The same old game is starting all over again. The big spenders in Congress and the administrative state are demanding an increase in the debt limit. Republicans aren’t happy about it. They are demanding some fiscal responsibility. The negotiations begin. But the cards are stacked, and why? Because the bad guys in this drama always have a central threat that the good guys do not: the prospect of default.
Sure enough, and right on cue, the Congressional Budget Office is sounding the alarm that the United States will default on its debt as early as July and as late as September. This is supposed to be the great warning to Republicans to shape up and go along. And they probably will, sad to say.
“America has paid all of its bills on time since 1789, and not to do so would produce an economic and financial catastrophe,” said Janet Yellen. “Every responsible member of Congress must agree to raise the debt ceiling.” She added, “It’s something that simply can’t be negotiable.”
Catch that? Not negotiable. Meaning: there will be no change in the ways of Washington. We will just keep running up trillions and trillions and relying on the Federal Reserve to print the necessary money. Americans pay either way that the debt is funded: taxes or inflation. Either way, we get the bill for what they do.
That’s the crucial difference between public and private debt. With private debt, the borrowers pledge their own money. The lenders benefit but only because of the successes of the borrowing institution. If it doesn’t work out, that’s a risk that everyone takes.
With public debt, the borrower pledges nothing. It only gets the money to pay back the lenders by promising other people’s money, which they get one way or another. This is precisely why governments should not be in the business of borrowing, and certainly they should never be allowed to do so if they have a money printer in the basement called the central bank.
This is why the liberal tradition has always emphasized frugality in government. Frugality in business may or may not be a good thing but, regardless, the people who make the mistake pay the price. With government, it’s the public that pays the price.
And we know what will happen. If the Republicans don’t cave, there will be all sorts of hysteria about shutting down the government. Inevitably, they will shut down the parts of the government that the public actually uses, such as the monuments, national parks, and passport services. It’s all a manipulative trick to cause constituents to ring up their representatives and demand they approve a higher debt limit and a higher budget.
We’ve been doing this dance for decades now. It’s really tiresome.
Let’s just explore the unthinkable. The Republicans refuse to go along. Months roll on. The government shuts down. Still they don’t budge. There is no budget deal. It’s a game of chicken. Whoever has the most convictions wins. Let’s say that the Republicans stick to their principles.
Then what happens? U.S. debt gets downgraded. And downgraded again. There suddenly appears a default premium as with every other debt instrument on the planet Earth. Why should the U.S. government be any different? Well, some people in Washington believe it should be. Otherwise the only result will be catastrophe, so they say.
Maybe it is time to rethink this whole scenario. What if U.S. debt carried a default premium? And what if the United States actually defaulted? It would hardly be the first time in history a government has done so. And the way that Washington has conducted fiscal policy over the last decades—and certainly over three years—it is a deserved fate.
“Although largely forgotten by historians and by the public, repudiation of public debt is a solid part of the American tradition. The first wave of repudiation of state debt came during the 1840’s, after the panics of 1837 and 1839. Those panics were the consequence of a massive inflationary boom fueled by the Whig-run Second Bank of the United States. Riding the wave of inflationary credit, numerous state governments, largely those run by the Whigs, floated an enormous amount of debt, most of which went into wasteful public works (euphemistically called ‘internal improvements’), and into the creation of inflationary banks. Outstanding public debt by state governments rose from $26 million to $170 million during the decade of the 1830’s. Most of these securities were financed by British and Dutch investors ....
“The next great wave of state debt repudiation came in the South after the blight of Northern occupation and Reconstruction had been lifted from them. Eight Southern states (Alabama, Arkansas, Florida, Louisiana, North Carolina, South Carolina, Tennessee, and Virginia) proceeded, during the late 1870’s and early 1880’s under Democratic regimes, to repudiate the debt foisted upon their taxpayers by the corrupt and wasteful carpetbag Radical Republican governments under Reconstruction.”
As for the federal government, we don’t really have a precedent but nor do we have precedent for the outrageous spending and debt being accumulated today.
So let’s just say that the Republicans get a backbone and let the risk of default happen. In the first instance, it would be a massive savings on spending to service the debt which American taxpayers must do today and at increasingly high and unsustainable rates. That’s a very good thing. The holders of debt start to get nervous when it is downgraded and they move to other forms of debt instruments or stocks or cash.
It doesn’t have to end in default. The government can sell assets. And there are vast amounts of them: land (enormous amounts of it), buildings, machinery, stockpiles of everything. That alone could pay off the debt. Just the land in the West would be enough. And then we start to cut government down to size, ending one agency after another. One department and bureau after another gets cut off the books. This is a very good thing.
Then government can service its debt. But let’s say it cannot and a real default happens. The federal government would lose creditworthiness. I say unto you: that would not be the worst thing. Indeed it might be the best thing. Maybe this goes on for a generation until Washington can get its house in order. That’s a sure path to fiscal discipline.
What do you do when your kid in college keeps running up the credit card bills that you pay and you can no longer afford it? Take away the card. It’s true for the federal government too.
In the end, it’s all about conviction and bravery. Republicans need to realize that this is an emergency, not the debt as such, as bad as it is, but the sheer size and scope of government. It is unjust. It is unconstitutional. It is a threat to life and liberty. Congress has only this one power left, the power of the purse. It’s time they get serious about it. Now is the time.
