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Economics

The US Debt Crisis

30 July 2011

The US Debt Crisis

By Gwynne Dyer

By the time you read this, you will probably know whether the United States is going to default on its debts this week, or not for another ten to twelve months. Unless there is a deal by Tuesday, the US government runs out of cash right away. But either way, American politics is becoming utterly dysfunctional.

“The biggest threat to the world financial system comes from a few right-wing nutters in the American Congress,” said Vince Cable, Business Secretary in Britain’s Conservative-led coalition government. Fair enough, but the true believers of the Tea Party, which controls a large fraction of the Republican Party’s seats in Congress, haven’t the slightest interest in the world financial system.

“It’s like a form of economic terrorism,” Wall Street financier Steve Rattner told the British Broadcasting Corporation. “These Tea Party guys are like strapped with dynamite standing in the middle of Times Square at rush hour and saying either you do it my way or we are going to blow you up, ourselves up and the whole country with us.” But that’s not what they intend. They just want to blow up Barack Obama.

The permissible limit on US government debt, currently set at $14.3 trillion, has been raised by Congress 106 times since 1940, including 18 times during the presidency of Republican saint Ronald Reagan. It normally goes through without debate, almost unnoticed.

The Republican decision to withhold agreement this time is rooted in the Tea Party’s 19th-century belief that the only appropriate response to a financial crisis is to cut spending and balance the budget. But most Republicans have heard of John Maynard Keynes and learned the lessons of the Great Depression; it’s more than fifty years since the mainstream Republican Party preached that all government spending was sin.

When the 2008 financial crisis hit, President George W Bush (“This sucker’s going down”) did what he had to do to ward off a second Great Depression: spend huge amounts of money to keep the economy turning over and to bail out financial institutions that were “too big to fail.” Barack Obama did the same, but he may pay a high price for it.

For Republican strategists, the attraction of a crisis over the US government deficit is that it could sabotage Obama’s re-election bid in 2012. With Republicans controlling the lower house of Congress, raising taxes on the rich and on corporations is out of the question. The deficit can only be cut by raising the taxes and cutting the benefits of the poor. So withhold permission to raise the debt limit until Obama agrees to attack his own key constituency.

That was doubtless the original idea, but then the Tea Party faction took the bit between its teeth.

First they forced John Boehner, the Speaker (Republican majority leader) in the House of Representatives, to drop his plan for $3 trillion cuts in government spending over the next ten years. Instead, insurgent Tea Party members of his own caucus made him adopt a two-stage approach mandating only $1.3 trillion in cuts now, with more to follow later.

Under the Tea Party plan, Congress would also authorise only a small increase in the debt ceiling now, so that Obama would have to come back and ask for another increase in mid-2012. It is a ploy intended to prolong the political crisis into next year and make the budget deficit the sole focus of attention during the election campaign.

Then, when Boehner was trying to get that amended plan through the House of Representatives last week, the Tea Party members threatened to vote against it unless they got further concessions from him. The second-stage negotiations in mid-2012 could not even start unless Congress also began work on a new constitutional amendment that would oblige the federal government to balance its budget every year, forever.

Obama could thwart that strategy if he could reach a compromise deal with the mainstream Republican leadership in Congress, which is why the Tea Party has worked so hard to radicalise the Republican position. It doesn’t want a deal because it believes that if the US government cannot pay its employees or send out social security cheques, the victims will not be interested in the political details. Obama’s in charge, so it’s his fault.

That may be true, but the collateral damage would be extreme. About 40 percent of US federal government spending would stop at once (ongoing tax revenues would cover the rest), and millions of people who work for the government or depend on social security payments, veterans’ benefits and the like would suddenly have no income.

The US government would almost certainly lose its AAA credit rating, so interest rates would rise not just for government debt but for every mortgage and personal loan in the country. The US would tumble back into recession, and the rest of the world would probably be dragged in behind it.

Still, if you don’t believe that anything good can happen in the United States until that usurper Obama is driven from office, and you don’t care what happens to poor Americans and to foreigners, it’s a pretty good strategy.

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To shorten to 725 words, omit paragraphs 3 and 11. (“It’s…Obama”; and “Then…forever”)