Hawk Nation: A Guide to the Catastrophic Debt Ceiling Debate

News reports hold that President Obama scored a political victory by agreeing to put Medicare and Social Security on the chopping block to achieve a “go-big” $4 trillion deficit reduction. Speaker Boehner had to concede that Republicans won't vote for any package that includes tax increases – and the deal died. So the gambit worked and the President emerged with a solid image as the alpha deficit hawk.

To which one can only say: how nice for him.

We're in a summer that only Salvador Dali could paint, a reality so twisted that one almost yearns for the simple verities of the War on Terror or even the invasion of Iraq. Then as now, to be serious one must be a “hawk.” (The dove is a weakling, a loser, and the owl for practical purposes does not exist.) So let's review some of the strange and mysterious faces of this ugly, vicious bird.

The debt ceiling was first enacted in 1917. Why? The date tells all: we were about to enter the Great War. To fund that effort, the Wilson government needed to issue Liberty Bonds. This was controversial, and the debt ceiling was cover, passed to reassure the rubes that Congress would be “responsible” even while the country went to war. It was, from the beginning, an exercise in bad faith and has remained so every single second to the present day.

Today this bad-faith law is pressed to its absurd extreme, to force massive cuts in public programs as the price of not-reneging on the public debts of the United States. Never mind that to force default on the public obligations of the United States is plainly unconstitutional. Section 4 of the 14th amendment says in simple language that public debts, once duly authorized by law and including pensions, by the way, “shall not be questioned.” The purpose of this language was to foreclose, to put beyond politics, any possibility that the Union would renege on debts and pensions and bounties incurred to win the Civil War. But the application is very general and the courts have ruled that the principle extends to the present day.

What is going on in Congress at this moment already violates that mandate. It is an effort to subvert the authority of the government to meet and therefore to incur obligations of every possible stripe. It is an attack on the concept of government itself – as the “Tea Party” by its very name would no doubt agree. It therefore paints those deficit hawks who are using the debt ceiling to take budget hostages as enemies of the United States Constitution.

The President, though supposedly a constitutional expert and though sworn to “preserve, protect and defend” the Constitution, will not say this. Instead he appears to treat the Constitution as an optional matter, to which he will not resort, in the hope that by negotiating with the hostage- takers he can reach some reasonable outcome that will preserve everyone's good name. (The great Harvard legal scholar Laurence Tribe recently argued that the President cannot defy the debt ceiling on his own. That's a debatable point.) It is as though Lincoln in 1861 faced with the siege of Sumter had sat down with Confederate commissioners to see what could be worked out.

In Washington it appears that this assault on government has a large measure of elite and media support, if not on the crass details or vulgar personalities but because it could conceivably force the parties to do “what they should do anyway” – namely come to a long-term deficit and debt agreement. Such an agreement would cut spending, raise some taxes, put the projected debt-to-GDP ratio on a declining track, and solve the “government's fiscal crisis.”

What fiscal crisis? The great unasked question in this summer of sound-and-fury is “why?” The United States has many problems at the moment: a high-and-stubborn unemployment rate, a foreclosure catastrophe, a slowing economy that has not recovered and will not recover from the Great Crisis, and the ongoing challenges of infrastructure, energy and climate change. Fiscal crisis? The entire thing is a figment, made up of wise-men's warnings repeated endlessly and linked to the projections of technicians at the Congressional Budget Office and elsewhere.

The projections, as I've written here, are made up of two economically impossible arguments. One is that there will be a big economic rebound, restoring near-full employment by 2013 or so. We're already off that track, as some of us warned from the beginning. Of course, a recovery would reduce the deficit even if nothing were done. But CBO then recreates the exploding debt by assumptions, which include steady growth and low inflation, but sharply higher health-care costs and much higher short-term interest rates. These lead the projected debt to compound skyward, soon surpassing all previous records in relation to GDP.

Is this possible? No it is not. The Federal Reserve would never raise the short-term interest rate as CBO projects, without a prior increase of inflation, which CBO assumes will not occur. If they did, the economy would collapse! And if they don't, the debt does not compound out of control. I have presented these simple numbers here. For what it's worth, if you believe the capital markets signal anything, they signal their disbelief in doomsday forecasts, in the long-term interest rate on US government bonds, every single day.

Is it possible that cutting government is, by some other path, the way to economic recovery?

There are many people who believe fervently in the resilience of the private sector and for whom government is just a burden. Some of those people are pure predators: resource magnates, media magnates, banking magnates. Others have blinded themselves to the role government actually plays in sustaining the advanced networks, human protections and social systems that make up our lives, and imagine that one can go back to the world of subsistence farming, church charity and credit from the corner store. But there were many fewer people in that world, they didn't do what we do, and they didn't live nearly so long.

In broad terms, today's government does four major things:

– it provides for the national defense.

– it purchases goods and services from the private economy for a wide range of public purposes, most of them individually quite small-scale in relation to GDP.

– it regulates a wide range of private-sector activity, for safety, health, environmental and other purposes, including financial stability – or so one should hope.

– it administers Social Security, Medicare and Medicaid, as well as other pension and health benefit programs.

On what grounds are any of these functions too large? As an economist concerned with peace and security issues, I do believe we would be better off ending the wars in Iraq and Afghanistan quickly, that we could dispense with the real resource costs of many foreign bases, aircraft carrier groups, fighter aircraft and submarines and nuclear weapons left over from the Cold War. But these are security judgments, not broad economic ones. In other words, I would not cut a single dime of Pentagon spending that was actually necessary to defend the United States, in order supposedly to lower the interest rate on federal debt.

By the same reasoning, why should we cut transportation, or public health, or environmental protection, or scientific research, or bank inspectors or funds that support the public schools? One can argue these matters program by program – and one should. (I would happily cut ethanol subsidies and oil company tax breaks, for starters.) But there is no economic case for placing an overall limit, and it is obvious that the 500,000 public sector workers – including many teachers, police, fire and park rangers and librarians – who have lost their jobs since 2009 were doing good and useful things that are now missed. If sacking them had been good for the economy, we would be having a stronger recovery than we are.

Finally there are Social Security, Medicare and Medicaid. Unlike the military or the transportation program, Social Security is not a government purchasing program. It therefore takes nothing directly from the private sector. What it does, is provide insurance: it protects workers from poverty in old age, whether or not their families would otherwise be willing and able to support them. And it taxes all workers, whether or not they would otherwise be burdened with elderly parents, or survivors, or the disabled, to support. Along with Medicare and Medicaid, Social Security is a powerful protector of the entire working population – young and old. It redistributes purchasing power, in loose relation to past earnings, in a way that meets the basic needs of a large number of Americans who would otherwise, in many millions of cases, be destitute or medically bankrupt.

What economic purpose would cutting such programs serve? To do so would again redistribute incomes. Many of the future elderly would be much worse off, and of course many would die younger than they otherwise would. Survivors and the disabled would suffer as well. In return, what would the federal government and the country gain? A release of real resources to the private sector? Social Security does not take real resources from the private sector! Lower interest rates? The idea is absurd, and not just because interest rates are low today. The notion that cutting Social Security would help keep interest rates down is absurd because interest rates are set in a way that has no relationship at all to the scale of Social Security, Medicare or Medicaid.*

This argument has nothing to do with the trope, oft-repeated and perfectly true, that the Social Security system does not contribute to the deficit. It would not matter if it did. The important question is: are benefits too high? Obviously not. How about payroll taxes – are they too low? There is no case for that either. One of the very few bright spots in recent policy was the decision to reduce payroll taxes on employees, temporarily, while leaving Social Security benefits alone.

If you wanted to build on that, the right steps would be to lower – not raise – the Social Security early retirement age, permitting for a few years older workers to exit the labor force permanently on better terms than are available to them today. This together with a lower age of access to Medicare would work quickly to rebalance the labor force, reducing unemployment and futile job search among older workers while increasing job openings for the young. It is the application of plain common sense. And unlike all the pressures to enact long-term cuts in these programs, it would help solve one of today’s important problems right away.

Instead of this, what do we have, from a President who claims to be a member of the Democratic Party? First, there is the claim that we face a fiscal crisis, which is a big untruth. Second, a concession in principle that we should deal with that crisis by enacting massive cuts in public services on one hand and in vital social insurance programs on the other. This is an arbitrary cruelty. Third, a refusal to stand on the strong ground of the Constitution, against those whose open and declared purpose is tear that document and the public credit to shreds.

In the Daily Beast on Sunday, Howard Kurtz wrote in optimistic terms of the prospects for a deficit bargain: “But away from the cameras, even sharp-tongued politicians recognize the imperative of avoiding the fate of Greece. It is a sign of the times that the Kabuki players of Washington may take a bow simply for averting catastrophe.”

Kurtz did not say that the big Kabuki here was his own notion that somehow the United States might face the fate of Greece – a small and overmatched member of a currency zone it cannot control. He did not say that the catastrophe he fears – a default on US government obligations – was entirely the product of treacherous politics, abetted by an irresolute President who seems not to grasp the danger of allowing the Constitution to fail.

And he did not say, that the deal he would applaud, with cuts to Social Security, Medicare, Medicaid and all the legitimate and necessary functions of government — would be for millions of Americans the catastrophe itself.

*Short-term rates are whatever the Federal Open Market Committee dictates they should be. And if the Treasury wants to pay low interest rates on the debt, it can always issue short-term debt only — or it can issue long bonds and the Federal Reserve can buy them back, maintaining the structure of interest rates it prefers. There is no market default risk, no threat to “solvency” from a “loss of confidence” – nothing the private sector can do to make the US government pay more than it wants do – a point that should be obvious from the fact that the Federal Reserve's interest rate decisions are never overruled by the market. The only way the United States government can default is if it makes a political decision to do so – which is what the debt-ceiling hostage-takers threaten and what the Constitution forbids.