John Tamny’s Debt Ceiling Snake Oil
John Tamny’s May 17 piece reveals a rather astonishing lack of financial savvy for a Forbes editor.
After his requisite insulting of Tim Geithner and Ben Bernanke, Tamny recommends Republicans continue a strategy of brinkmanship, counting on the Treasury Department to pay interest due on U.S. debt to avoid “catastrophe.” Then, Tamny asserts, Congress would be forced to make tough choices with regard to the remaining funds. Based on January CBO numbers, Congress would need to cut 40% of the current budget.
Tamny’s faith in Treasury to avoid disaster is surprising given his opinions of those running the place. But his faith is also unnecessary, since the Constitution’s 14th amendment mandates payments due on the government’s debts. Treasury has no choice but to service the debt.
Since interest payments are non-negotiable, the government would have to cut 44% of the rest of the budget. But it gets better (or worse, depending on your view).
If we went medieval on the budget, eliminating all non-defense discretionary spending and civilian pensions and cutting Medicaid, children’s health, and income security programs by 50%, we’d still have to cut 30% from Social Security, Medicare, and national defense.
Good luck with that, Mr. Tamny.
Then Tamny lets loose with a torrent of nonsense that I simply must parse:
“Default doubtless would shake confidence in U.S. debt, this would surely put a dent in global returns enjoyed by investors who specialize in buying it, but then it should be said that U.S. taxpayers should not be on the hook when it comes to subsidizing the world with a supposedly bulletproof place to park their capital.”
Taxpayers provide a heretofore unmatched confidence of repayment, and taxpayers are compensated for this confidence through lower borrowing costs for their government. Lower borrowing costs means lower future taxes to repay the debt. How exactly do taxpayers “subsidize” anything? Looks like a rational market-based equilibrium to me.
“Interest rates surely would go up if Treasury were to default, but then the pain of higher rates would largely be felt by a federal government that does too much, and spends too much.”
Somebody should tell Tamny that the federal government, however inefficient, serves the people. If Tamny’s desired-for result were to occur and higher debt service costs crowd out other government spending, taxpayers would receive less from the government for the same amount of taxation. Tamny is actually rooting for a worse deal for taxpayers. Or maybe in Tamny’s reality, government spending is, in itself, a negative; that’s the only way he could possibly believe taxpayers would be getting a better deal.
“Higher interest rates would put Washington on a diet, and while it would lead to more difficult times in our nation’s capital through reduced spending…”
Ahhh, the “starve the beast” theory. You know, cut sources of revenue and the government will be forced to get smaller as well. It worked so well with Reagan, didn’t it? Reagan slashed taxes and revenue plummeted from 19.3% of GDP in 1980-1982 to 17.5% in 1983-1986. Meanwhile, spending fell from 22.4% to… oh, that’s right – spending INCREASED to 22.8% of GDP for 1983-1986.
Tamny’s right though – if the government couldn’t borrow any more, the government would undoubtedly be somewhat smaller. But taxes (state and local included) would undoubtedly rise, perhaps dramatically, and the economy would re-tank as a result. Perhaps Tamny shares Mitch McConnell’s “number one goal” of defeating Obama in 2012 – regardless of the economic damage necessary, and all of this is just propaganda.
Recapping, if the debt ceiling were not raised, taxpayers would enjoy some combination of higher taxes and less service from the government. Welcome to Tamny’s world, where this is a good outcome.
“…capital not vacuumed up by Washington would be left to the productive in the private sector. Washington’s recession would be the rest of the world’s boom.”
Nonsense. Tamny apparently believes that an increase in the cost of government borrowing would be a positive for the private sector. First off, the prime rate is lower than it’s been in more than 50 years; there’s not an awful lot of room for reducing borrowing costs, requisite for increased demand for capital.
Secondly, does Tamny really believe that a drop in confidence in American government debt wouldn’t carry over to a drop in confidence in American corporate debt? Far more likely would be a corresponding increase in corporate interest rates, as capital owners would be more prone to believe the government would inflate away its debt, leading to higher inflation expectations and risk premiums across the board.
“Higher interest rates for all entities public and private… [should] be embraced. It’s well past time that interest rates better reflect market realities, plus if rates increase, the unspoken of positive here will be an increase in capital made available by savers to entrepreneurs based on savers achieving a higher return for monies that aren’t consumed.”
Wow. Please walk through this with me. Tamny says that an increase in risk premiums would be a good thing, and that savers would make more capital available if rates were higher. But this is backwards; why would rates be higher? Because savers would demand higher returns due to increased perceived risk. Going back to basic market curves, an increased risk premium would shift the supply curve up, so that higher rates are necessary to generate the same capital supply.
Welcome to Econ 101: Intro to Microeconomics, Mr. Tamny. Please study hard.