You’ve heard the story many times: Supposedly, any day now investors will lose faith in America’s ability to come to grips with its budget failures. When they do, there will be a run on Treasury bonds, interest rates will spike, and the U.S. economy will plunge back into recession.
This sounds plausible to many people, because it’s roughly speaking what happened to Greece. But we’re not Greece, and it’s almost impossible to see how this could actually happen to a country in our situation.
For we have our own currency — and almost all of our debt, both private and public, is denominated in dollars. So our government, unlike the Greek government, literally can’t run out of money. After all, it can print the stuff. So there’s almost no risk that America will default on its debt — I’d say no risk at all if it weren’t for the possibility that Republicans would once again try to hold the nation hostage over the debt ceiling.
But if the U.S. government prints money to pay its bills, won’t that lead to inflation? No, not if the economy is still depressed.
Now, it’s true that investors might start to expect higher inflation some years down the road. They might also push down the value of the dollar. Both of these things, however, would actually help rather than hurt the U.S. economy right now: expected inflation would discourage corporations and families from sitting on cash, while a weaker dollar would make our exports more competitive.
Still, haven’t crises like the one envisioned by deficit scolds happened in the past? Actually, no. As far as I can tell, every example supposedly illustrating the dangers of debt involves either a country that, like Greece today, lacked its own currency, or a country that, like Asian economies in the 1990s, had large debts in foreign currencies. Countries with large debts in their own currency, like France after World War I, have sometimes experienced big loss-of-confidence drops in the value of their currency — but nothing like the debt-induced recession we’re being told to fear.
So let’s step back for a minute, and consider what’s going on here. For years, deficit scolds have held Washington in thrall with warnings of an imminent debt crisis, even though investors, who continue to buy U.S. bonds, clearly believe that such a crisis won’t happen; economic analysis says that such a crisis can’t happen; and the historical record shows no examples bearing any resemblance to our current situation in which such a crisis actually did happen.
It’s very important to keep this in mind as the “negotiators” use the deficit as the reason they must come up with a “big deal” to solve it once and for all. Like Bob Corker, former car salesman and current Capitol Hill gang member and U.S. senator:
I have shared with House and Senate leaders as well as the White House a 242-page bill that, along with other agreed-upon cuts that are to be enacted, would produce $4.5 trillion in fiscal reforms and replace sequestration. While I know this bill can be improved, it shows clearly that we can do what is necessary, today, with relatively simple legislation. The proposal includes pro-growth federal tax reform, which generates more static revenue — mostly from very high-income Americans — by capping federal deductions at $50,000 without raising tax rates.
It mandates common-sense reforms to the federal workforce, which will help bring its compensation in line with private-sector benefits, and implements a chained consumer price index across the government, a more accurate indicator of inflation. It also includes comprehensive Medicare reform that keeps in place fee-for-service Medicare without capping growth, competing side by side with private options that seniors can choose instead if they wish. Coupled with gradual age increases within Medicare and Social Security; the introduction of means testing; increasing premiums ever so slightly for those making more than $50,000 a year in retirement; and ending a massive “bed tax” gimmick the states use in Medicaid to bilk the federal government of billions, this reform would put our country on firmer financial footing and begin to vanquish our long-term deficit.
I am encouraged that leaders of both parties have shown openness toward a long-term solution. House Speaker John Boehner has pledged to put raising revenue on the table as long as it is accompanied with fundamental reforms to entitlements, especially Medicare. And President Obama has indicated a willingness to tackle entitlement reforms if accompanied by revenue.
As time ticks on, it’s looking that they’ll have to “kick the can down the road” in some fashion, subject to all manner of triggers and sequesters and other gimmicks that will allegedly commit them to doing things they really want to do but can’t quite get up their nerve for. It would be surprising if they could come up with a full-blown Grand Bargain at this point (although they could try to float one anyway.)
So perhaps the real question is what they’ll do to avoid the big issues of the so-called fiscal cliff in the short term. The big items are the debt ceiling and the Bush tax cuts (although I’d argue the expiration of the payroll tax holiday and Unemployment Insurance are equally stark.) The fact is that if the government were sane, they wouldn’t tie any of this to deficit reduction at all and instead deal with it in light of our current economic woes. If they did that, they’d just extend everything and raise the debt ceiling. We don’t need austerity right now (although the rich could surely afford to kick in some money for stimulus since they have been making out like bandits for the past couple of years.)
The White House put this scare story out today as a way to force a deal:
The White House warned Monday that the average family will pay $2,200 more in taxes next year if Congress does not freeze tax rates for the middle class, publishing a new report as part of President Obama’s campaign to extend tax cuts for most Americans while allowing taxes on the wealthiest to rise.
The White House report says Americans could dramatically pull back on spending in the crucial holiday season if they expect sharp tax hikes next year, which would cut deeply into take-home pay. A tepid shopping season would interrupt a string of positive data in recent weeks that suggest Americans are increasingly opening their pocketbooks after years of post-recession caution.
The report is part of a strategy to pressure Congress to pass legislation that would immediately extend the George W. Bush-era tax cuts for families earning less than $250,000 a year.
That would be a great victory for the White House, to be sure. And who knows, maybe the Republicans will just completely fold and decide it’s the best thing for the country. But I’m going to go out on a limb and assume the White House knows that isn’t going to happen without strings attached. It’s a negotiating gambit. But it raises an important question: what if all this fiscal cliff hysteria succeeds in scaring people into slowing their spending and creating even more of a drag on the weakening economy? I don’t know.
They’re playing a dangerous game. Who knows what this nonsense will do to our shaky recovery. But the greatest danger still remains a Grand Bargain that sells out the future security of many millions of Americans in order to get a deal that nominally raises some revenue today for deficit reduction. That would be insanity. Let’s hope they have at least gotten beyond doing that in a lame duck session composed of a bunch of politicians who have been voted out of office. What could be more undemocratic than that?