The Corner

Another Cup of Tea

Tea-party Republicans in the House did the right thing in fastening Washington’s attention to the future path of federal spending. Now they and their colleagues in the House and the Senate should avoid cheapening their achievement.

The House Republicans should signal that they’ll pass what comes out of the Senate, whether it’s a Reid-McConnell compromise or even a clean debt-hike bill. Increasingly fevered days of negotiations as the week begins aren’t going to solve anything. 

Politicians of both parties have got the point that tea partiers wanted to get across. We can’t spend what we plan to spend in the future without harming the character of the country. The question is: What do we cut, and how?

No one on either side has come close to answering that. The placeholders that have come out of each chamber of Congress reflect this vacuum.

Are we going to slash discretionary spending such as transportation investment to make room for ever-growing entitlements as the population ages, even though we need better infrastructure to support the economic growth that we need to support the aging population?

That’s what both the Boehner and the Reid plans imply, with 378-to-1 and 68-to-1 ratios respectively of cuts in discretionary spending to cuts in mandatory spending (which includes entitlements). 

A balanced-budget amendment wouldn’t resolve this question or others. It would be a straitjacket with a formless dummy inside — some unknowable mix of taxes and spending. “Balancing the budget” by zeroing out highway spending to maintain policy illusion on entitlements for a while longer, for instance, would only tip the scale against growth.

And if Republicans do too good a job at convincing people that balanced budgets are important, eventually they’ll walk right into a budget “solution” that involves severe tax hikes during a recession, or one that involves gutting the military. 

Absent an economic miracle, the nation faces tough choices. Let’s not make them harder by pretending that defaulting on our external debt is an option.

Nor is it realistic to contemplate internally defaulting on Social Security checks or delaying payments owed to vendors — or instantly slashing spending by nearly half to try to pay our outstanding bills.  

External debt default would risk a financial crisis. Any politician who is cavalier about this possibility should remember that much of the increase in outstanding debt over the past few years has come from the still-fresh financial meltdown.

As Carmen M. Reinhart and Kenneth S. Rogoff wrote in This Time is Different, their 800-year survey of financial debacles:

Banking crises almost invariably lead to sharp declines in tax revenues, while other factors leading to higher deficits can include the operation of automatic fiscal stabilizers [such as unemployment insurance], counter-cyclical fiscal policy [such as aid to state governments and other “stimulus”], and higher interest payments. . . . On average, during the modern era, real government debt rises by 86 percent during the three years following a banking crisis. . . . These fiscal consequences, which include both direct and indirect costs, are an order of magnitude larger than the usual bank bailout costs.

In the nearly three years since Lehman Brothers collapsed, government debt is up 48 percent. A default on our bonds probably would send the debt spiraling higher, as it would result in bigger government, not smaller.

A global run on short-term money and “repo” markets whose currency is Treasury bonds would spur businesses to shed hundreds of thousands of jobs. That’s what happened in 2008, because the businesses that relied on such markets to meet payroll or to finance inventory had a hard time getting cash. 

This time as last, the newly unemployed would fall right onto unemployment, disability, and Medicaid rolls.

It wouldn’t take long — a matter of days — for the U.S. government to capitulate. But the damage would be done. 

Even delays in dispatching Social Security benefits and in writing checks to vendors such as defense contractors would slow the economy. Without expected cash coming in, people and businesses would have to hoard more money to be sure of paying their bills. 

It would be one thing if an instant solution to our long-term fiscal, social, and economic problems were at hand, and the only thing stopping us from enacting it were the ability to borrow more money next week. But that’s not the case.

An intensification of default brinkmanship would only hurt the economy, and make longer-term problems harder to solve. 

— Nicole Gelinas is a contributing editor of the Manhattan Institute’s City Journal


The Latest