Of Debt Ceiling Debates, Non-Denial Denials and Non-Default Defaults

There are a great number of things one could say about the latest Potomac two-step. The deal itself is labyrinthine and the Republicans outmaneuvered the Democrats by convincing them—with the help of many of the media—that Tea Party partisans would never agree to anything in violation of “The Oath.” Funny, I always thought that federal lawmakers took an oath to “support and defend the Constitution of the United States,” as opposed to pledging allegiance to a group like The Americans for Tax Reform, which convinces our legislators to sign a pledge stating that they will never raise taxes, on anyone, for any reason (unless of course, those tax increases are accompanied by equal or greater tax reductions).

As there will be countless opportunities to read about every excruciating detail of the debate and the compromise, let me focus on one. Although there wasn’t a default in terms of America’s payments, there was a gaping, unprecedented, and embarrassing default in our political process, Democratic philosophy, and the social contract of the United States. And it will most likely cost us all money.

Over the past couple days, three small, yet respected, rating agencies downgraded the U. S. credit rating. We heard very little about that. Shortly after the President signed the compromise bill, Moody’s announced that it wouldn’t downgrade the United States’ debt rating, but had changed its outlook to “negative.” Our financial North Star—the stock market—continued its slide for an eighth straight day, dropping most precipitously after the announcement that the deal had been done, and the details were released. As usual, the smart money knows. We may be waiting with bated breath for an official word from S&P, but the writing is on the wall.

[Article: Will Bureaucrats Prevent You From Buying a Home?]

Here’s what we just did: we cut spending in the middle of a recession (we all know there’s still a recession going on, don’t we?). This violates every principle of sound economics, and in my opinion will ensure that the arsenic ice cream cone of the American economy will get a double dip. We completely put off any rational discussion of what priorities will govern the cost-cutting efforts—that, pursuant to the new bill, must add up to a total of $2.4 trillion by December 23, which will make for a very red Christmas, and keep Medicare beneficiaries wondering about what benefits they really will have come January. We just engaged in a deficit reduction effort without any increase in revenues—a very Tea Party move, but not necessarily a very sound one.

Lest past lessons be forgot in the swirl of political rhetoric: When an urgent debt reduction bill was passed during the Reagan administration, the shortfall was made up by a mixture of 82% in revenue increases, and 18% in cost cuts; under Bush 41 it was 38% revenue increase and 62% cost cut; in the Clinton Era, it was 62% revenue increase and 38% cost cut. Today, however, the Friends of the Tea Party forced through a unilateral spending cut at a time when every major economist has opined that America’s debt problem cannot be solved without a combination of both revenue increases and cost reductions.

Sadly, we have forever undermined our political will and the efficacy of our political process in the eyes of every alert American, and in the eyes of the rest of the world. This, of course, is the real problem. Our nation is fractured, and no longer has a unified voice.

And that is what will cost money. Whichever side you’re on, you must appreciate that the chances of a new economic downturn (or, if you’re an optimist, a break in the recovery) have increased markedly. Although it is unlikely that the major rating agencies will immediately downgrade our credit, the chance of that downgrade has been immeasurably increased by the bombast and theater that accompanied this compromise, along with the promise of a repeat performance in December. Rates may well go up, sooner than they should have or otherwise would have, making all of the problems that I have written about in this column—such as the housing price and foreclosure crisis—much more pronounced. Presumably the compromise was necessary in order to return stability to the economy and to the marketplace. But it didn’t—we know that T-bills will pay interest, but we don’t know where we are going as a society.

[Featured Product: Compare prepaid credit cards]

Non-Default Default (cont.) »