By Alex Schiff, University of Michigan
I haven’t really written about politics yet in this column. If you hate that stuff, I won’t be offended if you skip this article. But I’ve been following the whole debt debate for quite some time and I feel compelled to weigh in on a talking point on both sides of the aisle: the idea of our reputation being ruined by a default on our debt.
For those just checking in, the past several months have been completely consumed by debate over raising the debt ceiling, a statutory limit on the amount of debt that the United States can borrow. It was put in place by the Second Liberty Bond Act of 1917 to make it easier for the country to issue debt rather than authorizing each issuance separately. The ceiling has been raised from time to time, with increasing frequency over the past decade, in order to allow for further borrowing.
Over the past year, however, the Republican-controlled House of Representatives has said enough is enough and are using the issue to force spending cuts and a drastic decrease in the overall federal deficit. Whether you like their goals or not, I think we can all agree that they are taking the debt ceiling (and by extension, the entire world economy) hostage in order to achieve a massive reduction in government spending.
No one’s arguing that deficit reduction isn’t a desirable goal. In fact it’s a quite necessary one. But let’s be clear that there is absolutely no practical reason whatsoever that the United States can’t raise the debt ceiling tomorrow with no changes in the budget. There is an insatiable demand for our debt right now due to its perception as a “risk-free” asset amid very volatile financial markets. We have no problem issuing debt at reasonable interest rates. We can debate whether “kicking the can down the road” is wise, but I repeat, there is zero real-world limitation on our ability to raise the debt ceiling immediately. None. Raising the debt ceiling is a purely procedural matter. So this isn’t a situation where we can’t do it — we just refuse to.
But I digress. The rhetoric around Washington is that the main reason we can’t default on our debt is that it will call into question the credibility of our obligations — no one will want to loan us money if we don’t pay our bills. Just listen to Treasury Secretary Tim Geithner’s comments in this excerpt from Politico:
“Treasury securities enjoy their unique role in the global financial system precisely because they are viewed as a risk-free asset,” he writes. “Investors have absolute confidence that the United States will meet its debt obligations on time, every time, and in full.”
Further, a default, Geithner writes, “would call into question the status of Treasury securities as a cornerstone of the financial system, potentially squandering this unique role and the economic benefits that come with it.”
And they’re absolutely right. A failure to raise the debt ceiling (and thus default on our debt) would call into question the safety of what has so far been perceived as the world’s safest asset: U.S. Treasury bonds (how we sell our debt). The entire international financial system essentially rests on the assumption that we will never default on our debt. When individual citizens, pension plans, endowment funds and even entire nations want to store their wealth in something safe and predictable that earns just enough interest to keep up with inflation (whether they actually do is a whole different debate), they look to U.S. Treasury bonds.
The interest rates on these bonds drive the rates on nearly every other interest-earning asset in the world — from other nation’s debt to the interest I pay on my student loans. If we were to give the middle finger to the people who loan us money (what a default inevitably does), we could see a huge increase in rates from the current roughly 3% on 10-Year Treasury bonds. To give some perspective, 4 days before Russia defaulted on its domestic debt and halted payments to foreign creditors, its bonds’ annual yields rose to 200% in 1998. And no one in their right mind wanted to lend money to Russia for quite some time after that.
I would like to believe that our leaders are smart enough to stave off such a doomsday scenario. But no matter what happens, America’s reputation has already been tarnished beyond repair. Our image as a mature democracy has quickly been eroding over the past several years. For centuries, our two-party system has been completely predicated on our ability to compromise and meet in the middle. That’s what has always set us apart (for better or worse) from European parliamentary systems that seem to change every six months. For much of its history, America took pride in the relative stability and maturity of its politics.
But anyone that has followed the past four years of politics has seen that willingness to compromise get squashed by the rise of fringe groups like the Tea Party. By being the loudest and most childish ones in the room, they have successfully moved the conversation substantially further to the right of where most Americans feel comfortable. They have declared war on revenue as a matter of principle. All sources of revenue are unholy and must be abolished, from corporate profits taxes to tax loopholes that make it cheaper to ship jobs overseas. Mention the word “revenue” and the likes of Herman Cain and Jim DeMint reflexively go on a mouth-watering tirade like a bunch of Pavlov’s dogs.
You don’t need to be a left-wing-fasco-communist-hippie to be ashamed of the fact that our nation put enough of these people in office to make a difference. They have destroyed the commitment to compromise our Founding Fathers baked into the heart of how Congress is supposed to operate according to the Constitution. And in two weeks we could very well commit economic suicide because of their shenanigans. Like I said before, there is no practical reason we couldn’t raise the debt ceiling today to give negotiations more time to play out. The GOP, now the puppets of the Tea Party, simply refuses to do it.
Instead, they’ve shown the world that our policy-making is no longer driven by consensus and compromise. It’s driven by a bunch of children who learned the unfortunate lesson that in this country, the person who screams loudest wields the greatest influence. Despite a Democrat-controlled White House and Senate (and House until 2010), the legislation flowing from Washington since 2008 would have been championed by Republican governments before it. From health care reform to financial reform to deficit reduction, the final bills are for better or worse overwhelmingly marked by conservative ideas and philosophy.
Yet the Tea Party still screams “socialism!” and “Today marks the death of freedom!” while the left wonders, “Uh, wasn’t that your idea?” There is simply no middle ground with these people. There is only a “you’re either with us or you’re a fascist” mentality that is both pathetic and terrifying at the same time. It leaves no one happy, even when one side clearly wins.
I’ll leave you all with one final question. Knowing what you know about the people that drive policy in the United States — and that we have a long list of polarizing issues that need to be addressed before we’ll be back on a sustainable fiscal path — would you buy our debt? As politicians beat their chests in Washington, the rest of the world is asking that very question.
Alex Schiff is the co-founder of The New Student Union.