Debt, Default, And International Faith In The American Government
Would you trust the men and women in this building?
As I noted this morning, passing the midnight Thursday deadline that the Treasury Department has set vis a vis the debt ceiling, the U.S. Government isn’t likely to face real fiscal problems if the debt ceiling isn’t raised for another week or so. Indeed, it’s increasingly looking like we won’t really have to worry about that happening in the immediate future since Congress is fast at work on one of its last-minute kick the can down the road “solutions” to its completely manufactured crisis. Despite all of that, though, the twin crises of the shutdown and the debt ceiling crisis have once again laid bare the basic failure of Capitol Hill, and specifically this time around House Republicans and a small segment of Senate Republicans, to perform the basic tasks of governing. Indeed, it was these failures that largely led Standard & Poors to downgrade American debt back in 2011, and was also cited last night by Fitch in their own decision to put America on “negative credit watch.” That’s one reason why Felix Salmon argues that the damage from our twin crises of September/October 2013 has already been done:
[W]e’re already well past the point at which that certainty has been called into question. Fidelity, for instance, has no US debt coming due in October or early November, and neither does Reich & Tang:
While he doesn’t believe the U.S. will default, Tom Nelson, chief investment officer at Reich & Tang, which oversees $35 billion including $17 billion in money-market funds, said that the firm isn’t holding any U.S. securities that pay interest at the end of October through mid-November because if a default does take place, “we’d be criticized for stepping in front of that train.”
The vaseline, in other words, already has sand in it. The global faith in US institutions has alreadybeen undermined. The mechanism by which catastrophe would arise has already been set into motion. And as a result, economic growth in both the US and the rest of the world will be lower than it should be. Unemployment will be higher. Social unrest will be more destructive. These things aren’t as bad now as they would be if we actually got to a point of payment default. But even a payment default wouldn’t cause mass overnight failures: the catastrophe would be slower and nastier than that, less visible, less spectacular. We’re not talking the final scene of Fight Club, we’re talking more about another global credit crisis — where “credit” means “trust”, and “trust” means “trust in the US government as the one institution which cannot fail”.
While debt default is undoubtedly the worst of all possible worlds, then, the bonkers level of Washington dysfunction on display right now is nearly as bad. Every day that goes past is a day where trust and faith in the US government is evaporating — and once it has evaporated, it will never return.
If Salmon is right, of course, then a great deal of the damage that results from a default has already been done even if Congress does manage to hammer together a deal that kicks the can down the road in enough time to avoid the Treasury having to deal with serious cash flow problems. For the past month or so, the world has watched while the supposed leaders of the United States clamored their way through twin crises that were largely self-inflicted.
There was no rational reason for the government to shutdown, for example. The Continuing Resolution that Harry Reid and John Boehner had agreed to over the summer kept the sequester cuts in place, as Republicans wanted, and barely touched any areas of concern to Democrats. In a rational world, it should have passed the House easily, and I suspect that this is exactly what people like Boehner and Cantor wanted. Instead, a foolish crusade led by a Freshman Senator from Texas and whipped into a frenzy by organizations clearly more concerned with mailing lists and donations than anything else took the process over and caused the Republican Party to spend the end of September committing stupid act after stupid act even though they knew there was no chance whatsoever that any of these tactics would get past a Democratic Senate or Democratic President. At the same time, the debt ceiling issue was looming in front of them It’s not like they didn’t know it was happening. Congress had already punted on the issue twice this year and the Treasury Department had spent the better part of the summer using all the tricks in its book to stave off the inevitable. They knew by early September that the real crisis would hit some time in mid-October. And yet here we are in the actual final hours, we still don’t have a deal done, and the best we’re going to be able to get is something that just delays the crisis for a couple more months.
If that happens, which seems increasingly likely, we’ll avoid most of the immediate economic impact that would come from breaching the debt ceiling but, as Damien Cave notes in today’s New York Times, the events of the past month have left much of the world shaking its head:
Faced with Washington’s march toward a default, the world has reacted mostly with disbelief that the reigning superpower could fall into such dysfunction, worry over global suffering to come and frustration that American lawmakers could let the problem reach this point.
