Flirting With Default

As the August 2 deadline approaches, Congress continues to fight over whether and under what conditions to raise the federal debt ceiling. Both Standard and Poor’s and Moody’s have warned that they might reduce the nation’s credit rating—with potentially catastrophic effects—unless progress is made. Nearly all the major political players agree that not raising the ceiling—making the government unable to meet all its financial obligations—would be, as Treasury Secretary Geithner says, “unthinkably damaging to the economy.”

So why even flirt with disaster? Ostensibly, it’s because if we don’t act to cut spending now our growing national debt will become unmanageable. That’s nonsense. As large as our debt is, we are not broke. In fact, as I wrote last week, our supposedly unmanageable deficits would mostly disappear if we simply let the Bush tax cuts expire. The country could begin to pay off its debts if we let tax rates return to something like the level they were under the Clinton administration, rates which would still be a moderate level compared to other advanced economies. The fact is that we have a budget crisis only because we refuse to pay more in taxes. In other words, it’s not that we can’t afford to pay for things like Medicare, public education, or the national defense. It’s that we don’t really want to pay for them.

In fact, Republicans are using the idea that we are facing an imminent debt crisis to win political concessions in Congress and position themselves for the 2012 election. Their latest tactic is to push a balanced budget amendment—which would make negotiations like this harder in the future—designed to fail but to embarrass Democrats in the process. And, as Paul Krugman points out, while Republicans insist that the growing debt is a national crisis, they nevertheless refuse to consider raising taxes to solve that crisis—even though federal tax rates in the U.S. are about as low as they have been since the 1940s. In fact, with the economy still slow, it wouldn’t be a good time either to raise taxes or cut spending—a fiscal contraction is the last thing the economy needs. But the point is that for all their overheated talk about a national crisis Republicans don’t care much about the deficit. As Krugman says, “It has always been nothing but a club with which to beat down opposition to an ideological goal, namely the dissolution of the welfare state.”

Photo credit: Pete Souza