There is a lot of talk about the debt ceiling increase and the nominal “centrists” (or, if you prefer, “moderates,” “pragmatists,” or whatever) are claiming that if the US does not raise the debt limit right away, the economy will collapse and the Democrats will enjoy a beautiful upland of permanent majorities.
The paragon of this school of thought is Megan McCardle, whose blog never ceases to surprise me with its mediocre yet self-important arguments. Why the Hated Instapundit links to her, I do not know.
McCardle worries that both parties are fundamentally misjudging the debt ceiling “crisis”, but fundamentally blames the Republicans because apparently actually trying to bring the US government’s revenues in balance with its expenditures is destabilizing or something.
I suppose this isn’t entirely her fault. She gets a lot of her instruction from the conventional school of economics that believes that the sum total of a nation’s consumption plus investment plus government spending equals the gross domestic product (for you econ types, this equation is represented as C+I+G= GDP). To this one can add the sum of exports minus imports, thus C+I+G + (EX-IM) = GDP.
All nice and neat, except that it doesn’t work that way.
This model assumes that government spending is every bit as efficient as private sector spending. It isn’t.
Clearly McCardle has never read (or perhaps understood) Seen and Unseen by Frederic Bastiat . That is, she sees only the reduction in government outlays which must therefore erode the overall well-being of the country. But this ignores that which is not seen – that the same money might have been better invested without government getting in the way.
Consider a government loan guarantee. These are usually made based on politics, not economic worth (which is why the guarantee is needed in the first place). A large percentage of these go south, and when they do, they take money that otherwise would have been attracted to a viable investment and waste it on one that merely looked good to a politician.
This fallacy is the first part of why McCardle’s analysis is fundamentally wrong.
The second part is that she argues that Wall Street (and the bond market) only think in the short term. That may be so, but we are rapidly moving beyond the short term. Our national debt is growing so rapidly that the nice clean debt increase that she (and the Democrats) pine for will only make the problem worse. Far from demonstrating the willingness of the US government to pay its debts, it shows that we will borrow as much as we can, and are incapable of taking any steps to stop.
Now is as good a time as any to apply the brakes to this self-destructive cycle. The GOP needs to stand fast and force spending cuts because they are the only way out of this mess.
WIN-WIN SCENARIO? If the ratings agencies do downgrade US debt, that also has its advantages as it illustrates the immediate need for the government to stop borrowing money and live within its means.
Higher interest rates would send a sharp signal that we cannot pretend that we’ll balance the budget in 2024 or whatever arbitrary year the Dem spin doctors have picked that conveniently falls after their careers in politics are over.
Sooner or later, the debt party is going to have to end. The earlier it does, the less total damage there will be. I say we get on with it.