How we got into this fine mess

July 25, 2011
Jim Surowiecki.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google,mail" data-share-count="false">

For a clear, powerful, and erudite short take on the current debt debacle, there’s no better place to go than Jim Surowiecki. His main thesis is pretty much impossible to argue with: that the debt ceiling should be abolished. If Congress wants to cap the government’s borrowing, it can and should do that in the budgeting process, not with a saber-toothed ceiling which risks devastating the entire global economy.

The debt ceiling, it turns out, has been a dangerous anachronism for almost 40 years now:

Congress used to exercise only loose control over the government budget, and the President was able to borrow money and spend money with little legislative oversight. But this hasn’t been the case since 1974; Congress now passes comprehensive budget resolutions that detail exactly how the government will tax and spend, and the Treasury Department borrows only the money that Congress allows it to.

There’s an important lesson here. For 37 years, the debt ceiling has provided an easy way for the party which isn’t in the White House to posture politically against the party which is in the White House. Even Barack Obama voted against raising it, once. Every one of the dozens of times the debt ceiling was reached, there was a small but non-zero probability that something disastrous would happen. And each time, disaster was, predictably, averted. It’s a classic sign of how tail risks are treacherous and breed invidious complacency. We’ve reached the debt ceiling dozens of times; nothing’s ever happened; so there’s nothing to worry about; so there’s no point expending precious political capital doing the right thing and abolishing it.

And now we’re paying the price. It’s increasingly looking like the best-case scenario is that America simply loses its triple-A credit rating — something which in and of itself will be pointless, dangerous, unnecessarily expensive and potentially catastrophic. The worst-case scenario, of course, is an outright default.

The lion’s share of the blame here belongs with the Republicans in general, the House Republicans in particular, and the Tea Party caucus within the House Republicans most of all. But it’s not like these people’s existence or intransigence was any great secret. And so the White House tactics over the course of the past few months look dangerously naive.

Bear with me on a short digression here. Back when George W Bush enacted his first big round of tax cuts, Paul Krugman wrote a column (I can’t find it right now, Google’s new algorithm hates pulling up old content) saying that, in effect, Bush had made Clinton look like an utter chump. There’s no point in Democratic presidents practicing fiscal responsibility and balancing the budget, he said, if their Republican successors are just going to come along and squander all that hard-earned fiscal rectitude on dangerously large tax cuts for the rich.

That kind of thinking helped to set up a vicious dynamic — Republicans would increase spending and slash taxes, while Democrats would increase spending and leave taxes untouched. It’s something which is certain to end in tears sooner or later — something the responsible people at Treasury know full well.

Which brings us to the current debt-ceiling debate. The budget debate, of course, sets near-term taxation and spending. So seeking to make a virtue out of necessity, Treasury entered negotiations over the debt ceiling to do something longer-term: to put in place a decade-long “fiscal straitjacket” which would constrain future Democratic and Republican administrations alike. That would address the Krugman point, and help to cement — rather than weaken — America’s triple-A credit rating.

As things turned out, of course, Treasury’s bright idea backfired catastrophically. Far from putting the US on a course of long-term fiscal prudence, it put the country on a log raft with no paddle, careening straight towards a deathly waterfall. In hindsight, attempting to engage the House Republicans on long-term fiscal issues was a silly idea — these are people who think you can raise revenues by cutting taxes. A fiscal straitjacket, necessarily, involves some mechanism for raising taxes; since that was always going to be anathema to the Republicans, there was no point even trying to construct one.

The cost of Treasury’s tactical mistake is going to be enormous. I don’t know how much choice Treasury had in the matter, of course: it’s possible that this particular debt-ceiling debate was going to come to tears no matter how the White House decided to approach it. But I can’t help but draw some kind of causal connection between Treasury’s oversized ambitions and the current mess. In any case, it’s a sunk cost at this point. And we’re all going to pay for it, dearly, in the years and decades to come.

Update: Many thanks to yonran, in the comments, for finding that column.


Comments are closed.