This is going to sound crazy, but I don’t think Congress should raise the federal government’s debt limit. The American economy cannot develop further until the political deadlock of the past quarter century is broken.
Last week, the Treasury Secretary announced that the government will run out of money as early as next month unless Congress raises the debt ceiling. When that happens, we will either find a way around the border and never have to hear about it again, or the US will default on its financial obligations and likely trigger a global economic crisis. Probably the latter.
How bad will it be if the US doesn’t pay its debt on time? Well, the world economy depends on the abundance of dollars because it’s the currency everyone uses for international trade. Oil, coffee and computer chips? Everything is bought and sold in dollars anywhere in the world. That means almost every country is trying to ensure they have access to dollars in the event of an economic disruption, and they do that by holding US Treasury bonds.
If we pay off even a small part of this debt, the whole world will be faced with the possibility that the dollar is not as stable as everyone thinks. It’s impossible to know how things will play out, but certainly the impact on daily life in the US will be profound.
The dollar would likely depreciate and imports would become more expensive. Conversely, our exports would be more competitive. But in the short term, the prices of a variety of common goods, such as clothing and consumer electronics, will rise, exacerbating the inflation problem. And because US debt would be riskier for investors, interest rates would have to rise, which would further constrain both government and consumer spending.
Research by rating agency Moody’s Analytics suggests that a prolonged debt ceiling stalemate would cost the US 5 million jobs and plunge us into a deep recession. With the federal budget constrained by the debt ceiling, we would see huge cuts in public services — not just Social Security and Medicare, but schools and law enforcement — as demand increases.
In short, we would be up a creek without a paddle.
But the political debate we are having here is nothing new. We have spent the last quarter century in a political swamp and the economy has suffered as a result.
The US wastes $408 billion worth of food every year, yet 34 million people, including 9 million children, do not eat enough on a regular basis.
We are facing an epidemic of loneliness that is affecting young and old alike. A recent report found that three out of five Americans experience loneliness on a regular basis.
We have developed an inability to rebuild almost anything. Housing construction, transport infrastructure, power generation, industrial capacities – construction today is often unaffordable and associated with extensive legal disputes.
And instead of tackling major issues in American society, we fight over money. Neither side has any reason to compromise with the other, and if they can’t, our problems get a lot worse.
We shouldn’t have to ask ourselves whether or not we’re going to plunge into a self-inflicted economic crisis. The fact that we are points to much deeper problems.
Samuel Barbour is a local economics professor who reflects on all things current in our community and abroad. Questions and comments can be received at [email protected]
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