Thursday, February 03, 2011

A non-existential dilemma

A big fight is looming in the U.S. Congress as the county approaches its debt ceiling of $14.3 trillion. The easy solution, advocated mostly by Democrats, is that Congress simply raise the ceiling yet again (it has been raised about 70 times in the past 50 years). The harder, mostly Republican, one is to not raise it, instead cut governmental services to keep borrowing under the limit.

Austan Goolsbee, Chair of the Council of Economic Advisers, cautions against the Republican suggestion that it would lead the U.S. to default on its debt and damage its good faith and credit.

That argument is pure nonsense. It is like sticking an eraser in each nostril and run around screaming "I can't breathe!". A couple of counter-arguments:

First, place those interest-collectors first in line at pay-off time. That is what millions of financially overstretched, profligate Americans (was there a redundant word among the last two?) do fortnight after fortnight; pay off their most urgent debts first.

Second, as far as the good faith and credit goes, is simple - TINA. "TINA" is a concept explained to me long ago by friends who went to IRMA. It stands for There Is No Alternative. If, according to Mr Goolsbee's logic, foreign investors and nations slow down on buying American bonds, what will they buy? The Renminbi? I doubt it. In spite of its faults, America still provides the world an exceptional level of predictability and comfort in its robust legal, political, capitalist, and innovation systems. The very fact that America is having a lively and consequential discussion about its debt ceiling speaks a comforting lot about its political pedigree.

The irony of it is, as long as America's potential lenders have no plausible alternative, America will not have a TINA-moment that will force it to make a difficult decision.

Not to say the Republicans' stand is praiseworthy. Their proposal to manage with budget cuts across the board except on defense spending is cynical and self-serving. If the ceiling-retainers were to have some credibility in this writer's eyes, they should propose hefty defense cuts. Most ceiling-retainers are self-styled stewards of the Constitution; really, what part of the Constitution authorizes the U.S. government to operate military bases in, say, Japan?

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