Tuesday, July 12, 2011

Senator Warner’s Misleading Framing of the Debt Limit Issue

Last week I watched Senators Mark Warner (D., Va.) and Mike Crapo (R., Id.) discuss the debt limit and the negotiations to resolve the impasse on the Charlie Rose show. They are both members of the Senate "Gang of Six" (now five), which has been meeting to try to hammer out a compromise that they could sell to their colleagues.

Nothing Senator Crapo said surprised me, since his ideological position is clear. But I was disappointed in some of what Senator Warner had to say, which was misleading. In summary (I am writing this from memory), he said we need to fix the fiscal situation because a U.S. government default would be disastrous.

This confuses two different things, the statutory debt limit and the longer-term fiscal situation of the federal government. The reason that the possibility of a government default next month has arisen is not due to the size of the current deficit or debt of the U.S. government, large as they are. The Treasury currently has no problem borrowing money, currently at historically low interest rates. Rather, the possibility of default has to do with a statute that limits the amount of debt the Treasury can issue. Once that statute is amended to increase the amount the Treasury can borrow, the Treasury will have no problem keeping the government financed. In other words, the U.S. is not in the same situation as Greece, which has borrowed in a currency it does not control and whose ability to meet its euro-denominated obligations is in serious doubt.

The longer-term fiscal situation is what the negotiations are really about. But there is no economic reason that this needs to be tied to the debt limit increase. The link between the two is a political choice that the Republicans initially made and that President Obama has now embraced. Senator Warner seemed to be saying that if there is no plan to deal with the fiscal situation, the government might default, but he did not clarify that this is a political judgment, not an economic one. If his point had been that there was a political necessity to come up with some kind of long-term plan, I would not be making this criticism. But making it sound like the markets would go haywire if there is no compromise soon is misleading. The markets will go haywire if the Treasury defaults, and that would be due to a failure of the Congress to increase the debt limit, not because it failed to restructure Medicare and Social Security, cut defense spending, and reform the tax code in the next few weeks. In any case, I don't see default happening; I continue to believe that at some point the imminent specter of a government default will force some kind of resolution.

It was also galling that both Warner and Crapo were trying to present themselves as eminently reasonable. But threatening to put the U.S. into default unless a long-term fiscal plan is enacted is hardly the tactic of reasonable people. Charlie Rose should have called them on it. As it was all three men were pretending to have a serious discussion, with the two Senators often smiling, in my view inappropriately.

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