Is Defaulting on the National Debt on the Table?
Truthout, September 7, 2010
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In an interview last week, Representative Chris Van Hollen, the chairman of the Democratic Congressional Campaign Committee, persistently refused to take cuts to Social Security off the table. He said that President Obama’s deficit commission would make its report after the election and that the Democratic leadership could not say before seeing it that a plan that includes cuts to Social Security was unacceptable.
If there is some principle at stake here, it is not one that the vast majority of the America people share. Social Security is a hugely popular and successful program. The vast majority of retirees depend on Social Security for the bulk of their income.
This dependence is almost certain to grow in the next two decades due to the country’s incompetent economic management. The huge cohort of baby boomers is approaching retirement with almost nothing other than their Social Security to support them. This is the result of the fact that the Greenspan-Bernanke crew, as well the Clinton-Bush gang, thought that asset bubbles were fun.
The collapse of the housing bubble has eliminated much of the wealth that baby boomers were able to accumulate during their working lifetime. With their retirement rapidly approaching and a continuing failure of economic policy to produce normal levels of employment, baby boomers will have little opportunity to make up for their lost wealth.
So, why can’t the Democratic Party leadership say that cuts to Social Security are off the table? What part of this is so hard for Mr. Van Hollen to understand?
If Van Hollen is saying that everything is on the table, then he is almost certainly not telling the truth. It is highly unlikely that the deficit commission would consider a partial default on the national debt as an option. Furthermore, it is certain that if the commission did produce a set of recommendations that included a partial default on the national debt that it would almost certainly be rejected out of hand by the both the Democratic leadership in Congress and the Obama Administration.
Of course there is no reason for the U.S. government to default on its debt. The country is having no difficulty whatsoever borrowing at the moment, with investors willing to make long-term loans at interest rates below 3.0 percent.
Furthermore, the Federal Reserve Board can freely buy up more debt, if investors did become more reluctant to hold government bonds at some point in the future. In ordinary times this could create a problem with inflation; however, with the vast amounts of idle capacity and huge reservoir of unemployed workers, inflation is clearly not going to be a problem in the foreseeable future.
Given the ease with which the country can borrow, and the relatively minor burden posed by interest payments there is no reason for the United States to default on its debt. But of course there is also no reason for it to cut Social Security payments, which would amount to a defacto default on its debt to the Social Security trust fund. Near retirees have already paid for their Social Security with their Social Security taxes. These taxes were used to buy the U.S. government bonds held by the trust fund. If the government substantially reduces scheduled benefits, this is effectively defaulting on these bonds.
If Van Hollen feels comfortable ruling out a default on the government debt more generally, then he should have no problem ruling out cuts to Social Security. Of course, if we do see cuts to Social Security on the table, then the public should insist that default on the debt is also on the table.
This is nutball economics, but if the Democrats in Congress insist on practicing it, then voters should insist that it is not just working people who get hurt. The Wall Street boys should know that they are risk too.
The reality is that we can get back to full employment quickly but we lack the political will to do it. The reality is that the budget deficit is not a problem in the short-term because of the vast amount of unemployment – the deficit is supporting the economy and preventing unemployment from rising higher.
And, the budget deficit is not a problem in the long-term – the problem is a broken U.S. health care system that threatens to send costs through the roof in both the private and public sector. If we fix our health care system, then we have no deficit problem.
If Social Security is on the table, it is because people in the Obama Administration and the Democratic Party leadership want to cut Social Security. It really is very simple.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The End of Loser Liberalism: Making Markets Progressive. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues.