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COMMENTARY
July 30, 2011
Age of default
The American "debt ceiling" has, like everything else, a history. And like so much else in what I persistently call Nanny Statecraft, it goes back to the First World War. Once upon a time, the U.S. Congress had to authorize every single bond issue. That meant finding a political justification, which slowed the borrowing down.This process became tedious in 1917, when U.S. war participation required a rapid and, by peacetime standards, reckless enlargement of public debt. Rather than vote bond by bond, Congress now set an overall ceiling, through which the Treasury was not to pass, until Congress raised it. The evolution of the mechanism is itself rather tedious (there was a further, event-driven relaxation of discipline during the Second World War, and then accounting tricks after). The "principle" of the debt ceiling remained in place, though in practice the House of Representatives simply raised it, semi-automatically, with each new budget. Over the last several years, even the discipline of regular budgets has been abandoned down there. But the debt ceiling inconveniently remains. It was raised to the unimaginable height of $14.3 trillion in February of last year, to accommodate wild "stimulus" spending, on top of the remorseless inflationary advance of "entitlements," and the rise of the debt-service costs, too. From the point of view of the political class, this is not the problem. The problem is rather that a large faction of the U.S. electorate has had enough. Worse, they have tired of attempts to scare them with what will happen if the ceiling is not raised again, by Tuesday. The "Tea Party" is tactically Republican, but suspicious of the entire political class, both Democrat and Republican. The Republicans know it, and are thus in a bind, unable to make the usual last-minute compromises. Populists, these "tea-baggers" (as the Dem wits call them) are under the naive impression that in a democracy "the people" call the shots. They have familiarized themselves with the language of the American constitution, to this effect. They are mostly, indeed, just like old-fashioned Americans, still employed in productive labour, as opposed to the sophisticated and abstract paper and service economy on which a more urban America now lives. And they will not stand for another penny in taxes; the U.S. economy has already slowed enough without that. Instead, they demand that the vast system of "entitlements," that has grown like a fiscal cancer, be attacked with the equivalent of fiscal chemotherapy. Simple souls, they think that instead of raising the debt ceiling, the government should try to live within its means. I, incidentally, applaud their simplicity - the Tea Party is dead right on the cause and the effect - though I worry about the ramifications, whenever a populist movement gets angry and out of hand. The very fact that they are not easily scared troubles me, for as an amateur student of history I have seen this movie before. The rest of the U.S. electorate remains easily scared, however, and therein lies the Democratic Party's hope of (temporary) salvation. No one can predict exactly what will happen, if, or rather as now appears, when, the U.S. Treasury hits the debt ceiling, and then defaults on (some tiny fraction of) its financial obligations, Tuesday. The reason no one can predict this, is that so much depends on how that treasury, and its current political masters, decide to handle it. There are by now many accounting tricks to get around the obstacle. Even without them, sensible choices could be made about which debts to pay immediately (salaries and pensions, for instance), and which to defer until the politicians have sorted out the mess. It is, alas, in President Barack Obama's political interest - since he is widely blamed for the profligate failure of his stimulus measures, and for breaking the bank with ambitious new schemes for health care and the like - to make the cuts as immediate and painful as possible, while making the Republicans wear them. He is on record threatening, for instance, the payout of veterans' pensions. We will see next week what unfolds, and just how far the political temperature rises, in consequence. Yet, whatever transpires politically, "default" will not go away. The United States have been bankrupt for some time, regardless of accounting: bankrupt like Iceland, Greece, Portugal, Spain, Italy, and Ireland. That is to say, the U.S. federal government has no ability to repay its creditors within any foreseeable period of time. It has been operating upon "full faith and credit," since time out of mind, trading upon a productive reputation from long ago. But America's actual productivity has itself been progressively "outsourced." "Full faith and credit" is something that cannot survive doubt. And we are approaching the point where doubt triumphs. David Warren
© Ottawa Citizen
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