Friday, June 07, 2013

Foreign Reactions to Republicans' Plans to Create Another Debt Ceiling Crisis

-- Posted by Neil H. Buchanan

[UPDATE: The video of my lecture is now available here.  My formal presentation begins at the 7:12 mark, and runs for about 32 minutes.]

Two weeks ago, in a relatively lighthearted post here on Dorf on Law, I mentioned my recent "Inaugural Lecture" at a university in Vienna, Austria.  After mentioning the lecture, however, I quickly changed the subject, choosing to talk about Viennese opera, transportation infraustructure, and "vegan schnitzel."  In today's post, I return to discuss the lecture itself, especially the comments and questions from my European audience.  Describing a contrived U.S. political crisis that could destroy the world economy is difficult enough among Americans.  Europeans are genuinely befuddled, but in ways that are often instructive.

When I delivered the lecture on May 23, the debt ceiling had just "woken up" from its 15-week hibernation.  The U.S. Treasury was forced immediately to re-engage in its "extraordinary measures" to avoid defaulting on its obligations.  The latest indications are that those measures could take us through late September or even October, before an outright catastrophic default would become inevitable (should Republicans refuse to increase the ceiling to accommodate even their own taxing and spending plans).  We are, in other words, pretty much in the same mess that we were in during the summer of 2011, but with Republicans even more determined to force default, and with President Obama having maneuvered himself into an even worse bargaining position.

How to explain all of this to a collection of non-American tax law experts in Austria?  There was actually an additional challenge in doing so, because the standard subjects for these inaugural lectures are typically drawn from EU tax law.  The audience was, therefore, not merely unfamiliar with U.S. budget politics, but their primary interests are mostly in technical questions regarding model tax treaties, cost accounting for business expenses, and so on.  I was discussing a topic in which they had a deep stake, but that was truly unfamiliar to them.

I began by declaring that "the United States is important."  I did so with a smile, and the quick acknowledgement that I did not want to be an Ugly American who simply presumes that the USA is all that matters.  Instead, I simply reminded everyone of the uncontroversial fact that the U.S.'s central position in the global financial system makes what happens in U.S. politics a matter of grave importance to the rest of the world.  Saying that the U.S. is important is not a statement of U.S. exceptionalism or an invocation of divine right, but simply a statement of reality (that one can bemoan or celebrate).

The remainder of the lecture followed the usual pattern of the many posts and columns (and law review articles) that I have written, separately and with Professor Dorf, over the last two-plus years.  The crisis has nothing to do with any underlying budgetary problem, but rather with the arbitrariness of hitting the specific debt ceiling number.  The possibility of "prioritizing" payments still amounts to default, and is in any event politically unsustainable ("Pay the Rich and Foreigners First").  Most importantly, destroying the full faith and credit of the United States government, by allowing it to default on any of its obligations, would wreak havoc on the entire world economy.

Among many interesting reactions from my audience, four stand out:

(1) As a broad matter, I found it fascinating that the people who asked questions immediately viewed the matter through the lens of "too much debt."  This happens (on purpose, of course) in U.S. discussions as well.  No matter how much one points out that the increase in debt is controlled by Congress's taxing and spending decisions, which automatically limit the total accumulation of debt, people evidently hear "debt ceiling" and think, "Oh good, because debt is too high."

Interestingly, this particular audience is likely to be among the biggest fans of the savage austerity that the European Central Bank, the German government, and the IMF have been imposing on the poorer countries of Europe.  They are business-oriented tax experts.  Austria's budget situation is about the same as Germany's (which actually means: not that different from the U.S., but somehow they believe that they are more virtuous).  Other people in the room were from other wealthy European countries.  Some of the morality of "debt is bad" was palpable in the room -- again, even though I tried to be as clear as possible that the issues under discussion were simply not logically connected to concerns about levels of debt and deficits.

(2) In a somewhat similar vein, one of the tax experts who was an official discussant after my lecture misconstrued my argument that, "If there is a debt ceiling-related default, it will not be because of any underlying economic problem in the U.S."  He commented that it was good to know that there were no underlying economic problems in the U.S., but the European situation is quite dire.  In part, this was a language barrier.  Although nearly all German-speaking academics, in my experience, are quite fluent in English, there are still subtleties that will inevitably be lost in translation.

