Devil’s Advocate

This post was originally written by Kevin Rogers of NCSJP and Action NC.  It was originally posted on www.actionnc.org.

 

It appears this morning that Congress finally found their collective sanity and averted the financial calamity they themselves created.

Truly, this is democracy at its finest.

While the political pundits analyze the political winners and losers to this debt-ceiling debacle, one thing is clear: they won, and we lost. This should not be surprising.

But more than that, I couldn’t help thinking that perhaps the Tea Party folks were onto something here – would it really have been so bad if we didn’t raise the debt ceiling? More to the point, who would a government default hurt more – the rich or the poor?

Let’s break it down:

If the government defaults, there isn’t enough money to pay all the bills – someone gets an IOU. And while I would rather get an IOU from Uncle Sam than my Uncle Al, I probably won’t be able to use an IOU to pay my rent, buy groceries, or pay for bus fare, which is exactly what many would have to do if Social Security payments weren’t made on-time. Or so the argument goes.

Just to play Devil’s Advocate for a moment, what if, instead of paying our bond creditors first, we paid domestic obligations first (like Social Security and Medicaid) and gave bondholders an IOU for the dividend? I know I’m going out on a limb here, but isn’t an a Treasury Bond essentially a government IOU anyway? Will these investors really run for the hills because they have to wait an extra week or two for their payments? Yes, China and others could reduce their long-term investment in T-bills, but where the heck else would they be guaranteed a safer investment – even with our maxed-out government credit card?

I know it is more complicated than that, and there are many possible (though I would argue improbable) long-term negative consequences of a default, including a credit downgrade (by the same folks who told us junk mortgages were AAA, so why anyone listens to them anymore is yet another baffling question) and increased costs for consumer borrowing.  But are those costs really worse than the long-term cuts to entitlement programs such as Medicaid and Social Security that are possible under this deal?

For your average low-income worker or retiree, I would argue not. These folks already pay adisproportionally high amount to access credit, when it’s even available, so it is doubtful that higher rates would really have much effect on them since, in many cases, they are already paying the highest APR allowed by law. Low income Americans are also far less likely to have significant retirement investments that would be negatively impacted by a down-turn in the stock market, and are therefore, ironically, far better protected from short-term swings in financial market conditions.

Don’t get me wrong – I’m glad Congress was able to come to an agreement that averted a default, because I think we would have paid our creditors before our citizens, and that would have been a double loss for people at the bottom of this financial food-chain. But I can’t help but wonder “what if.”

Rob Emanuel, former Chief of Staff to President Obama and current Chicago mayor, was famously quoted as saying “You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before.” Indeed, what if we changed this crisis into an opportunity to actually value our most important responsibilities, rather than cheapening them, and in the process redefine what it means to honor obligations, rather than merely satisfy them.

Leave it to Congress to waste an opportunity.

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