Commentary by Elliott Parker: U.S. has a lot riding on showdown over debt
July 8, 2011
Should Congress raise the debt ceiling, or refuse in order to drive through cuts in Social Security, Medicare, and defense spending? This is a question my friend Ty Cobb contemplated in a recent Nevada Appeal column.
Federal debt is now roughly equal to our annual Gross Domestic Product, its highest level since 1947. More than a third of that federal debt is intra-governmental debt. What matters most is the debt held by the public, and especially the debt we owe to foreigners. Americans have been spending more than we have been making for decades, unsustainably borrowing from abroad. Federal debt matters, but so does private debt.
Half of the U.S. federal debt held by the public is owed to foreign bondholders. China holds a large portion of U.S. Treasuries, and has been quietly selling some off this past year in favor of other currencies. Ty correctly argues that we should be careful that China and other foreign lenders do not do anything more dramatic.
Ty blames this growing debt on entitlements, but I respectfully disagree. Social Security and Medicare spending is primarily a future threat, one we can sidestep with moderate reforms to limit benefits and collect more contributions.
The real culprit for the growth in our debt is the Bush tax cuts, which turned federal budget surpluses into chronic deficits. This recession then exploded it. Our already-low tax collections fell even more, and the federal government added to the deficit in a temporary, if uphill effort, to keep the Great Recession from turning into another Great Depression.
We pay less now in federal tax than any time since the late 1940s. However, some in Congress argue that raising taxes back to the level of the late 1990s would hurt the economy, even though that was a period of rapid growth. Their actions say they care more about keeping taxes low than about the growing federal debt.
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U.S. government bonds have long been the world’s safest asset, and if we lose this status we will pay much higher interest rates, exacerbating the budget deficit even more. The dollar would fall in value, hurting some sectors but helping to close our trade deficit. However, suddenly rising interest rates would increase unemployment again, and any dramatic loss of confidence could lead to another financial crisis far worse than the crisis of 2008.
President Ronald Reagan raised the debt ceiling several times, and said, “The full consequences of a default – or even the serious prospect of default – by the United States are impossible to predict and awesome to contemplate. … The nation can ill afford to allow such a result.” Reagan also said that Congress often brought the government to the edge of default, for political reasons, before it would act.
Congress is responsible for passing the budget, and it is disingenuous to authorize certain expenditures, refuse to levy enough taxes to pay for them, and then refuse to borrow to cover the difference. Such an action would also be unconstitutional, since the 14th Amendment says that “The validity of the public debt of the United States … shall not be questioned.” Congress should stop holding the world economy hostage with this threat.
• Elliott Parker is professor and chair of the UNR Economics Department.