It's déjà vu about a debt crisis all over again
The problem is not really economic, it's moral, as it turns out
As the United States hurtles toward a sovereign debt crisis, and very possibly default, the one broken record that keeps on replaying in the headlines of a highly polarized media and the ever shrill monotones of national political discourse is the also very real global economic catastrophe that will ensure if the country does not pay its bills on time.
But the question nobody seems to be asking is what are the consequences if the debt limit is indeed raised at the last minute, as happened in 2011, and we go back to business as usual. The naïve assumption, of course, is that we can all take a deep breath and deal with the problem of ballooning federal deficits with a more relaxed posture.
The narrative of the left is that the crisis is overblown by zealots on the right, which with its narrow margin of control in the House of Representatives is jockeying to “hold hostage” the national economy in order to force its own arbitrary spending cutbacks, which it did with some success in 2011 when Barack Obama was President. They point out that Republicans are just as responsible as Democrats for the runaway deficit and that appreciable fiscal savings will only come at the expense of programs that voters from both parties would never countenance.
The narrative of the right is that is that the current national budget deficit of approximately $31 trillion is unsustainable, especially at a time of rampant inflation, and that if someone refuses to draw a line in the stand at this juncture, the debt will become unsustainable.
Ironically, both positions have merit. Most of our current budgetary imbalance can be attributed to the cumulative impact of emergency fiscal and monetary policies aimed at staving off previous episodes of financial contagion and collapse, such as the Great Recession of 2008-11 and the Covid lockdowns from 2020-22. Those policies received bipartisan backing.
But the global economy is undergoing seismic shifts that have fomented altogether new kinds of challenges and perils that were barely visible even five years ago. The expansion of international commerce and the integration of markets that ensued at the end of the Cold War has now run its course, and the tendency over the last decade has been toward more regional trading blocs and economic partnership that match multi-polar political alliances.
Major wars such as the ongoing conflict in Ukraine and the mounting threat that many Asian countries perceive in China’s new military might have altered capital flows and supply chains, while the heightened cost of once cheap labor in developing countries have reversed previous trends toward “offshoring” and “outsourcing” with “onshoring” and “insourcing”.
These changes have made certain nations less economically vulnerable, but have also put pressure on costs. The upshot has been an inflationary dynamic that the world has not witnessed for half a century, and in just a little over a year the global financial ledger has been transformed from a preponderance of savings to a cascade of debt.
According to the Institute of International Finance, “the global debt stock grew by $8.3 trillion to a near-record $305 trillion in Q1 2023. The synergy between ballooning liabilities “and rising interest rates has pushed up debt service costs, prompting concerns about the use of leverage in the financial system.” Elevated interest rates, designed to combat inflation, in reality make debt much harder to pay off.
Because the American dollar is the default currency for international business and U.S. Treasuries are the benchmark investment vehicle for almost all trading nations, including rival regimes, the wobbly debt pyramid Is just as dangerous as default itself. In fact, some prophets of economic doom have insisted that an engineered default sooner would possibly mitigate the dire effects of a natural one later.
As financial journalist Elliot Smith notes, the proverbial “canary in the coal mine” is the very recent surge of debt overload incurred by nations of the Global South as a direct consequence of America’s unprecedented budget deficits. “Total debt in emerging markets,” he writes, in just the past quarter “hit a new record high of more than $100 trillion, around 250% of GDP, up from $75 trillion in 2019. China, Mexico, Brazil, India and Turkey were the largest upward contributors.”
As the non-partisan Congressional Budget Office points out, the problem is not really whether spending can be cut without any significant damage to the American economy. The more pressing issue is what to cut, and here America’s hyper-partisan gridlock makes those choices more difficult than ever.
Aside from growing entitlements due to a graying population and augmented government assistance for the indigent and distressed, new budgetary line items mandated by relatively recent Congressional authorizations such as green energy initiatives make the task even more formidable. “Cutting nondefense discretionary outlays might require policymakers to cut back some of those recent increases, just as they would have to examine other programs that have seen funding boosts in recent years.”
In previous decades the conflict in America between right and left with regard to fiscal policy routinely came down to a choice between defense and non-defense spending (the so-called “guns and butter” dilemma). But since the onset of the war in Ukraine and the global ambitions of the Biden administration, aimed at countering its predecessor’s “America first” policies, the left no longer can afford demanding such an option.
Most economic historians will remind us that it was President Lyndon Johnson’s refusal in the late 1960s to make the “guns and butter” choice between funding the Vietnam War and the recently inaugurated Great Society programs such as Medicare were the premiere cause of the Great Inflation that ravaged America throughout the 1970s.
So much of the present Congressional impasse comes down to the Manichean struggle in American public life over the past decades between two radically different visions of what the cognitive theorist George Lakoff has labelled “moral politics”. Lakoff suggests that progressive and conservative political preferences do not have any ontological or a priori claim to validity, but are anchored in significantly divergent, but historically grounded “deep frames” that automatically skew the evidence for what should be morally compelling, and that in an age of hyperpartisanship and siloed popular discourse has elevated confirmation bias over serious argument.
Thus in the ongoing debates over the budget stalemate conservatives will argue that “welfare” must not be administered without strict criteria of eligibility known as “welfare”, while progressives will just as adamantly insist that such criteria are racist and discriminatory in practice to begin with.
Of course, during the Covid pandemic it became the crown jewel of conventional wisdom that the virus did not discriminate at the moral level, and the same can be said as well for both recession and inflation. Policy choices are ethical choices, and the real choice that politicians must face is the moral standards according to which certain inevitable outcomes from their decisions can be deliberated and evaluated.
Inasmuch as the moral “frames” of American politics appear increasingly irreconcilable, there can only logically never be any kind of “win-win” solution (the Holy Grail of so-called “non-partisanship”), and any “win-lose” proposition invariably conjures up the specter of who the “winners” and “losers” might be.
Unless there is immediate and sizable give on either side, the only genuine payoff can be characterized as “lose-lose”, which would naturally satisfy the cynical observation of the eminent progressive economist John Maynard Keynes, who quipped that “in the end we are all dead.”