A common question crossing continents remains quite simple: The Americans aren’t really that unreasonable and self-destructive, are they?
“It just goes to show that it’s not only Greece that has irresponsible and shortsighted politicians,” said Ioanna Kalavryti, 34, a teacher in Athens. “We’ve been held hostage by our reckless politicians, and the interests they serve, for more than three years now. I guess our American friends are getting a taste of the same medicine.”
(…)
Already, many argue, the standoff in Washington has deepened the sense of America’s decline. On the streets of many countries, conversations about the United States now regularly include expressions of shock and dismay. One businessman in Mexico said that following the fracas was like watching a famous couple’s marriage collapse in public, with shoving, shouting and ugly insults.
How, many ask, did the United States become more like the rest of the world, and less of an obvious leader? “I think the U.S. is losing its place,” said Osama Shawki, a shopkeeper in Cairo.
Others agreed. “It’s strange that such a thing has happened there,” said Irina Popova, 40, a homemaker in Russia, which suffered a financial collapse and default in 1998. “I always dreamed of going to America. It can happen to any country. It was us before, now it’s them.”
On the streets of Greece, people seemed to be shaking their heads, stunned at what they saw as American political weakness corroding a country of obvious strength.
“I never thought a global superpower like the U.S. could ever be in a comparable position to Greece,” said Theodore Couloumbis, emeritus professor of international relations at the University of Athens. “Both countries are paying dearly for rising political tensions. But in America’s case, there is the potential for serious global repercussions, too.”
Now, obviously, there’s just a bit of ridiculous hyperbole going on here. The United States is neither Greece, nor Argentina, not Mexico, and we’re not likely to become any one of them at any time in the foreseeable future. Yes, we’ve got economic, structural, and political problems that are making things a lot more difficult than they ought to be, and the deep political divide in this country on some very fundamental questions tends to magnify those problems in a time of crisis. At the same time, though, we’re still the biggest economy in the world, the world’s most coveted consumer market, and the source of the world’s safest investment (T-Bills) notwithstanding the current debt ceiling problems. We’ll bounce back from these crises no matter how much Congress screws things up, and the world will continue to look to the United States for economic and political leadership largely because there isn’t anyone else capable of taking on that role, or willing to do so.
All that said, though, Ezra Klein and Evan Soltas are right to point out that this might not last forever:
Fitch and S&P aren’t saying anything that the rest of the country doesn’t believe. They’re not even saying anything that Wall Street doesn’t believe. Everyone knows that American politics has become a game of Calvinball played with live ammunition. The question facing traders is when to finally bet that this is the day when someone doesn’t make it out alive.
What you see with the Fitch and S&P calls is that the market price on the U.S. political system doesn’t reflect what market participants are coming to believe about it: that a once capable and reliable system is now dysfunctional and unpredictable.
That raises the possibility that a pivotal event could move markets dramatically because traders are prepared to believe, and to begin trading on, a much more pessimistic assessment of America’s political system. If everyone were moved to act on that belief simultaneously — by a debt-ceiling crisis, for example — the results could be earthshaking.
Gary Gorton, an economist who specializes in financial crises, put it crisply: “Financial markets can be wrong and they can be wrong in a big way because they don’t understand the situation and it only becomes clear ex-post.”
And it would be so clear. It was there in the polls, which showed the American people had lost faith in their government. It was there in the news stories, which showed Republicans in Congress becoming increasingly reckless. It was even being said by the ratings agencies. The ratings agencies!
This is the second or third time we’ve been through this game since 2010, although it’s the first time we’ve been through a shutdown since Clinton was President. On none of these occasions has Congress taken up the task of working on the type of long term fiscal reform that we actually need in this country. Instead, we just keep kicking the can down the road, usually past the next election, and hoping that nobody notices. So far, the rest of the world doesn’t seem to mind, or if they do they realize that they’ve got no real choice but to go along with it. If they start changing their minds, though, the costs to the economy here would be quite severe indeed. So, you know, maybe it’s time for Congress to work on things like tax reform, entitlement reform, and budget process reform (the proposals James Joyner made the other day are a good place to start, I think) before we have no other choice and even less time.
