Tuesday, April 26, 2011

Of Debt Limits and Economic Explosions

-- Posted by Neil H. Buchanan

In yesterday's post, Professor Dorf worked through the various ways in which the inflammatory term "terrorism" could be applied to the Republicans' current threats to allow the U.S. government to reach its debt limit next month -- and, presumably, thus to allow the country to default on its obligations soon thereafter. He concluded that it could be accurate to call these threats terroristic if either: (1) all hardball tactics in negotiations are called terroristic, regardless of content, (2) the term terroristic carries with it condemnnation of the substantive goals that the Republicans are trying to achieve, or (3) the Republicans' position is too "demanding," by which he means that they are insisting upon cuts in spending that had "nothing to do with running up the deficit and debt" while preserving and worsening the policies that had everything to do with our having arrived at the current situation, or "they'll blow up the economy."

I had been planning to write about the debt limit in any event, of course. There is no economic policy question that is of greater moment than whether the United States will default on its debts. Indeed, even during the Congressional hearing about which I have written recently (here, here, and here), I was not surprised when the topic of the debt limit was raised (by Rep. Neal, D-MA), who asked me about the issue, even though the topic of the hearing was tax simplification. The debt limit question is so profoundly important that it is bound to seep into nearly every discussion in Washington (and elsewhere). Unfortunately, Mr. Neal posed his question as his time was expiring, so I was only allowed to give a one-sentence answer, which was: "Nothing is worth threatening the credit-worthiness of the United States."

Although I was disappointed not to have had the opportunity to expand on those thoughts at the time, I was comforted by the knowledge that I would be able to do so on Dorf on Law -- clearly a much more influential venue than a hearing of the Ways and Means Committee!

Professor Dorf's post yesterday included an analogy to labor contract negotiations, likening the take-it-or-leave-it positions that are natural to any contract negotiation to the Republicans' position on raising the debt limit. If this is an accurate analogy, however, then the only way to explain the Democrats' current position is to suggest that they simply do not know how to negotiate, because they are not willing to take their own hard-line position on the debt limit.

While there is plenty of evidence to suggest that the Democrats are terribly (or comically) ineffective negotiators, even I think that it is an overstatement to say that they do not understand how to negotiate. During negotiations in December over the fate of the Bush tax cuts, after all, some Democrats at least raised the possibility of allowing all of the tax cuts to expire, including the tax cuts that both sides supported, in an effort to force the Republicans to agree to the more limited extension of cuts for the non-rich. The Democrats blinked first, of course. That does not mean, however, that they are ignorant of hardball tactics.

Much of the work in Professor Dorf's final point, it turns out, is done by the phrase "blow up the economy." He discusses the contract negotiations in the National Football League, and their potential to lead to a stalemate that will hurt both sides. The limitation on that analogy is not, however, that the damage from a lockout/strike is limited to the parties at the table. The damage of a work stoppage would go well beyond the players and the owners. Just ask the non-player employees of the teams, as well as the broadcasters, memorabilia vendors, restaurant and hotel workers, and so on. Also, although they would not lose financially, the fans of the game would surely consider themselves victims of any stoppage as well.

Which brings us back to what it means to "blow up the economy." The issue is not collateral damage, but quite simply the stakes. The worst that could happen to the NFL, after all, is that they will alienate their fan base. While this could lead to a death spiral for the game, the leaders on both sides of the negotiations surely remember that Major League Baseball suffered briefly from its last serious labor dispute (in the early 1990's), but that the game ultimately came back even stronger than before the lost 1994 season. Moreover, even if the country permanently turned against football, the damage to the country as a whole would be rather limited. Restaurants and hotels would find other ways to make sales, unemployed beer vendors would ultimately find jobs elsewhere, people would learn to care about soccer, and so on.

Even with much more at stake than the NFL's negotiations, the negotiations over the extension of the Bush tax cuts were categorically less frightening than the looming standoff over the debt. The worst that could have happened (as I argued at the time) is that the tax cuts would have expired on December 31 at midnight, and the unemployment benefits would not have been extended on the schedule that President Obama demanded. Both of those outcomes are clearly unfortunate. Both, however, would also have been temporary. My position at the time was that Obama should have been willing to allow the cuts to expire for everyone, because that outcome -- while not anyone's first choice -- was neither catastrophic nor irreversible.

The costs of deadlock in December, on the tax side, would have involved some administrative and planning nightmares. Even so, everyone would have proceeded in the knowledge that the ultimate deal could be made retroactive to January 1. Yes, that would have probably required some extensions of filing deadlines, but there is no reason to think that that would have caused any irreversible harms. The uncertainty involved in tax planning would have been intensified, of course. How much worse, however, would that uncertainty have been, compared to the final year of the Bush tax cuts (all of 2010), when everyone realized that Congress had actually allowed the estate tax to expire for a year, even though everyone -- and I mean everyone -- had been assuming that Congress would have been forced to act before then? The marginal increase in uncertainty that would have been caused by the standoff over the Bush tax cuts lasting into 2011, in other words, seems relatively small.

Of course, there could have been genuine harm to genuinely innocent people from such a standoff. Obama's big selling point to his fellow (?) Democrats was that he had prevented millions of people who had lost their jobs through no fault of their own from losing their lifelines. This is no minor consideration, but it also is temporary. Everyone knew that even the Republican leadership would ultimately capitulate on some extension of unemployment benefits, simply because the economy remains so weak. While even a few months can be disastrous in the context of unemployment benefits, the degree of harm was still within the range of what is typically at stake in U.S. political negotiations.

All of which brings me back to my reply to Rep. Neal: "Nothing is worth threatening the credit-worthiness of the United States." While that statement has some limits (involving, for example, trading off slavery or genocide as a condition for paying the country's debts), within the range of possibilities that we now face, the consequences of a debt default are simply too awful to contemplate. We are, after all, talking about a financial crisis that would lead to a global economic crisis that would make the recent Great Recession look like child's play. The last time something like that happened, it took ten years and a world war to end the economic devastation. The resulting political instability, moreover, is what led to that war. As bad as I think the Tea Partiers are, they could easily be replaced by (or, in some cases, morph into) violent, anti-democratic mobs. Nothing is worth that risk.

There is, in addition, an irony here. The reason that Republicans say they are unwilling to allow the government's debt to continue to rise is that they fear a debt crisis. That is, if we wait too long to address our debt, the global bond market's vigilantes will punish us, just as surely as they have punished Greece, Ireland, Portugal, and Spain. The willingness to block an increase in the debt limit, therefore, amounts to the following statement: "Because political negotiations might ultimately fail, resulting in our debt becoming worthless, we must definitely make our debt worthless right now." That is the stark reality. If we allow the U.S. government to default on its debt, everything changes. There is no substitute for having a spotless record of paying one's debts. One default means that further defaults are possible, changing our economic situation forever.

The negotiations over the debt limit, therefore, are genuinely different from all other political issues that separate the parties. The Democrats take the position that we should be unwilling even to flirt with the idea that we will not pay our creditors. The Republicans openly threaten to allow the U.S. government to default. Even as a negotiating position (and even if it were not tied to bizarre ideological minutiae like NPR's funding), this is irresponsibility at its most extreme.

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