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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

The Irresponsibility of Saying We’re “Bankrupt”



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Over the last few years, too many conservative politicians and commentators have casually thrown around the idea that the United States is “bankrupt” or “insolvent” or that we “can’t afford to pay our bills.” Unfortunately, this repetition seems to have led many people to actually believe that the United States is broke.

What you are watching happen in Washington this week is a logical extension of the “we’re broke” mindset. If the United States were actually facing a debt crisis, in danger of losing access to the bond markets—a Greek-like situation, real insolvency—it would be quite reasonable to hold the debt ceiling negotiations hostage while demanding a fiscal adjustment that would sharply reduce debt-to-GDP ratios.

The “we’re broke” mindset simultaneously explains what might seem like a paradox of conservative thinking today: federal deficits are alarming and unsustainable, undermining our national credit, and yet we should not think about raising taxes.

If you have a bad-but-fixable debt problem, tax increases are a logical part of the austerity package to get you on the road to health. Just look at any country in Europe that’s actually implementing an austerity plan. But if things are already too far gone to fix, if we’re really broke, why bother raising taxes? That’s just more money down the hole. Conveniently, this position allows Republicans to conclude that alarming deficits are cause for spending cuts, but not for tax increases.

Indeed, Ryan Ellis of Americans for Tax Reform told me this week that he doesn’t think most of ATR’s pledge signers believe that rating agencies would view a federal tax increase as improving the creditworthiness of Treasury bonds. That’s completely insane—ask any bond analyst how he feels about his borrower entity raising taxes—but it reflects the Bizarro World mentality that made this week’s events possible.

The truth is this: we are not facing an imminent debt crisis, except for the one that Congress might artificially create. Our current debt-to-GDP ratio is above the ideal level, but manageable. We can afford to run big deficits for a few more years. Our long-term fiscal course is unsustainable, but—as shown by the Bowles-Simpson commission and others—a set of manageable adjustments in the medium term can make it sustainable again. Panicking now about the public debt ratio is an error.

As Joe Weisenthal wrote last year, bankrupt entities can’t borrow at 2.8 percent for 10 years. And indeed today, the 10-year Treasury yield is back down to 2.8 percent. Nervous investors are seeking shelter in the Treasury markets—even though a good part of the economic uncertainty is coming from the debt ceiling crisis itself. If we were really broke, that behavior would make no sense.

The markets know the U.S. government isn’t broke. But unfortunately, a lot of politicians have convinced themselves that it is, are behaving accordingly, and are making a huge mess as a result. And anybody who has said that the government is “bankrupt” shares in the blame.



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