worried about someone breaking into your email, one of the best things you can do is change your email password to something that will be hard to guess.

When you receive email, it is important to remember that you can never really know who sent an email message. If information you receive in email is critical, verify it in a more secure medium (such as a web site or telephone call) before relying on it as a basis for action.

Contracting and Expanding Industries

It is not so hard to spot a industry that’s declining. Few would argue with the new IBISWorld list of dying industries (“dying” appears to mean U.S. revenue declining by more than 50% between 2000 and 2016, in this case). The top of the list is land-line telephone. I remember thinking I was something of a trailblazer in dropping my land line in 2006, but a lot of people may have thought the same thing. According to IBISWorld, that industry’s revenue fell by 55% in the last 10 years. It is similarly no surprise that record stores and photofinishing are on the list. The one category that seems to surprise people is “formal wear and costume rental,” but now that I think about, the recession pretty well killed off formal wear as a costume style for social occasions, and none of the costume rental stores I remember visiting in the 1990s are still in business.

But the whole economy is not declining, even if most of the largest industries are. It is not so easy to spot an industry that is likely to expand in the next few years. Some are obvious enough, like robots and electric cars, but these are so small that they almost cannot help but expand. The bets two years ago were on education, health care, and information technology, which “always” expand, yet they are showing little sign of expanding right now. Instead, technological and cultural changes are improving productivity in those industries while chipping away at their revenue. For example, the newer computers last longer, so customers spend less money replacing them. In health care last week, scientists found that routine prostate screening does more harm than good. Scientific discoveries such as this one result in better health care but take away billions of dollars in revenue from doctors and hospitals.

Spotting the expanding industries is an important preoccupation for investors, who do more good for the world when they invest in an up-and-coming industry. It is also important for economists, because economic growth comes from expanding industries. Most large industries and product categories are declining most of the time; in times like this, nearly every industry is in decline. The economic growth comes from relatively few places, often in industries with new technology. If we can pick out the growth areas, it is easier to predict where the economy as a whole is heading.

On IBISWorld’s 10 dying industries list, there are two where their projections could be mistaken: textiles and clothing. U.S. companies face increasing global competition coupled with a declining U.S. demand for clothing. On the other hand, new technology such as robotics and cotton recycling could become important enough to turn a dying industry into a growth industry. But how are you supposed to predict when and where something like that will occur? You can see why the big growth industries often aren’t the ones we expect.

Hunger Strike for the Ability to Work

I’m participating in a fast today. Several thousand people across the United States are fasting to protest some of the recently proposed federal government budget cuts. It’s a purely symbolic action on my part, not really a sacrifice, as going without food today won’t have a noticeable impact on my ability to work. Probably most participants today, though, are actually suffering from the disruption in their food habits, and some are on an actual hunger strike, planning to go without food indefinitely until their concerns are addressed.

The point I personally hope to make is that it is the height of folly, even in an austerity budget, to axe the very things that are necessary for people to work and live. To a limited extent, the government must support such things as food, housing, safety, and transportation.

Let me start with transportation as an example. Broad cuts in transportation leave significant numbers of people at home, unable to get to work. When people don’t work, they don’t pay taxes. And when people don’t pay taxes, that makes the budget situation worse, not better.

It is the same with food. When people can’t eat, the quality of their work suffers almost immediately. If they are looking for work, the quality of their job search declines in the same way, and the tendency for employers to take them seriously or view them favorably all but vanishes. In the United States today, it is basically impossible for a person who looks like they are suffering from hunger to find a job. But again, as long as they aren’t working, they aren’t paying taxes. Thus, withholding food from people does not improve the budget either.

The budget talks in Portugal broke down because the ruling party wanted to make cuts that they themselves acknowledged would leave a significant fraction of the country’s citizens homeless and hungry. Portugal is in an actual fiscal crisis, but even in that situation, it makes no sense to make decisions that let a nation’s ability to work just wither away. Portugal’s budget plan was like a farmer who decided to save time by not watering any of the crops — a panic move that would make things worse, not eventually, but in the very near future.

Unlike Portugal, the United States is not in an actual fiscal crisis, but political opportunists are using the current budget pressures as an excuse to do away with some of the most essential functions of government, including food programs. The amount of money to be saved by withholding food from hungry people is so small it doesn’t matter to the budget anyway. The tax revenue lost when hungry people can’t work and food producers are forced to cut back production is larger. This may well be what the supporters of these particular cuts have in mind — not fiscal sanity at all, but using an imaginary fiscal crisis to try to squeeze whole groups of people out of the economy with aggressive cuts this year, and even more aggressive cuts next year after they have made the budget situation worse.

I won’t argue with the idea of an austerity budget, but austerity doesn’t mean starvation. A country becomes stronger and a budget is balanced by expanding people’s ability to work, not by taking it away. In the end, in an economic sense, a country is its workers. Cut the budget as much as it needs to be cut, but don’t take away the essentials of life that make people able to work. That’s the point I’m hoping to make by going hungry today.

This Week in Bank Failures

Ireland bank stress test results were released yesterday, throwing that country’s fiscal plans into disarray. The banks need an additional €24 billion in guarantees from the government, and there may shortly be no choice but to wind down some of the banks to protect the country from insolvency. As an initial step, the Finance Minister has announced a plan to merge two of the four largest banks. The plan also calls for the troubled banks to shrink their operations by about a third over the next two years, which will include closing some offices and selling some assets. Further action may be needed when the banks are looked at again in May. In its new approach to its banks, Ireland may be trying to follow the more successful pattern of Iceland.

The Dodd-Frank Act requires U.S. mortgage lenders to retain an ownership share in loans they originate, a requirement known as risk retention. Technically, it is the issuers of the mortgage-backed derivatives that are subject to the rule, but either way, risk retention affects the originating bank. The law may not have any effect on the market, though. In drafting regulations, federal banking regulators seem surprisingly eager to find ways to work around the law. Proposed regulations released this week would exempt most ordinary home mortgages from the risk retention rules. The proposed rules require, for example, a 20 percent down payment, a term between 1 and 30 years, and a written application from the borrower. Rules also cover areas such as ability to pay, insurance, and underwriting, but they exempt loans that are perfectly ordinary in these respects.

Regulators, along with real estate lobbyists, seem to be worried that the securitization market (assuming it ever makes a comeback) will completely bypass mortgages that are subject to risk retention. No one has explained why they imagine the market working that way — perhaps it is nothing more than a question of stigma — but that’s why regulators want to do away with the risk retention rules for most mortgages.

AIG is reorganizing its flagship property and casualty insurance business unit. Details of the moves suggest that AIG expects to need some kind of Treasury support for a stock offering when that business unit, Chartis, is spun off.

The Fed is not waiting for AIG to get back on its feet, and is going ahead (over AIG’s objections) with an auction of $15 billion in mortgage bonds it purchased from the insurance company when it was on the verge of bankruptcy.

Treasury-owned GMAC has filed for a public stock offering under its new name Ally Financial. The IPO could bring in $5 billion and set the stage for the U.S. Treasury and General Motors to sell off their shares in the lender. Regardless of the details of the stock offering, which have yet to be worked out, Ally is not expected to be worth as much as the $17 billion the Treasury put into it during the Wall Street bailout.