Looming Treasury “Default”: Theater of the Absurd

For weeks, we have been treated to comic opera in D.C.’s theater of the politically and economically absurd. On the stage, the actors—President Obama, the Secretary of the Treasury, congressional leaders—hop about, shouting moronic lines about the national “default” that will occur unless the government’s statutory debt limit is raised, reciting Chicken Little lines about how such a default will trigger worldwide economic catastrophe. According to a report in yesterday’s Christian Science Monitor,

Facing an Aug. 2 deadline, Congress and the White House are stepping up face time to avert what the Treasury Department has called “catastrophic economic and market consequences” of a default on the national debt.

Think about this statement. Have governments defaulted in the past? Of course, they have, on hundreds of occasions over the centuries. Have these defaults triggered “catastrophic economic and market consequences”? No. When a government defaults, there are consequences, of course, including heightened reluctance of lenders to lend to the deadbeat government in the future or at least to lend at such favorable interest rates. Often partial payments of principal and interest are arranged or debts are restructured. The world keeps spinning.

Has the U.S. government ever defaulted before? Yes, in 1933, by refusing to honor the gold clauses in its bonds, the Treasury engaged in a massive default. Ironically, for mainstream economists and economic historians, the government’s abandonment of the gold standard, along with its associated default on its gold obligations, is seen as the decisive government action that stopped the Great Contraction and set in motion a recovery from the Depression. (Don’t laugh: for some time, this interpretation has been the reigning view in academia.)

If we attend to the lines being mouthed by the actors in this absurd play, however, we see quite plainly that the whole “crisis” is as phony as a $3 Federal Reserve note.

Despite a sense of urgency acknowledged by both sides, partisan positions are still far apart. Republicans say that tax increases are off the table and that a debt deal must include trillions in spending cuts at least as robust as the trillions the White House aims to add to the debt limit. Democrats aim to protect entitlements such as Social Security and Medicare and are pushing for new spending to stimulate the economy.

Mr. Obama said on Tuesday that a “balanced approach”—combining spending cuts and tax increases, including cutting tax breaks for the rich—is within reach.

“I believe that right now we’ve got a unique opportunity to do something big, to tackle our deficit in a way that forces our government to live within its means, that puts our economy on a stronger footing for the future and still allows us to invest in that future,” Obama told reporters.

In response, House Speaker John Boehner (R) of Ohio said that tax increases, even those targeting unpopular loopholes, are not politically feasible.

“The legislation the president has asked for—which would increase taxes on small businesses and destroy more American jobs—cannot pass the House, as I have stated repeatedly,” he said in a statement. “The American people simply won’t stand for it. And their elected representatives in Congress won’t vote for it.”

In short, the whole show is a farce, nothing more than a convenient occasion to seize a public-relation lever to move a mass of money out of the taxpayers’ bank accounts into the Treasury’s account at the Fed—but only for an instant, because the Treasury has plans to spend every cent it snatches and, of course, to spend even more, financing its profligacy by going even more deeply into debt (again, not the government officials’ personal debt, but yours and mine, to be serviced under threat of fines and imprisonment).

If you had maxed out your credit cards and nobody would lend you a dime, you would have to bring your expenditures into line with your income. Going ever more deeply into debt is universally recognized as ruinous for any individual or family. Yet people seem to believe that this simple economic fact of life does not apply to an organization that styles itself “the government.” Of course, this gang does have an option that you and I do not have: the ability to threaten violence against the peons it rules in order to make them hand over loot. But this option has obvious limits, and when those limits are reached, increased borrowing by the government portends the same ruinous outcome that excessive indebtedness brings to an individual or a family that consistently lives beyond its means.

In the case of government irresponsibility, however, the ruin takes a somewhat different form: it comes not to the irresponsible decision-makers themselves—members of the criminal gang can expect to get off scot-free. The ruin comes to those who were foolish enough to permit such criminals to rule them in the first place, and hence to strip the society of potentially productive resources and to divert those resources to wasteful uses and to the enrichment of the gang’s principal supporters and crony capitalist pals.

Sail on, sail on, Columbia! Even if this crackpot-criminal gang gets its debt limit raised in the end—and it almost certainly will do so—its heading remains on course for a smash-up on the bigger rocks ahead.