As long as the Tea Party tail is wagging the Republican dog I see little short-term chance that that kind of process can be set in motion.
As a general positive, we do have sequestration in progress and that is slowing the rate of spending growth, the economy is growing at a modest rate, and we’re slowly gaining traction after the precipitous crash of 2008. In the short-term we are on a good path. We do not need to go bi-polar as Republicans seem to prefer.
The issues James spoke of are long-term items and should definitely be addressed. Keep in mind however, the last time we broached these items about 4 years ago, one of the participants in that working group, Paul Ryan, voted against the package. Maybe the politics will have changed as a result of this well-planned idiocy, I hope so. As long as people like Ted Cruz are excluded from the table there is a chance that something like Bowles-Simpson could be successful in a 2nd incarnation.
About half of them, yes.
Fixed that for you.
How sadly ironic: the Republicans who have spent the last few years accusing Obama of lowering America’s standing in the world have done so much in the last month to damage it themselves.
Unfortunately, we have quite a few Americans who think that by trashing the US’s economy we will somehow return to some halcyonic yesterday where every American was a farmer and we didn’t have that much of an army and we had a “small” government.
The fact that we had child labor, environmental degradation (remember the Dust Bowl?), and people died in their mid-50s is conveniently forgotten.
Let’s just split up the country. Put all the Tea Partiers/anarchist libertarians in their own country and they can run their own government however they like.
@grumpy realist:
While it is a good idea, I doubt that Kenya is very happy with sharing a border with Somalia.
Perhaps if they all relocated to Alaska?
And make sure the government keeps its nose out of their oil money checks!
I think that The Onion, as is all too common, has this one right:
James Fallows’ observation that the United States’ incredible wealth allows us to expend immense sums on utter foolishness without inflicting terrible hardship gave me pause. Our country is a bit like trust-fund schlemiels who are granted many chances to screw up thanks to inheritance (whilst a lot of working class kids have no room for error).
We learned from the Great Depression . . . until we forgot, then went overboard on deregulation. Now, only the commoner has suffered, which allows the truly elite to continue the party.
The International community may be losing faith in the United States, but we remain (and will for the foreseeable future) the least bad option for people’s money in times of turmoil.
It’s all academic now, since it looks like we’ll raise the debt ceiling, but I think had we actually breached, it’s not inconceivable that (perhaps ironically) everybody else in the world would have been hurt worse than the U.S. … in a world-wide recession/depression (even if we caused it), we’d almost certainly be the final ship to sink.
p.s. (again perhaps ironically) if we do lose the faith of the world at some point in the future, as we’ve just witnessed, it’s much more likely to be caused by people who are overly concerned with debt (and their reckless actions), than debt itself.
I’d basically trust all of the people in that building that Doug did not specifically work to empower.
In teaspeak, this is code for dismantling Medicare and gutting Social Security. Under those conditions, I am not sure what there is to talk about.
How much damage has the GOP done to America in a short time? It’s an excellent question. On of the great strengths of our country is stability – the oldest, most stable government in the world. The safe haven for much of the world’s wealth.
Investors around the world are now asking themselves if the US government is a rational actor. And the answer, thanks to the teas, may well be “no”.
But, money is pouring into Ted Cruz’s PAC, and he is now the highest profile conservative in America. Mission accomplished. Sadly, his followers are too ignorant to understand what the cost was, and will be for his ascension.
I await the Republican plan to reform social security and medicare. This should be good.
@anjin-san: Can you conceive of any type of entitlement reform that isn’t gutting, dismantling, destroying, whatever? Because if you can’t, if the side you defend can’t, then we’re going broke in a few years rather than right now. Spending Thursday or Friday will be tricky, although there may be a deal worked out on that. Spending in 2020 will be just as tricky as if we don’t get a deal in the next couple of days.
I can’t emphasize this enough: you can’t take entitlement reform off the table on our current trajectory, any more than the Republicans can take a debt ceiling hike off the table right now. We cannot afford to subsidize people for the last third of their lives.
