Default Lies Not in Our Stars, But in Ourselves — 25 July 2011

As I predicted, this debt ceiling negotiation is going right down to the wire.  But there are some very interesting interplays going on as we approach the witching hour.

First of all, let us all acknowledge that there will be no default.  Period.  Those who use the expression are being either disingenuous or ignorant, and that includes the president.  A default occurs when you fail to pay your creditors.  Failing to pay your employees is not a default.  Those investors, whether private or sovereign, who bought US Treasuries will receive their interest payments without fail.  There is plenty of tax revenue for that, even at today’s reduced levels.  It’s the rest of the government’s obligations that may or may not get paid.  The term default is being tossed about far too liberally (if you’ll forgive the expression).  Greece will have a default.  We will not.  At least not this year.

Having said that, however, it is also true that the US may suffer a downgrade in its credit rating.  Frankly, it is overdue.  If you look at Europe and their near-universal embrace of the logic of “austerity” you have to wonder how S&P and the other rating agencies view the US in its current near-denial of a situation that is arguably far worse and hesitate for an instant before issuing a downgrade.  If the US were a corporation and had to account for its liabilities according to GAAP (generally accepted accounting principles), the country would have been declared bankrupt years ago.  It is only because the government has the power to debase its currency and print more of the dollars that it owes to others that we maintain the fig leaf of fiscal respectability.

But here is the reason there will be a deal: Even though the US Treasury can assure that the top-of-the-list obligations will be paid, such as interest on the debt, Social Security, military, etc, the Executive has tremendous powers to determine what else does get paid.  And you can count on the White House to short-change those expenditures that will cause the maximum consternation – like national parks, and services that every American relies on from day to day.  The Republicans do not want to be tagged with forcing those closures like they did in 1995, which assures that they will pass a bill on time.

But – the most logical bill will be one that secures a temporary increase to the debt ceiling in exchange for cuts that most participants have agreed on, followed by a bigger bill later on.  I think we have found by bitter experience – the “stimulus”, Obamacare, Dodd-Frank – what happens when you try to pass a huge piece of legislation in a rush against an artificial deadline.  You get a situation in which, as Nancy Pelosi said, “you have to pass the bill to find out what’s in it.”  A temporary extension, with cuts equal to the size of the limit increase, will send this whole debate into overtime, and give the participants a chance to work out something with a bit more thought behind the details.

Now, Obama has declared he will veto a bill that does not take this issue off the table until after the election.  Well might he want to – another several months of debate over this issue will only highlight how ineffectual his leadership has been.  After all, he could have dealt with this issue two years ago when he had firm control of both Houses of Congress.  But if John Boehner succeeds in passing a two-stroke plan, can Obama afford to veto it?  If he does, he will be broadcasting to the world that his opposition had more to do with the electoral calendar than to the exigencies of managing the country’s finances.

The strongest argument Obama has in this dogfight is the notion – and he pressed it again in his speech tonight – that making tax increases a part of this deficit reduction package is an issue of “fairness.”  And he always casts it in class-warfare terms: “millionaires and billionaires” and “owners of corporate jets” (that will be corporations, but when he expresses it that way it sounds more like obscenely rich people) aren’t paying their “fair share.” He knows as well as I do that a) the wealthy pay more of the income tax burden than they take in income; that b) our top 10% pay for a larger share of government than the top decile in any other advanced country; and that c) (as Obama himself declared) you don’t want to raise taxes in a recession.

Still, conservatives have had a hard time countering the argument that the morally superior thing to do is to part with a bit of one’s income to care for the less fortunate – that is, the lefty redistributionist argument.  I don’t think conservatives should be bashful on that score.  As Arthur Brooks of the American Enterprise Institute put it recently, the conservative argument is in favor of “freedom and opportunity for everybody—including the poor… that succeeding on our merits, doing something meaningful, and having responsibility for our own affairs are what give us the best life.”

Charity is fine, and it is good that churches and other organizations exist to tap that urge to be magnanimous.  But when government is the one arranging the charity it crosses the line into coercion – it takes money from some to give it to others, which stunts the ambitions both of those who are taxed and as well those who receive.   It is no coincidence that there is a direct correlation among countries between the level of government control of the economy and the level of unemployment in the workforce.

This is the plane on which the Republicans should carry their argument against the Obama doctrine.  Not only are we living far beyond our means; this government’s spending is causing immeasurable harm to every American and to their children.

It’s not just about “who pays” for reduced spending.  As John Boehner says, it’s about doing what’s right for the country.

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