The Debt Panic

How worried should we be about the national debt? Is the United States really headed the way of Greece and Portugal?In an article just posted to our home page, the economist Charles Michael Andres Clark argues that the debt panic that has seized much of Washington and the media indicates a profound misunderstanding of some economic basics. Clark, a senior fellow at the Vincentian Center for Church and Society and professor of economics at St. Johns University in New York, addresses four myths about public debt, the first of which is that our federal government is in danger of going bankrupt:

The first and most basic myth is the idea that the U.S. government is about to run out of money. In fact, the U.S. Treasury cant run out of money because it pays its bills in money it creates. If the federal government owed its debt in Euros or some other currencyor if it had, say, a gold standard, which would limit the governments ability to create new moneythen Ryan and Boehner might be right to warn of bankruptcy. But U.S. debt is owed in U.S. dollars, a sovereign currency that isnt chained to the value of any commodity. The U.S. government could of course decide not to pay its bills (for example, by refusing to raise the debt ceiling), but it can never lose its ability to pay them. When politicians and journalists say that the United States is in danger of becoming the next Greece, Ireland, or Portugal, they are ignoring the fact that these other countries no longer have a sovereign currency. They must pay their debts in Euros, the supply of which they do not control. They are thus like California, New York, and all the other states facing big budget deficits: they can solve their fiscal problems only by selling bonds or raising taxes. They cannot create more money.The U.S. governments situation is more like that of Japan, which faced similar dire warnings a decade ago when its debt-to-GDP ratio reached 100 percent. Now the ratio is over 200 percent (twice ours), and still the Japanese government has no problem finding people to loan it money at low interest. This is because what matters to buyers of Japans bonds isnt the size of the countrys debt but the fact that it has its own currencyand so will never be forced to default.

Clark's larger point is that politicians should not present the policy options they prefer as if they were necessities rather than options. Just as a country with a sovereign currency can default only by choosing to do so, so a rich country with low taxes that cuts it already-modest welfare provisions is making a choice about its priorities. No brute law of economics requires us to privatize Medicare or reduce Social Security benefits.

Voters deserve to be treated like adults, not children, and this means that politicians shouldnt say we cant when they really just mean we dont want to. If some members of the House and Senate dont think the federal government should take care of those who arent fully able to take care of themselvesif, say, they believe its up to the states or private charity to do thisthen let them say so openly instead of presenting their policy preference as a matter of fiscal necessity. Small-government conservatives are now using the national debt as an excuse to cut programs theyve long wanted to cut, even when the government was running a surplus. When the economy is in good shape, the programs are said to be unnecessary and wasteful: let the thriving private sector take care of whatever problems the public programs were designed to address. And when the economy declines, the same people tell us we can no longer afford such a generous safety net. Whatever ails us, the cure is smaller government.The biggest economic problems the United States now faces are unemployment, income inequality, and the fact that much of the financial sector still operates like a casino. If the country could solve these problems, the gap between government outlays and government spending would immediately shrink, if not disappear. By instead focusing attention on the countrys debt, politicians are getting it backwards. Contrary to the claim of many leading Republicans on Capitol Hill, there is no reason to think that immediate cuts to government spending will help the economyor that spending cuts cant wait until the economy improves.

Matthew Boudway is senior editor of Commonweal.

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