I’m sure he can, as the Democrats have put offers on the table that included cuts to social security (chained CPI, etc) and medicare. REPEATEDLY.
And you act as if it never happened.
Social Security and Medicare cuts are on the table, Pinky. We don’t love it, anymore than I expect ya’ll to like tax increases, but they’re on the table (so long as tax increases are on the table). That’s what “a balanced approach” means, which Obama keeps saying over and over and over. The core of any doable Grand Bargain is an exchange of these things. The people who keep rejecting such a bargain are Republicans (Paul Ryan, etc).
@ Pinky
I am afraid I am not terribly impressed by right wing Cassandras. These are the same people that have been telling us that Europe’s “socialist” health care systems are on the brink of collapse – since 1980.
So sorry, I am not willing to discuss gutting SS & Medicare so that 1%ers can have more tax cuts.
Hear, hear. If we want to put our fiscal house in order, there will have to be cuts. And tax increases. Or we can kick the can down the road and hope for the best.
Paul Ryan and his ilk have proved themselves to be dangerously incompetent. Not so long ago, the GOP was home to men like Bob Dole, who I could respectfully disagree with. That I could trust to place our country first in deeds, not only with words. Men who you could do business with, compromise, and shake hands with in good faith. Barry Goldwater. Howard Baker. GHW Bush. The list goes on.
That seems like a bygone golden age now.
Doug: “Would you trust the men and women in this building? ”
Doug, don’t try to bullsh*t us – it’s the Republicans who’ve done this. Not the Democrats, the Republicans.
It’s pretty amazing that the Democratic offers in past “Grand Bargain” negotiations have already been put down the memory hole so effectively that Pinky, who strives to be a relatively reasonable righty, apparently doesn’t recall them.
@Pinky:
Please take a gander at the graphic on this page:
Effective tax rates, Selected Countries
And then take a look at this trend line:
US Federal Receipts and Outlays as % of GDP
Neither of those support any “sky is falling” story line.
We are a very low tax nation, we had as a natural consequence of the Great Recession an increase in outlays and a reduction in receipts. Things are trending in the right direction right now.
And we probably could pay a bit more tax, and should, to support the services an advanced nation should provide.
It is an interesting question, as life expectancies head towards 100, how much we should expect 70-somethings to work.
But that’s not something we need to decide all at once.
@Pinky:
That sounds suspiciously like “Death Panels” doesn’t it?
I agree, we need to discuss Medicare honestly (for a change) and that means consideration of increasing taxes to pay for the senior health benefit system that we want. The Medicare Tax is very low and I believe we have the capacity to increase that tax, whether we have the desire to pay for what we want is another matter.
@Pinky:
This is a little off, as there is nothing similar between entitlement reform and raising the debt ceiling. You did almost get it right, I’ve fixed it for you.
We can’t go broke, Pinky. We have printing presses but don’t seem to know how to operate them even though fiscal policy (helicopter drop of $) is called for.
@john personna:
While life expectancies head upwards, people’s ability to work is not lengthening. All increasing life expectancies means is that we can expect to be old, sick and weak for longer than we were able to be old, sick and weak before, not that we will continue to be strong and vital workers into our senior years.
@Pinky:
Got any evidence for that claim? I mean, seriously, why can’t we afford it? We’re the richest and most powerful country in the world.
@john personna:
Interesting question, isn’t it? I wonder what the government’s actuaries expect in terms of non-productive years? Personally I’ll retire when I’m dead. Even then, given royalties, I’ll be earning for a few years after I’m dead.
@michael reynolds: Not just a “few years”. 75 of them to be exact.
Yeah, let’s throw the outrageously long periods of copyright into the mix as well, as long as we’re talking about reformation of stuff. Personally, I’d like to either cut it back to the two 28-year chunks, that’s all folks, or make it more like trademark: keep the long periods but you have to reaffirm your copyright once every 10 years and pay a fee. That would allow us to clear out all the “orphan copyrights” where you can’t even figure out where to get permission from because nobody bothered to track anything.
@Rafer Janders:
It varies, and that is what makes it an interesting question.
It would be much simpler if say “librarian” and “bricklayer” had same “use by” dates.
