Originally published on February 25, 2011
In Alan Blinder’s commentary today, “The Economic Silly Season is Upon US,” in the WSJ, he emphasizes how “silly” legislators have become in their proposals and debates. It is true that politics often does seem absurd, but rather than pointing fingers and calling people silly, it would behoove us to try to understand the constraints imposed in the political system that lead legislators into these silly positions and statements.
For example, after Blinder explains how any reduction in the national debt requires a cut in expenditures and/or an increase in taxes, he suggests that it is silly to simply command the debt not rise by refusal to increase the national debt ceiling. Although he accepts that this approach may be a tactic to force necessary cuts, he argues that it might also damage the creditworthiness of the US government in order to achieve something the Congress has the power to do anyway.
This conclusion ignores the political realities though. Although Congress has the power to balance the budget and reduce the national debt, individual legislators have little personal incentive to vote to do so since it would open them up to damning criticisms in their next election campaign and threaten to thwart their own personal goals. This is a reason why some “device,” like a refusal to raise the debt ceiling could force the changes and allow legislators some political cover from future criticism. Any action that will effectively reduce the deficit must be politically palatable to a majority of voting members to have any chance of passage. Having some scapegoat to point the finger at is sometimes effective. Most States have the statutory requirement to balance their budgets … and this rule provides the necessary leverage to tie legislators’ hands. It provides the political scapegoat that is needed in most instances. In this way legislators can truthfully say, “I didn’t want to cut your benefits, or lay off workers, or raises taxes; but the law made me do it!”
Refusing to raise the debt ceiling might also provide political cover since it would force unpalatable cuts in spending to comply with the law. Critics of this approach, including Blinder, argue that it would damage the creditworthiness of the US government. However, for several reasons this outcome seems highly unlikely.
For example, there is little to no chance that a refusal to raise the debt ceiling would force a default by the US government on its debt. Interest payments on the debt, while sizeable, would surely be considered a top priority, precisely because maintaining these would be necessary to assure investor confidence. In other words, if the debt ceiling is raised the US government can and will continue to service its debts and live up to its previous commitments. Because investors will recognize this same strong incentive, it is unlikely they will flee US treasuries, unless of course they naively begin to believe the hyped-up rhetoric of the fearmongers.
At the same time a refusal to raise the debt ceiling would force the US government to balance its budget right now! That would mean making drastic cuts in spending or raising revenues. Basically it would force a pay as you go system in which spending must equal revenues … and if the revenues are not there, then they cannot be spent.
Given the size of our current deficit these dramatic changes in spending are likely to cause severe pain and disruption in the short run. It would be similar to a household having its credit cards cut up and forced to live solely on its annual income. Although the effect would surely be painful to endure, the household is likely to emerge healthier financially in the long run. The same may be the effect of the US government.
I am not convinced myself that refusing to raise the debt ceiling now is the best way to force the changes that legislators are politically disinclined to make on their own. However, I do think it is important to realize that imposing hard constraints, such as refusing to raise the debt ceiling, is precisely the kind of silliness we need in order to get our legislators to implement more sensible policies.
