Issues

No Matter What Happens, America’s Reputation Will Be Ruined


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.

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The New Student Union is an online magazine run by and for college students covering the issues we care about. Self-starters with great communication skills and a passion for writing should email info@newstudentunion.com to get involved. Official site will launch in late 2011.

Discussion

15 thoughts on “No Matter What Happens, America’s Reputation Will Be Ruined

  1. uhhh, what reputation? as foolish and corrupt? I think we’re perfectly ssafe with that one

    Posted by Firstname Lastname | July 26, 2011, 12:31 pm
    • Our reputation as a mature democracy that can solve basic problems. If we have leaders willing to throw our economy into depression in order to get 100% of their way and make no compromises, that’s when we should be worried. Our government has always had a bad reputation domestically (people have been making fun of government’s inefficacy for decades), but when the rest of the world looks on and sees that their money really may not be safe here any more — not because we can’t afford to pay our bills but because we have people holding our access to funds hostage — that’s when we’ll start to really feel the consequences.

      Posted by Alex Schiff | July 26, 2011, 4:19 pm
  2. Just this afternoon I googled “US debt crisis explained” …even as a business graduate, the whole debate around this issue has been confusing me. Anyway, nothing I found on Google summed it up for me better than this did, so thanks!

    On another note, I agree entirely with your point, and it’s true, American politics has become a scarier and scarier lately. With the likes of Michele Bachmann and others firmly on the scene, compromise really does seem to be headed for the drain.

    Posted by daniellery | July 26, 2011, 3:19 pm
    • Thanks Danielle! I appreciate that.

      We have a political system entirely predicated on compromise with one party that blatantly refuses to compromise in any way shape or form. It’s like trying to shove a square peg through a round hole with an inflatable mallet.

      Posted by Alex Schiff | July 26, 2011, 4:21 pm
    • Jumping in on this thread, which I acknowledge is four days old almost, but I think the issue with the extreme poles on the left and right dominating the political discourse has very much to do with the respective natures of the moderate majority and the extremes on both its sides. The smaller and more extreme a party or group is (there is a correlation), the louder it’s going to be. The moderates in the country aren’t being heard because, via their moderate nature, they don’t have loud voices. Of course, as Thucydides would remind me, Athens lost the war (handily) and the soft-spoken Spartans lead the League to victory.

      Posted by makuezue | July 30, 2011, 12:33 am
      • The thing is, I wouldn’t say the Democratic Party is at all controlled by the extreme left. If it was, health care reform would have had a lot more debate about a single payer system (where government is the universal insurer, but doctors, hospitals, and the broader medical system remains private, like in Canada). If you look at the ideas coming out of conservative think tanks in the 1990’s, that’s basically what we got in the Affordable Care Act. The Democratic Party is supporting and passing legislation that is heavily marked by conservative ideas because they can’t pass what they actually want (rightly or wrongly) due to the need to get a super-majority to accomplish ANYTHING today. This is unprecedented.

        The Republican Party has simply moved so drastically to the right that moderate Democrats now look like socialists. The “government takeover” of all the industries the Tea Party moans about is in reality the same plans put forward by Republican leaders pre-Obama. Which is fine – centrism is what we’re supposed to get out of our politics. Instead, Democrats are starting in the center because they recognize there is no hope of getting the minority party to talk about anything left of it (which is wrong in it of itself, people still voted for a Democrat-held Senate). But the Republicans are so far to the right nowadays that “meeting in the middle” is quite right of center and firmly in Republican territory. Take, for example, the debt debate. Does anyone honestly think that a plan composed of 3-to-1 spending cuts vs. tax increases (the one that Obama was attempting to broker) is a “left-leaning” plan? Heck no! It is very conservative. Which is fine if you think that’s right for the country. I’m not saying it is or isn’t. I’m just saying that it is NOT in the middle, it is NOT left-leaning — it is something that Republicans a few years ago would have been drooling over. Today, they’ve turned into one giant libertarian cult (except most of the libertarians I know still say they would never want to be associated with the Republican Party because of the idiocy and hypocrisy that surrounds it). Again, if that’s what you want, then you should be happy right now, but you can’t even begin to make the argument that that is a) in the middle or b) what the people want.

        Posted by Alex Schiff | July 30, 2011, 3:31 pm
      • The United States has been a center-right nation for decades following the stagflation and subsequent deregulation that occurred in the 1970s. A large reason for the shift is associated with the downfall of organized labor — partially because of anti-labor/pro-business legislation, but also non-related or additional factors (rapid globalization being the most prominent). The 12 years of Reagan and Papa Bush obviously contributed to this paradigm shift as well. But I’d say the biggest ideological slide toward the right in the U.S. ironically took place during Jimmy Carter’s presidency and the Reagan/Thatcher revolutions. There were literally tax revolts in the streets of some of our largest cities.

        So Alex, I honestly don’t believe that “Republicans are so far to right nowadays.” Yes, the middle is right of center and it HAS BEEN for quite some time. You cite the failure to pass health care reform, but if I remember correctly an even more tame version of Obama’s plan failed to pass during the Clinton years.

        I wouldn’t be so quick to cast the GOP as far-right. Where are the serious calls for mass privatization of entitlements or restrictions on immigration at the federal level? Where were the spending cuts and non-existent tax increases during Republican presidencies? (including Reagan: http://reason.com/archives/2011/07/18/distorting-reagans-record).

        And let’s flip the script. Are gun restrictions harsher or more lax than they were in the 1970s? Has religion guided more or less policymaking since that era? Have we become more far-right in terms of how society views minorities? Are we spending more or less on education and welfare assistance at the federal level than the 1970s? In general, do our businesses have to deal with more or less regulation? You unfavorably compare our healthcare system to Canada’s, but what about our present level of corporate taxation?

        Alex, I agree with you that the move to the right has made perfectly legitimate proposals from moderate Democrats seem loony, and not for the better. You’ve hit the nail on the head there. I suppose that’s a consequence of the ideological shift and it’s not good for political discourse in this country. I wish I had an easy answer for how to present a balanced view on issues without uttering the words: Fairness Doctrine.

        There is one shift that we should really be concerned about and it’s not Dems vs. GOP. It’s the growing income inequality that’s occurring at the top 1 percent. Besides our business leaders and hedge fund managers, this group includes our politicians and bureaucrats. Frank-Dodd and other attempts at regulation in the financial sector have had a minimal effect on restraining their activity. The control over the economy that this group possesses is scary, and is the major reason for the recent crisis that seemed to fuck over everybody — except them.

        Apologies for the essay.

        Posted by Alex Biles | July 31, 2011, 8:27 am
  3. Once again Alex has hit the nail squarely on the head.The ramifications of the Republicans mad dash to financial instability are already being felt by the various stock markets and if the deadline for raising the ceiling is reached without a change “Black Friday” will look like a blip by comparison to the drop the markets will take on Aug.3rd.I will never understand the psyche of people who vote for politicians whose sole interest is to protect the pockets of multi-millionaires and corporations earning billions in profits while taking away minimal benefits such as Social Security and Medicare from the masses.It’s the stuff that fuels revolutions.Allen Kovinsky

    Posted by Allen J.Kovinsky | July 28, 2011, 9:53 am
  4. Let me play devils advocate for a moment. There is no firm nexus between raising the debt limit and defaulting on our debt. Within our complex and arcane laws (known as USC) there are many mechanisms for the government to pay our debts without raising the ceiling. And I’m not talkin about the U of S. California !

    Posted by Dr. Paul | July 29, 2011, 11:24 am

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