@grumpy realist:
There is a lot of interesting discussion going on surrounding Tyler Cowen’s two books, The Great Stagnation, and The Average Is Over.
I too think that better intellectual property laws would improve personal and national prosperity. Sadly, those kinds of questions seem doomed to be “second string” to “Obamaaaaaa!” etc.
@Pinky: “We cannot afford to subsidize people for the last third of their lives. ”
Of course we can, if we choose to. We can restore our tax rates, especially on higher earners, to rational levels, and we can stop shovelling money at military contractors.
@michael reynolds: “Personally I’ll retire when I’m dead”
Me, too. But you and I are lucky enough to do the work we’ve chosen to do, that we can do for ourselves and by ourselves, and that we can continue to do even as our bodies age. There are an awful lot of people who do not fit this description, and, unlike the Thomas Friedmans of the world, I don’t think their retirement should be defined by my fairly unique situation.
@john personna:
Well, and there’s also the question as to whether, even if people can work, they’ll be able to find work. Know any companies hiring 65 year olds?
I’d rather subsidize seniors for the final third of their years than subsidize Defense Contractors.
Let’s have the vote.
@ Rafer Janders
Because the motto of tea party America is “we can’t get it done” – not public transportation, not universal health care, not infrastructure, not education, and so on…
Their vision of America seems to be limited to being great at blowing things up and tax cuts for the rich.
@Rob in CT:
Me:
Rob:
Anjin-san:
@ Pinky
Words mean things. Cutting is one thing, gutting another.
So yes, we can talk about cuts. To deal with our fiscal problems we are going to have to cut a lot of things, such as the DOD budget.
No, I am not interested in talking to silver spoon baby Paul Ryan about how we have to gut SS & Medicare. He has his rich mommy and his rich wife to take care of him. Most Americans don’t have that luxury.
@Rafer Janders:
Again, more complicated.
They say that one reason for higher than usual unemployment in young cohorts is more deferment of retirement in old cohorts.
(If I thought there was an easy answer, I probably would not have called it “an interesting question.”)
@john personna:
And if I was older, and Republicans kept talking about cutting my Social Security and Medicare and pension, I might put off retiring for longer so as to build up more of a nest egg….
@grumpy realist:
I like your optimism about my longevity on the shelves. Copyright may last 75 years, but unless I’m e.b. white and don’t know it, I doubt I’ll be earning for that long.
@wr:
I agree. There’s a world of difference between 70 year-old writer or Supreme Court Justice on the one hand and 70 year-old bricklayer or waiter.
I look back wistfully of leaders that I was raised on and followed in the news. Statesmanship, not political games, posturing, and soap boxing for the ever present “news” channels. Politics was an honorable calling then. Truman, Kennedy, Johnson (the most effective politician in our lifetime), Carter, and the irrepressible Hubert Humphrey (if we had another week Humphrey would have beat Nixon in ‘68). Congressional leaders Dirksen, Russell, Ervin, Fulbright, Mansfield, Nunn, Mills, and Long. These were people, who regardless of party affiliation, respected each other, were respected by the people, and knew how to get things done. Those were and are my heroes.
@michael reynolds:
And look, even if you have a physically easy profession, there’s probably still no chance that you’ll be able to do it at 70. There’s not many law firms that hire 70 year old lawyers or movie studios that hire 70 year old writers or universities that hire 70 year old professors. We can’t expect people to work until 70 if there’s no one who’s actually hiring them.
@Rafer Janders:
Yes, yes, it is all the Republicans’ faults that we face this broadening range of retirement outcomes.
Better health care has nothing to do with it.
@Rafer Janders:
I submit that what you should be looking for is a strategy that works with a very broad range of situations.
If a 70 year old librarian or writer is encouraged to retire that may not be a real win, while on the other hand, someone who has few options at 55 may have no choice.
Your .. posturing, frankly … has not addressed that these people should be encouraged differently.
@Rafer Janders:
My IP lawyer is either just beyond or just coming up on 70. Hiring is one thing, staying on the job is another. I’d be willing to bet that the 2013 expectations for retirement are different than the 1937 ones.
