While drafting this post, Jane Hamsher asked me to check on what reputable economists were saying about the underlying premises of the debt debate and the position S&P is taking about the risks of a US default. After reading her timeline and checking the Econ sites, here is what I found.
There doesn’t seem to be a sound basis for the current debt hysteria, or for S&P’s insistence on at least a $4 trillion down payment on debt reduction as a reasonable condition for maintaing a strong credit rating, any more than there is for the crackpot notion that a non-crazy US can be forced to default on its debt.
As every reputable economist keeps reminding us (see, e.g., James K. Galbraith, Joe Stiglitz, FT’s Martin Wolf, Peter Radford, Bruce Bartlett, Warren Mosler, etc), the US is not Greece and does not face its risk of default. Unlike Greece, the US has its own currency, and unlike Greece, its debt is denominated and would be paid in its own currency. It can create that currency at will. So the only way the US can be forced into default is if Congress and the President do something that would be insane, like refuse to raise the debt limit, and the President then refuse to use the Executive authority of the Constitution to prevent a default.
Further, the notion that the US is anywhere close to some theoretical or practical limit to its borrowing authority is questionable at best (more from Shiller and Krugman). It’s not supported by our own history nor the examples in other countries (e.g., Japan).
And we aren’t facing some out of control deficit crisis either. As Simon Johnson, James Kwak and others have pointed out, if the US simply allowed the Bush tax cuts to expire as scheduled, and we assumed other likely changes — some positive (less war), some negative (doc and AMT “fixes”) — to occur as expected, the US primary budget (excludes interest) would be in balance or surplus by 2021.
So there’s no looming debt crisis over that 10 year period. Rather, as many economists tell us, and today’s awful Commerce Department report tells us, the real “deficit” we face is a jobs and spending deficit, because were not spending enough to create or even move strongly towards full employment.
The problem in later decades is the escalation in private health care costs, which represent an economy-wide problem, not a separate Medicare crisis. Wanna fix that? Start with Medicare for All, not forcing seniors to wait two years longer.
The officers of S&P may have their own reasons for squeezing the Administration or wishing the debt-GDP ratio were lower — such as forcing Congress to cut spending on Social Security and Medicare and thus pushing the elderly into greater reliance on their favorite Wall Street clients and their privatized alternatives. But they don’t have a solid economic theory to support it nor do they have the rating competence or credibility (Mike Konczal; more from Krugman) to justify telling investors their own arbitrary ideological preferences should be the basis for assessing US default risks.
Whatever S&P’s agenda, it has nothing to do with avoiding default risks or putting the US on sound fiscal footing. It’s time the media and Congress started asking them what their political agenda is and whom it serves.