There’s a reason such economic ‘thinkers’ such as Peter Klein, Christian Reconstructionist Gary North, Murray Rothbard, and the Mises Institute occupy a tiny niche in the economics ideas market. Economists come in all flavors from left to right, but the advocates of debt repudiation are way way off on the right fringe.
The essence of their argument is that if the U.S. defaults on its debt the investors will depart, leaving the U.S. to rely solely on its tax revenues to fund government operations, a position which instantly creates the necessity of a balanced budget. Here are a couple of samples:
“There are still many in the South, where the Republican Party is now based, whose hostility to the national debt traces back to those days. In his 1987 essay, “The Ethics of Debt Default,” Buchanan made an argument often repeated by libertarians and Tea Party members: if the Treasury were to default, no one would ever lend it money again, thus imposing a balanced budget; the government could only spend as much as tax revenue permitted.” [NYT]
“If we refuse to raise the debt ceiling, then we wont be able to make our payments on the old debt; but only some of the payments. So our creditors will be pissed (those who don’t get paid). But we can then start talking about fiscal responsibility, we’ll reduce our spending, then start acting like a mature, sensible country instead of the profligate teenager we’ve been.” [eli5]
Not. So. Fast. There’s a real world out there and these people aren’t living in it.
When we speak of Federal government obligations — the United States doesn’t have creditors (other than those enterprises to whom we are obligated to meet the terms of contracts) — the United States has investors. We have sold Treasuries when our budget had a deficit and when our budget had a surplus (Clinton Administration). The Austerians/Defaulters make it seem as though the only reason to issue Treasuries is to pay off debt — they do that, but they also serve to create a “safe haven” for investment.
Those arguing that we could refuse to honor our obligations and actually benefit from the default are focusing solely on the “cover the debt” side of the equation without considering the “invest in something safe” side.
Because U.S. Treasuries are the “gold standard” investment other forms of investment are tied to them. The issuance of a bond (note or bill) is a binding contract on which other binding contracts are based. [WaPo] Jonathan Capehart also mentions the “roll over risk.”
“Billions of maturing securities come due on a weekly basis,” Patterson said. “Normally, people plow their money right back” into new bonds during a Treasury auction. That money equates to about $100 billion each week. “If there was a crisis of confidence” because the United States was prioritizing payments and failing to pay billions in government obligations, bondholders “could, instead of reinvesting in Treasuries, simply cash out and take their money somewhere else,” Patterson said.” [WaPo]
Then there’s the practical side of the process. To default on the national debt is unconstitutional (Amendment 14, section 4), illegal, and completely impractical. [Slate]
If the roll out of Apple Maps was a problem, and the glitches associated with the Affordable Care Act exchanges have illustrated significant IT issues, wait until the Treasury Department tries to re-set its entire computer system — tied into other agency (foreign and domestic) computer systems — along with the Fedwire system, etc. etc. etc. It seems a bit disingenuous to argue that the ACA computerized elements are a “unmitigated disaster,” and then try to contend that revamping the Treasury’s entire integrated software system on the fly would be “doable.”
** And, by the way — the members of Congress and the President of the United States have health insurance from the Federal Employees Health Benefit Plan. Remember the part of the ACA which says that if you have health insurance from your employer you don’t need to participate in the exchange? Then Senator Charles Grassley (R-IA) added an amendment:
“The only health plans that the Federal Government may make available to Members of Congress and congressional staff with respect to their service as a Member of Congress or congressional staff shall be health plans that are — (I) created under this Act (or an amendment made by this Act); or (II) offered through an Exchange established under this Act (or an amendment made by this Act).” [WaPo] […]
What is the controversy about?
“This isn’t, in other words, an effort to flee Obamacare. It’s an effort to fix a drafting error that prevents the federal government from paying into insurance exchanges on behalf of congressional staffers who got caught up in a political controversy.” [WaPo]
That would be receptionists, clerks, and other Congressional personnel who are making about $29,000 per year.
Meanwhile, the Tortilla Coast Club members continue to delude themselves that “the President and Congress aren’t ‘on’ Obamacare,” (hint: They have employer paid insurance, it’s the staffers who are getting screwed) and It’s OK, if we just default on the Full Faith and Credit of the United States we’ll end up with a balanced budget. If you believe this I have some lovely northern Nevada real estate for you… bridge included.