Assuming my health stays good I’d feel ridiculous retiring. I know people who’ve been retired longer than they were employed. It’s absurd, unless you’re in a job that relies on physical ability.
I took my first retirement at 45.
Slacker, I know …
I’m hoping that at some point I can stop working for a living, & put my skill set to work on something a bit more meaningful, public policy relating to mental health issues and using IT systems to more effectively track stressed wildlife populations are two things that come to mind.
A thread about what OTB readers would like to do if they had financial freedom would be interesting.
Not to mention the increasing number of Alzheimer’s sufferers who need even more support.
Personally, what I would like to see is tweaks to Social Security, drastic rationing in Medicare, large whopping cuts in military and oil/gas subsidies as well as farm supports, and take all that money and throw it at R&D to solve the problems we have with Alzheimer’s, cancer, energy et al. It just seems to me to be a much more efficient use of what we have. We’re going to have to figure out how to come to grips with a life scenario where a size able chunk of it is spent in “retirement.” and yes, also nag people much more to take active responsibility of their health. Isn’t 40 percent of health problems caused by lifestyle? Most of us now have incredibly sedentary lifestyles and a chunk of us who do heavy work end up trashing our bodies due to the strain caused by repetition. Somehow we have to develop a better happy medium.
@anjin-san:
For what it’s worth, here is a question that interests me .. I could “take”‘ a job.
Should I if I don’t need to?
Whose job would I take?
@this:
Dear idiot downvoter, we face a number of problems as the span between retirement and death expands. I mean it’s good obviously that people live long, but problematic that they (at individual rates) progress from fit and able to infirm and intensively supported. People now might be living 20 or 30 years with managed conditions.
“I blame Republicans” is an incredibly shallow answer to these problems.
And stupid as well.
in real terms, who could actually “collect” our bad debt? get real, the world relies on our excessive spending/lifestyle and will do anything to take part of it.
@john personna: if you’re filthy rich i’d say no- if you need money i’d say yes! of course motivation makes for a healthy body/soul(if you have one) so it’s all up to you in the end. some people need to keep busy for self worth- others, not so much.
@Pinky:
Way to address the fact that the Democratic Party (the side anjin-san backs, as you alluded to in your post) has repeatedly put entitlement cuts on the table. They want those cuts paired with tax increases. And that’s where things always break down, because the GOP won’t accept tax increases. Ryan tries his snake oil sales job with “tax reform” that will shift the tax burden downward, and others just say no more taxation (Taxed Enough Already – TEA). Given the changes to the tax code over the past ~30 years, that’s a ridiculous answer. So we have our impass.
Both anjin-san and I will accept a deal that cuts Medicare and/or Social Security benefits, IF it’s a balanced deal that includes tax increases on the affluent (I’d prefer one that mainly focuses on income tax deductions + a capital gains tax increase, but those details are up for debate). That’s the mainstream Democratic Party position, and though I haven’t checked recently I’m pretty sure it’s solidly backed up by poll data.
You want to have a reasonable debate? Stop arguing against your fantasy/nightmare opponent and deal with the real one. So many people demand the Democrats take positions that they have been taking for years and express anger or frustration that they’re not doing… what they’ve been doing.
@bill:
I’m not filthy rich. I can take trips in my Prius, and hike and ride my mountain bike.
I fly fish, but research my own rivers, and don’t hire guides, etc.
@john personna:
jp, I’m not sure what you see there that is cause for optimism. The gap between receipts and outlays is the widest it has been since WW2, and trending in the wrong direction. The happy reconciliation of the two is in the fictional part of the chart called ‘projected’. And the outlay growth that is driving the long-term trends is in the mandatory part of the pie, not the discretionary.
I agree that we are under-taxed, as a nation, but the arithmetic is not that hard. We can’t tax enough to pay for the current Medicare system, and we’re getting lousy value for our health care outlays at the moment. We can’t fix this just by bumping up the tax or tweaking the implementation.
There are much more cost-effective (and just plain effective) health care systems out there. They all fall squarely in the box labeled “socialism” by Republican candidates. I fear that things will have to get much, much worse before such a system will be politically realizable.