An insolvent giant? A colossus weighed down by debt? This is the situation the United States finds itself in over the raising of the debt ceiling after the last one was hit on May 16. Bills designed to do so have been voted down in the House. The Obama administration has been trying to hammer out an arrangement with politicians on both sides of the aisle to keep the credit coming. Amidst the chattering, a gloomy reality is facing the US voter and politician alike: On August 2, the United States may well go into default.
Many members of the Republican Party, showing yet again that voodoo economics is their m?tier, see little problem in sabotaging efforts to lift the ceiling. The party of fiscal responsibility is anything but in recent years, and the term ‘debt’ is bound to send them over the edge in paranoid rage. Rectifying the situation through more taxes (or closing tax loopholes) is a scant possibility for them, but nor are they in favour of enabling the facilities to borrow more.
With the stalling of any new bills to increase the ceiling, the Treasury is engaging in a series of gymnastic maneuvers. The panic is gradually taking hold. Treasury Secretary Timothy Geithner took measures in May to halt investments in two big government pensions plans to enable the government to continue its borrowing regime.
The US chief of the Federal Reserve Ben Bernanke has also weighed into the debate, making the most crucial remarks so far. US creditworthiness risks being flushed down the financial toilet if the limit is not raised. ‘Failing to raise the debt limit would require the federal government to delay or renege on payments for obligations already entered into’ (News Herald, Jun 15). In not doing so, the US risks having the role of the dollar undermined, damaging the value of Treasury securities in the global market, and ‘induce downgrades of U.S. government debt’. His comments have been dismissed as ‘unhelpful’, begging the question what a ‘helpful’ suggestion might be.
What might be figured in any immediate solution? Budget cuts could be thrown in the arrangement. Moderate Republicans might well be won over, conceding to raising the debt ceiling if, in fact, amendments were made to trimming budget outlays. But the problem then begins: what items?
With the US empire embroiled in conflicts it is not winning, a scaling down of military commitments would be a fabulous saving. But historically, the holders of empire are not prudent with their budgets. As Joshua Green of The Atlantic (May 6) explains, Congress and budgets is much like ‘having dinner at a restaurant and then haggling over the check. But given the tenor of our politics, a more apt analogy might be bulimia. First dinner, then…’
As Green reminds us, Congressman Richard Gephardt found himself in 1979 having to convince his colleagues to vote for an increase of the then debt ceiling (a relatively minute $1 trillion) with persistent ribbing. ‘Did you vote for the appropriations bill? The defense bill? The highway bill?’ The moral is childishly simple: if you don’t want to spend, don’t vote for a bill that incurs costs.
In any cost cutting exercise, the easy targets are almost the most damaging at home: medical health and education. Medicaid is always the soft target, because God, in the land where social Darwinism, gun and fetus is sacred, does not like welfare recipients. Little consideration is given to the fact that a vast number of individuals who rely on Medicaid are the elderly and disabled. The entire analysis, warns Bernanke, is flawed precisely because debt ceilings should not be bargaining instruments to inflict budget cuts.
The whole consequence of such wrangling is, as ever, instilled myopia. As President Charles Plosser of the Federal Reserve Bank of Philadelphia told a gathering of economists in London, those on the hill were simply interested in playing ‘a game of chicken’ over debt limits, ignoring the fundamental fiscal realities that are facing the country (WSJ, Jun 9).
In the short term, however, the economic problems may not be as dire. A default would only result if principal and interest is not repaid. Besides, debt is constitutionally sacred in a country fastidious with its credit bingeing. As the fourteenth amendment to the US constitution notes, ‘The validity of the public debt of the United States? shall not be questioned.’ There is an even an argument to be made that debt ceilings are not merely impairing in discharging US government obligations ? they might well be unconstitutional. That line of thinking, it seems, has been kept in cold storage.
Binoy Kampmark was a Commonwealth Scholar at Selwyn College, Cambridge. He lectures at RMIT University, Melbourne. Email: email@example.com