Sunday, 31 July 2011

What happens if the US fails to raise the debt ceiling?

Konrad Yakabuski, in the Globe and Mail: Debt-ceiling deniers court economic disaster.
An analysis by [Jay] Powell, a visiting scholar at the Washington-based Bipartisan Policy Center, shows that the U.S. government is projected to take in $172-billion in revenues between Aug. 3 and Aug. 31, but face bills totalling $306-billion.

The shortfall of $134-billion would not only force the government to choose whom to pay among its millions of debt holders, pension recipients and employees. The sudden plunge in federal spending – equivalent to a staggering 10 per cent of U.S. gross domestic product in August – would by all accounts pull the rug out from under the economy.
What's going on?

I think the source of the deadlock is that the Republicans and the Democrats represent two views which may be irreconcilable.

One view is that government is a huge waste, and government spending should be as close to zero as possible. Let’s call it the anti-government faction.

The other view (the status quo faction) is that government is a critical part of society as it exists today, providing the traditional functions of war, diplomacy, and justice; dampening the wild swings of the business cycle; and helping to close the gap between rich and poor, by funding services like public education and health care through a tax system which falls more heavily on the rich than the poor. It’s not difficult to have a society where the rich live in extravagant luxury and the poor struggle to keep from starving; see any ancient empire or modern Third World country. It’s far more difficult to maintain a middle-class society of broadly shared prosperity.

The only common ground here is that the status quo faction is willing to look for spending cuts, to make the government more efficient. I don’t think it’s going to be enough for the anti-government faction. And it’s going to make the recession worse.

Update: the Republicans have agreed to a deal, avoiding default.

No comments:

Post a Comment