Even so, I was quick to respond by saying that -- although it is true that the U.S. is doing better than Europe right now, precisely because we have merely muddled along for several years, rather than engaging in full-on sadistic austerity -- my point was not that the U.S. has no problems.  It is that this particular crisis is completely, entirely independent of the health of the economy, the sustainability of the long-term debt picture, etc.  This is important, I think, because if Republicans do drive the country into a wall in October, they (and their media enablers) will be quick to say that the resulting crisis is from "too much debt," not the deliberate default on a quite manageable level of debt.

(3) Two scholars (from the Netherlands, I think) talked to me after the lecture ended, and they were quite sure that there was a simple solution to the crisis.  I had explained the separation of powers in the U.S. Constitution, but they were absolutely certain that the President still has the unilateral power to reduce spending -- but not to increase taxes -- in the face of the debt ceiling.  I assured them that the President's power is really quite limited, but they said, "Surely, he can fire staff, to save money, right?"  I told them that his power to do even that was circumscribed by law.

This is, upon reflection, not merely a matter of dealing with people who are accustomed to more powerful executive branches.  It also reflects the widely held view in the U.S. that this is all a spending problem, not a taxing problem, and that the President is being recalcitrant by refusing to do everything he could do.

In reality, these two scholars were simply describing one of the "extraordinary measures" that the Treasury has now been forced to engage in, as an ordinary matter.  The whole point of the extraordinary measures is to find every dime under every seat cushion, every accounting maneuver, every foolish one-time asset sale that can stave off default.  People in the U.S. and abroad apparently believe that there is an infinite number of such ploys.  In that way, it is reminiscent of the "waste, fraud, and abuse" mantra that we hear from politicians all the time.  Innumeracy is an ugly thing.

(4) Finally, another of the official commentators began his remarks by pointing out that Austria has defaulted six times on its sovereign debt since the end of WWII.  He then said with a smile, "So don't worry so much.  You can survive defaults."  Much to my surprise, this brought me back to my opening joke: "The United States is important."  My point was that the U.S. is important in three ways: (a) Our economy is so big that downturns here are quickly felt abroad; (b) The U.S. dollar is still the world's reserve currency, so that confidence in the dollar is much more important than confidence in, say, the pre-euro Austrian Schilling; (c) United States Treasury securities are themselves a global currency.  Corporations and governments across the globe count Treasuries as "cash," because they have always carried zero risk of default.

If that latter situation changes, that will be disastrous not just because we are big, but because everyone cares about the status of U.S. Treasuries.  If, say, Iceland gives its debt holders the proverbial "haircut," then that is something to which markets can easily adjust.  As one of my research assistants put it --with self-consciously exaggerated arrogance -- when we were discussing these matters earlier this week: "Well, isn't it interesting that your country defaulted without destroying the world economy.  Good for you!  Your country is just adorable."

Maybe the better way to put it is that the United States is like Spider Man: With great power comes great responsibility.  It is a shame that Republicans think both that the U.S. is the most important country on earth, and that they can do whatever they want without consequences.

4 comments:

Shag from Brookline said...

Neil, thanks for putting some meat on the vegan bones you previously served.

While in (1) you pointed out: " ... the increase in debt is controlled by Congress's taxing and spending decisions, which automatically limit the total accumulation of debt, ... " perhaps you should have stressed Congress' role in the past in passing bills creating such spending which Congress cannot address with repeal bills because of the current gridlock. It is Congress holding the country hostage.

Bob Hockett said...

Thanks as ever, Neil. There's a sense in which what Republicans in the House are now contemplating resembles a scenario in which they work busily to draft legislation requiring that the President order a bombing mission over New York. It is so bloody close to statutorily mandating a national suicide that the President will have literally no sensible choice but to act 'unconstitutionally' - perhaps by choosing your least constitutional option. If that brings the Supremes into the act, so be it. It is hard to imagine even Scalia (or therefore those to his right)'s embracing outright cataclysm, even if Thomas might.

Bob Hockett said...

Whoops: Parenthetical should have read: "(or therefore those to his LEFT)'s." Sorry!

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