Apart from The Economist and the Financial Times, the British press does not want to believe that the big story in Washington (and Iowa) is not about Sarah Palin or Michelle Bachman – it’s the impasse over raising the ceiling on Federal borrowing. This is admittedly less entertaining than tracking rhetorical gaffes, but a US default is far more dangerous. Politics in Spires readers should agree.
The issue is simple; the implications are more complicated. In short, from time-to-time Congress has to sanction the Treasury to extend borrowing above a certain limit, something it has done on 16 occasions since 1993. Unpalatable perhaps, but this has been a routine exercise during Republican and Democratic controlled congresses. Yet spending is much higher nowadays, as are the mounting debt repayments, and in 2011 it is again politically propitious for congressmen to rediscover fiscal restraint. This is a recent development. After funding two wars and passing things like an unfunded prescription drugs bill and signing off on ballooning defence spending, Tea Party-infused conservatives are now shaming Obama and the Democrats for their post-financial crisis profligacy.
Hypocritical, but they have a point: Obama increased spending drastically thanks mainly to a large 2009 stimulus bill that had mixed results, depending on who you ask. Unemployment still hovers above 9%, not good for a country with a weak safety net compared to most of Europe. I think the issue is not just the cost of the stimulus bill but where the dosh went. With the backing of public sector unions, big supporters of the Democrats, lots of cash went to shoring up state budgets to avoid layoffs and pension shortages. A lot of this could have gone to the private sector instead (I’ve written about this before). But never mind. What should we do now? Both parties realise something needs to be done – as do those obscure souls who control America’s precious AAA bond rating – but Republicans refuse to budge on taxes and Democrats are loath to cut much from entitlements (Social Security, Medicare and the like). Also exclude defence spending (too many lobbyists and pet projects) and debt payments (a smart move, at least while they can) and we are left with about 12% of the Federal budget to work with. That’s it. So someone will have to blink. Republicans want to hold firm on taxes and force the Democrats to agree on finding $2 trillion in savings from the 12%-ish ‘discretionary spending’ pot, and in entitlements, over the next ten years. And after already acquiescing on extending Bush era tax cuts, Obama wants to eliminate cushy tax breaks for hedge fund managers and oil companies, a de-facto tax hike.
I’m not an economist and am not going to comment too much on the implications. All I will say is that the Republicans hoping and praying for a default are either delusional or devoid of any caring about world markets and the fallout. I trust the Chairman of the Federal Reserve and the IMF when they say it will be bad. Still, as Ron Haskins of the Brookings Institution, a Washington think tank, mentions no one knows what will happen.
“The biggest problem with arguing that default would be devastating is that no one can predict when the repercussions would begin and what they would be. Predicting markets is like predicting teenagers. But here’s something that should be a more persuasive argument than it is: we already owe the money. To get the money to pay our bills, we promised — involving the full faith and credit of the American government — to pay it back. That should be enough to convince any reasonable person that we must pay off our debts. The correct way to reduce the nation’s debt is to reduce spending and to increase revenues — not to break promises that we have already made.”
Politically speaking, it is dishonest to blame this entirely on the Republicans, as the Left (including many academics) want to do. Blame the president, I say. It is true that there is little political incentive to work with Obama on this issue (although cutting entitlements may easily backfire with senior voters), but the White House should never have given the opposition a political foothold on a usually perfunctory nose-holding budget matter. Just like the healthcare debate, as a exercise in attempted partisan transcendence or in my opinion too much arrogance about his own rhetorical persuasiveness, until a press conference yesterday (his first since early spring) Obama has not talked clearly to the American people and justified his plan for economic recovery, including reducing spending in the medium and long term. Most importantly, he has never sold the importance of increased public spending during a recession. Stepping into the void, Republicans took control of the narrative and see the debt ceiling as another place to exploit it. People are right to criticise the Right for playing with fiscal fire in the interest of political gain – but Obama handed them a match.
I’m curious about what other Oxbridgers think…
A Blake Ewing is a DPhil student and contributor to The Economist.