Debt Politics: The Lunatics Are Burning Down the Asylum

The other night, I went to a drinks event for journalists at the British Embassy.  Naturally, it was full of budget wonks who clustered around the bar, exuding pessimism the way gatherings of grandmothers exude hugs and Jean Nate.  Everyone quizzed everyone else about what they were hearing from their sources.  Turns out, everyone was hearing the same thing: Democrats do not want to touch anything that puts entitlements on the table.  Republicans will not move an inch on tax cuts.  The most terrifying takeaway: there are indeed Republicans, and maybe even some Democrats, who think that default is somehow no big deal.

I'm absolutely stonkered by this.  When I blog about strategic default by individuals, conservatives flood my comments with indignant outbursts, excoriating the sort of people who would rather pay private school tuition or an auto payment than their mortgage.  But many of these same people--or the politicians they elect--seem to think that it's preferable to default on the obligations of the United States rather than raise taxes one penny.

Yes, I understand that you think it is terrible and immoral to raise taxes; your opponents feel the same about cutting social spending.  But it is really, really terrible to default on obligations you have voluntarily assumed, and make no mistake, this is what you will do if you refuse to raise the debt ceiling.  Either we will default on our bonds, or Social Security checks and military pay deposits that people have planned on will not be issued.  It is appalling to contemplate reneging on our obligations this way, and Republicans are wrong to attempt to get their way by threatening to force the United States to welsh on its promises.  Imagine that the tables were turned, and Democrats were demanding enormous tax hikes in exchange for raising the debt ceiling, with not a penny in spending cuts.  Would you regard this as a just and acceptable tactic?

Yeah, me neither.  Which is why Republicans shouldn't be deploying it.

What's even stupider is that what the hard-liners are risking is much, much worse than the status quo.  If we default on our debt, we're not going to be able to roll over the billions which are coming due.  As I make it, our primary deficit is something north of 8% of GDP, which would have to be raised immediately if we defaulted--or about 1/3 of the total budget.  Some things can't be cut that quickly (we cannot cut loose our troops and equipment in Iraq and hope they find their way home), which means that other things would have to bear a larger burden.  There's no way it would all be done with spending cuts.

Say we do it 50-50.  Income tax revenues would have to be raised by almost a third immediately--yes, that's your personal tax check.  Your state and local governments would have to raise taxes too, because they would very likely lose a lot of federal aid.  Then there'd be a little economic contraction from the higher taxes and the lower spending, so we'd have to raise taxes further.

This is a much larger tax hike than will be required if we do this the sensible way: leave things as they are now, and make a deal to raise taxes and cut spending in the future, when deficits will be lower, and more modest changes will be require.  This way, you cut off our ability to borrow, force a large, contractionary tax hike on the economy immediately--and then face a bruising fight to lower taxes in the future.  How is this a win?

There is no scenario in which either the Republicans or the Democrats get to dictate terms and have everything their own way: all tax hikes, or all spending cuts.  As I keep saying over and over, you cannot have a policy plan that assumes the opposition party out of existence.