I’m sitting in Professor Eric Helland’s office in the Bauer rectangle on a late week morning, and while the scheduled interview turned congenial conversation we’re having is fun and lighthearted, our topic of conversation is quite the opposite: the debt ceiling.
The federal debt ceiling— a legislative limit on the amount of debt the United State can accrue, first passed in 1917 at the tail end of WWI as a way to limit presidential prerogative— has been used as a form of political capital for decades. Debt default is a serious thing, after all, and the minority party has always understood that the majority party will concede things in order to avoid it. What we’re going through today is not completely new.
The difference between now and yesteryear’s debt ceiling debacles, though, is that a) as financial instruments have become more complicated and “financial gymnastics” more preeminent, we tend to borrow more and in riskier ways, and b) our two main political parties are far more ideologically and geographically stratified than they have ever been.
As a result, what was once (in relative terms) a benign game of political quid pro quo has become something with far more deadly consequences. Defaulting on one’s debt is bad in any scenario, but it is especially bad when a contentious political climate actually makes it plausible.
Professor Helland, known for his colorful analogies and striking ability to explain sophisticated economic concepts in layman’s terms, put it to me in exactly that way.
“We’re playing political games with something that’s very valuable.”
So what happens if the U.S. does default?
Historically, the U.S. has been the foundation of the world economy because it is politically stable and economically prosperous. If the U.S. says it will pay you back, it will pay you back. U.S. treasury bonds have always had especially low interest rates because other countries buy into this idea.
The reason that debt default would be so catastrophic is that it would totally go against this common assumption. The U.S. would no longer be the world’s money safe haven. Inflation would go up, interest rates would spike, and the myth of “dollar exceptionalism” would be no more.
Indeed, the situation is so scary because it’s so unprecedented. The world economy is based around the idea that the U.S. just doesn’t do stuff like this, that a scenario like default could never occur.
What makes it even more unprecedented is the size of the U.S. debt market. Professor Helland pointed out that we’ve seen countries default in the past: Argentina in the ’90’s, Ireland more recently. What made these countries different was that they weren’t $17 trillion under water, and that they didn’t have money tucked into every major market around the world.
Default could also have major domestic consequences. The US would have to balance its deficit (year to year spending) in the short term. And because the federal government spends way more than it takes in, this would mean cutting popular programs like Medicare and Social Security, or furloughing government workers, or not paying troops. It would exacerbate the recession we’ve desperately been trying to climb out of since 2008. It would mean more pictures of foreclosed homes with outgrown lawns, and of shutdown manufacturing plants in once roaring American cities.
Other, equally troubling problems could arise: loss of value in stock, slower GDP growth, unemployment, less consumer spending; each one feeding off the others. And with U.S. debt underlying markets around the world, small domestic problems can now have major global ramifications. We experienced it in 2008, when a crisis in a small corner of one American industry nearly caused a global economic meltdown. Here, we see political dysfunction producing a similar result. It seems as if the economic truth of the day is that if one thing goes wrong, everything goes wrong.
Economics aside, how can we personify this issue? How can we relate what goes on in the world of math and money to what goes on in your life and mine? How can we begin to explain the political imbalance of the last thirty to forty years that our institutions, dysfunctional as they’ve become, can no longer reconcile?
Consider President Lincoln’s Second Inaugural address, which focuses on America’s Civil War that in March of 1865 seemed never-ending. It sheds light on elemental truths we are living with today.
“Yet, if God wills [the war] continue until all the wealth piled by the bondsman’s two hundred and fifty years of unrequited toil shall be sunk, and until every drop of blood drawn with the lash shall be paid by another drawn with the sword, as was said three thousand years ago, so still it must be said “the judgments of the Lord are true and righteous altogether.”
Lincoln, of course, was talking about slavery, an institution so overtly contradictory to the doctrine of equality that America was founded upon that it makes any issue we deal with today seem puny in comparison.
Nonetheless, Lincoln’s conception of God here is notable, because he isn’t really talking about God superstitiously. His belief in God is far more economical, and subscribes to the idea that there’s a mathematical justice to the universe. That if I commit a wrong in my life, somewhere down the line a price will be paid, even if it’s not by me, but, say, by my grandkids.
Maybe that’s what the U.S. is, in a certain sense, currently facing. We’re paying, in real economic terms, for the political dysfunction and ideological orthodoxy (particularly on the right) of the last thirty years.
Why we’re so politically dysfunctional is less clear. Perhaps one component is that America is so very individualistic, and as a result we have to deal inordinately with issues of greed and small-mindedness. We have lots of people who are too caught up defending their petty interests or are too terrified of change (both in the community and within themselves) to appreciate the issues at hand or to look down the road at what’s ahead.
What many kids see growing up is a country where lots of people want to be rich, and where those who are already rich hold on to what they have by evading the tax system or by pulling the strings of government in other ways, regardless of whether their self-interest contradicts commonly held ideals and morals.
To be fair, this is not something everyone does, but rather something that enough do for it to be a problem.
The U.S. is also going through a major crisis in identity. I saw firsthand when I was abroad in Europe countries with age-old cultural traditions struggling to deal with immigration because while they wanted to be inclusive on the one hand, they were scared of too much change too fast. They were wary of the beloved nation not being the same as it once was.
Similarly, the U.S. is changing faster than ever, and is becoming more progressive ideologically and more diverse demographically. Such circumstances make identity— the belief that I am a single, solitary entity— way more transient and subject to the tides. Perhaps what the refusal to compromise in government reveals is a deep-down fear of change that translates into a fear of “otherness”; of looking in the mirror and seeing a face that’s not yours.
Or maybe political dysfunction can be attributed to what I’ll dub the “Breaking Bad theory.” Being an effective citizen in a democracy requires time and energy. After all, you run the government, right? This doesn’t mean that you’re actually legislating or governing, per se, but that you know about what’s going on and about the people you elect to represent you.
But in an age such as ours, where you can go home at night and surf the web or watch a long, meandering (albeit entertaining) TV show, why would anyone want to learn about healthcare or affordable housing policy? It’s not that we necessarily don’t care, but that we live in a medium of perpetual distraction, while our supposedly citizen-run government is left on autopilot. It is, as we are now seeing, why Congressmen have for years been using the debt ceiling as a form of political capital even though a majority of Americans fundamentally don’t understand what the debt ceiling is.
As a government major, avid lover of politics, and millennial with an invested interest, I hope America gets its act together. I hope we find a way to borrow responsibly, to provide people, both privileged and downtrodden (but especially downtrodden) with the opportunities we claim to be the centerpiece of our democracy. And I hope we elect people in the future who we want to have a beer with, but who also have the know-how, common sense, and moral compass to be able to get things done. That’s what I hope. But what you hope for isn’t always what happens.