The federal debt is now about $31.5 trillion and will very soon bump against its current ceiling. Any notion that government, now wholly owned by the politics industry duopoly, works for the nation’s wellbeing is unmistakably dashed by Congress’ infighting over raising the ceiling. Failing to raise it would be the height of irresponsibility. In fact, as my friend, Luther Munford who also occasionally writes in this space, pointed out, Section 4 of the 14th Amendment forbids the government from defaulting on its debt.
We blame sitting presidents for borrowing and spending that challenges the debt ceiling but presidents can only propose legislation. Congress enacts legislation so Congress is solely responsible for borrowing, spending and raising the debt limit, at which they are well practiced. Past Congresses have voted to raise the ceiling 78 times since 1960, usually with little or no debate. Of those, 29 happened with a “profligate progressive” Democrat in office, 49 during a “fiscal conservative” Republican’s presidency.
If you are inclined to think government default is like individual bankruptcy, it is nothing of the kind. Individuals who default may get relief through bankruptcy with a chance to start over. U. S. default would be many orders of magnitude more damaging because of its national and international ramifications, none of them good. Also, unlike individual bankruptcy, most of the harm would be long-lasting, perhaps irreversible.
Domestic default means government would be unable to pay any of its obligations including to beneficiaries of Social Security and Medicare, military veterans and government retirees or pay civilian government employees’ salaries. Neither would it be able to pay suppliers, notably suppliers of military goods. The Treasury, which does the government’s borrowing, would be unable to make interest payments or payments due at maturity to individuals and institutions holding existing government debt instruments; bills, notes, bonds, and Treasury Inflation Protected Securities (TIPS). Default also means the market value of outstanding government debt would fall causing the interest rate on that debt to rise making future government borrowing more expensive. In turn, interest rates on all private debt, including mortgages, car loans, and credit cards would rise. Of course, the bear would be roaming Wall Street. You can imagine what will happen to the value of IRAs and other retirement nest eggs.
Around the world U.S. default would be at least as damaging as it would be here. The U.S. dollar at the moment is the world’s leading reserve currency, the de facto world currency. That means many countries, firms and individuals hold U.S. dollars because they are used in international trade and financial transactions, even those that don’t involve U.S. entities. Default likely would mean the other two, important reserve currencies, the Euro and Chinese renminbi, would replace the dollar as the main reserve currencies. Therefore, international holders of dollars would sell them thus depreciating the dollar. A falling dollar means we pay more for imported goods. We do like our imported cars, cameras, cell phones, clothes, shoes, TVs, computers, traveling abroad, wine and spirits; you get the idea.
Default would foment chaos in world-wide financial markets. In fact, Congress’s brinkmanship over the ceiling has already caused Standard & Poor’s to downgrade U.S. debt’s rating from AAA, the rating for essentially risk-free debt instruments. Perhaps most importantly default would cause a loss of faith in our government at home and around the world. Any one of these effects alone would be bad enough. Default would roll them up into one catastrophic package surely causing a deep and probably protracted recession, maybe even depression.
Though the two parties cooperated to capture government, their intra-industry rivalry is intense. Over time together they have built for themselves incentive structures such that working to promote the common welfare is no longer their major objective. Right now, their rivalry is playing out over the debt ceiling which has already begun to harm the rest of us. Every Senator and Representative knows they have no choice; they must raise the debt ceiling. Yet Congress is playing Russian roulette with the economy but the gun is pointed at our heads.
Do we have to deal with the size and rate of increase of the federal debt? Absolutely! And sooner rather than later. Until the rest of us get serious about clipping the wings of the political duopoly, our legislators’ incentives will not change. Unless we force them to at the ballot box, they certainly aren’t voluntarily going to change the rules of the game they’ve so expertly crafted to deliver benefits to themselves and their patrons at our expense. Congress works for us. It’s past time we begin to act like the boss.
Patrick Taylor lives in Ridgeland.
