One thing that I hear over and over from my conservative interlocutors on the budget is that they need spending cuts right now because they just don't trust the Democrats (or indeed the Republicans) to make spending cuts in the future. If they don't get the cuts now, the reasoning goes, it will be "jam yesterday, and jam tomorrow, but never jam today."
I certainly understand the worry, especially after Democrats and their own leadership pulled the cute trick of enacting a bunch of sham spending cuts in the last round of negotiations. But here's the question: why do you think spending cuts now will be any more likely to stick than spending cuts tomorrow? Anything you enact now, under threat of the debt ceiling, can always be un-enacted tomorrow.
Oh, sure, default would make it pretty hard to borrow money to fund new spending. But what makes you think they won't raise taxes to fund new spending instead? You cannot credibly bind future congresses to your will. If people want Medicare more than they fear tax hikes, they'll get Medicare, and tax hikes. And that is true whether or not you default. Eventually, we will close the budget deficit one way or another. Default does not make it any more likely that you will get your way on government spending. Indeed, it makes it somewhat less likely, because--however justified the tea party may feel--for the swing voters in the center, the proponents of smaller government will now look like The Party of Crazy.
Institutions are important, but in a democracy, there are no institutional shortcuts to credibility. I wrote this years ago
about the gold standard:
The lone advantage of a gold standard--and it is a real advantage--is that it prevents governments from inflating the currency. The problem is, this is only moderately true. The government, after all, can always modify its gold standard. Yes, you say, but it will pay a price in the markets, and this is true, but this is the same price it pays when it prints more fiat currency. Such practices do not go unnoticed for long.
As James Hamilton has pointed out, gold-backed currencies, like all money with a fixed exchange rate, are subject to speculative attacks whenever the government's financial position looks weak. Such speculative attacks often require punitive economic measures to fight off, which is one of the reasons that America suffered so nastily from the Great Depression--it raised interest rates in the middle of a recession in order to defend the credibility of its currency.
. . . In short, you don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway. (See Argentina's dollar peg).
This is also true of the current standoff. You cannot get anything out of a default that you didn't put into it. Don't have the national political consensus to cut Medicare/Medicaid/Social Security? Won't have it after we default, either. Don't trust future governments not to increase spending? Default won't stop them from, say, raiding your 401(k), the way Argentina did with its private pension funds.
Of course, maybe tying the joy of spending to the pain of taxes will make spending harder. But forgive me if I point out that the advocates of this position seem to want to have it both ways; they favor tax cuts because it will "starve the beast", and then they favor default because apparently deficits make spending too damn painless. You can support one of these, or the other, not both; if the latter is true, then the Bush tax cuts were an actively terrible idea that let Congress off the hook for controlling spending.
Moreover, as I pointed out in the earlier post, forcing the Democrats to choose between default and massive spending cuts might backfire, making it more likely that Democrats get a sweeping majority which enables them to do most of the budget closure with higher taxes. Once you've defaulted, there are no backsies; we'll be stuck with closing the budget gap in the middle of a recession and some pretty substantial capital flight, which you can expect to produce a pretty significant further decline in the tax take. Why would you want to take such an enormous gamble? I know, you're convinced it will pay off. But just consider for a moment that you might be wrong. There is surely some chance that you have miscalculated, genius though you may be. What then?
You may think that people in DC live in a bubble. You may even be right. But the longtime residents of this bubble have all spent a lot of time studying one subject: how people get re-elected. And they all seem pretty sure that defaulting on our debt, or shutting down the Social Security system, are not it. If you worry that you cannot secure a credible committment on future spending cuts now, think about what sort of credible commitment you'll get when there are 280 Democrats in the House.
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is a columnist at Bloomberg View
and a former senior editor at The Atlantic.
Her new book is The Up Side of Down