The Duck of Minerva

The Duck Quacks at Twilight

Raising the Debt Ceiling and Avoiding Economic Catastrophe

July 19, 2011

I keep meaning to write a follow up post on U.S. public opinion on climate change and how and why it matters for the world. But, the ongoing political posturing over raising the debt ceiling keeps commanding my attention. Everything I’ve read suggests that failure to resolve this by August 2nd would be what Federal Reserve Chairman Ben Bernanke called a “self-inflicted wound” on the part of the United States and potentially send the world in to an economic tailspin of perhaps unprecedented proportions. While we can’t know for sure what would happen, most sane observers of this unfolding catastrophe – Sebastian Mallaby, James Lindsay, Dan Dreznerthe U.S. business community, David Brooks, David Frum – suggest that this is one of those things in life that it would be wiser not to find out by trying our luck.

From an academic perspective, the question a few weeks ago was why weren’t the markets spooked and punishing the United States with higher interest rates and threats of a downgrade in the country’s credit rating. At the time, the somewhat obvious answer was that there simply wasn’t an alternative where investors could take their money. Many European economies are teetering in the face of debt crises of Greece, Ireland, and others. Japan is still recovering from the effects of the earthquake/tsunami/nuclear meltdown and the country had already been in the economic doldrums for more than a decade. Other countries that potentially could absorb global savings Australia and Brazil for example simply do not have markets large enough. Thus, despite the problems and doubts about America, investors still see the United States as the safest bet. Countries like China had too much money invested in the United States. Larger, more sustained efforts to shift to other currencies could do as much damage to China as they would to the United States.

In addition to these forces, markets were not punishing the United States because I think there was this expectation that surely American political leaders would sort this out. Yes, there will be this to and fro of political demagoguery on both sides as the country’s leaders try to position themselves for maximum political advantage. But, in keeping with Winston Churchill’s maxim, the Americans will ultimately do the right thing after trying everything else first.

In this case, the blinkered brinksmanship by both parties, but particularly House Republicans, has brought the country close to what might be an economic apocalypse. I do not write those words lightly, and I do actually mean them. My wife and I are expecting are first child in a matter of weeks, and I seriously worry that these so-called leaders may tempt fate by failing to reach a compromise on the debt ceiling and deficit reduction, one that includes both spending cuts AND new sources of revenue.

With climate change and the world’s increased environmental footprint, I worry about what kind of world our son will come into over the medium- to long-run. With the failure of the United States to raise the debt ceiling, I worry what kind of world he will be born into in three weeks. I am normally not prone to such dystopian thinking, but I hope for the sake of my family, your family, humanity as a whole that our leaders come to their senses and realize that now is not the moment to roll the dice with the global economy.

If you want to read what I’ve read on this, take a look at the last ten days of my Twitter feed

Re-tweets include debt calculators and show what bills we won’t be able to pay with existing funds. Other pieces look at how failure to raise the debt ceiling will drive up our borrowing costs and actually make the deficit worse. Others examine how a balanced budget amendment that House Republicans would like to attach to some final agreement would ultimately be a bad economic straitjacket in tough economic times. I also include links to threatened credit rating downgrades from Moody’s, S&P, and Fitch.
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Joshua Busby is an Associate Professor in the LBJ School of Public Affairs at the University of Texas-Austin. He is the author of Moral Movements and Foreign Policy (Cambridge, 2010) and the co-author, with Ethan Kapstein, of AIDS Drugs for All: Social Movements and Market Transformations (Cambridge, 2013). His main research interests include transnational advocacy and social movements, international security and climate change, global public health and HIV/ AIDS, energy and environmental policy, and U.S. foreign policy. He also tends to blog about global wildlife conservation.