David R. Henderson  

Bruce Bartlett on Debt Default

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On the prospect of U.S. government default on its debt, Bruce Bartlett writes, after mentioning John Tamny:

Tamny is not an isolated crackpot; reputable conservative economists have been writing sympathetically about the idea of default for decades. These include Nobel Prize-winning economist James M. Buchanan, whose 1987 essay, "The Ethics of Debt Default," defended the morality of default on the grounds that deficits weren't financing public capital but current consumption, with the bills being passed on to future generations.

Other prominent conservatives who have been favorable, even enthusiastic, about debt default include Murray Rothbard, Dan Pilla, Jeffrey Rogers Hummel, and Christopher Whalen. In 1995, then House speaker Newt Gingrich publicly warned the Public Securities Association that he was prepared to default on the debt unless Bill Clinton acceded to Republican demands for budget cuts. "I don't care what the price is," Gingrich said.

Where to start? I can see Bruce's claiming Jim Buchanan as a conservative. But anarchists Murray Rothbard and Jeff Hummel? The term "conservative anarchist" doesn't exactly roll off the tongue. More important, though, is that by calling Tamny a crackpot, and then saying he's not isolated, Bruce seems to hint that the rest of the people he cites are crackpots too. He doesn't quite say it and so preserves deniability. Incidentally, Jeff Hummel has made his case at Econlib for why there's a substantial probability of default.

Notice something else. By focusing on the sanity, or lack thereof, of those with whom he disagrees, Bruce avoids saying whether default is good or bad. He writes:

My purpose today is not to make the case against default or explain all of its ramifications.

But shouldn't it be? Some of us see default as one of the few ways left of reining in federal spending. Indeed, Bartlett quotes Tamny's claim that it would reduce federal spending. Is Bartlett denying this? He doesn't say. Bartlett has argued elsewhere that, however desirable it might be to cut government spending, the large federal government is here to stay. That's why he advocates higher taxes. But if Bartlett is willing to call people "crackpots" for advocating default, shouldn't he at least make somewhat of a case against default?


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CATEGORIES: Fiscal Policy



COMMENTS (15 to date)
Mercer writes:

"Some of us see default as one of the few ways left of reining in federal spending."

You must not have a good memory of the fall of 2008. When the stock market fell was federal spending reined in? No it definitely was not. The treasury security and fed chairman spent and loaned trillions. Note that Paulson and Bernanke were from the "limited government" party. When the crisis hit big business and Wall Street wanted massive federal spending and the GOP complied.

What makes you think a possible treasury default would be any different?

endorendil writes:

Government defaults happen all the time. When it happens to standalone governments with relatively small international exposure, like Russia, this is a manageable disaster, from which the world and the defaulting country can recover relatively easily. I suspect the same would be true if Greece defaulted.

A default by the US would be a different issue, because of the sheer size of the debt, the global importance of the US market and the reliance of the financial system on the world's benchmark investment: US treasuries. All the talk about the desirability of US default (as opposed to the possibility, which is definitely there) seems really glib. There's no way to predict what the world would look like after a US default, but it is not hard to imagine some very grim outcomes - mainly for the US.

@Mercer

A default would not necessarily be on purpose, nor would it necessarily be avoidable. If congress refuses to raise the debt ceiling, which it has almost done several times, the US might default. Sudden raises in interest rates might do the same. If international appetite for US treasuries wanes too fast, that too could cause a default. Even the most deft and coordinated response from US and non-US governments might fail to stop a default from occurring.

Steve Reilly writes:

You read "Tamny is not an isolated crackpot" as "He's a crackpot, but not an isolated one".

I read it as more like, "He isn't a crackpot and he's not alone in his beliefs; there are lots of distinguished people like him and I disagree with them all."

MikeDC writes:

You've nicely clarified why Bartlett always comes off as a major douche to me.

It's a good thing to preserve integrity by rightfully criticizing guys who you claim to be on the same side of on a debate. It's not a good thing to make a career out of being the "conservative economist" that does nothing but criticize "conservative economics".

Mercer writes:

When Bush signed Medicare part D into law he sent federal spending to a higher level. He should have raised taxes to pay for it. Bartlett recognizes this reality and tries to consider what new taxes will harm the economy the least. Most conservative economists refuse to offer a plan to pay for the current level of federal spending for seniors.

Do you think if a default crisis comes Congress will repeal Part D? Palin and the TPM label any attempt to rein in Medicare spending as death panels? Why is it better to refuse to say how our spending on seniors will be paid for and instead say you want to rein in federal spending when even the TPM refuses to consider any Medicare and Social Security cuts?

The result of the GOP refusal to say how they will pay for programs they want means that when a default crisis comes taxes will be raised on the Dems terms. Consider the new Medicare tax on investment income a preview.

B.B. writes:

No way.

It is true that after a default (meaning outright repudiation rather than restructuring) the government would have to work on a perpetual balanced budget basis. Who would lend money (voluntarily!) to a defaulter?

But it could raise spending. All the money going to pay interest could be diverted to other favorite sorts of spending. Noninterest spending could rise.

Also, federal default would probably render insolvent every large bank in the US, perhaps the world, and probably some major foreign central banks plus the Fed. Perhaps many pension funds and life insurance companies would also go into default.

If you think that the world does not need credit or finance, then advocate default. Otherwise, forget about it.

Relatively easier to "default" on Medicare promises, plus a tax hike.

Dan Weber writes:
Bruce avoids saying whether default is good or bad

He thinks it is bad. Very bad: http://www.capitalgainsandgames.com/blog/bruce-bartlett/1509/another-dumb-right-wing-idea-default-debt


Tom writes:

"When Bush signed Medicare part D into law he sent federal spending to a higher level."

Short term yes, long term no.
Part D is supposed to reign in medicare hospital costs $2 for every $1 spent on D.

If we raise taxes for the short run cost, we'll never repeal them in the long run. Instead we'll find somewhere else to spend the saved money. Bigger government would be the unintended consequence.

I wonder how many other places we could expand spending by x and reduce spending somewhere else by 2x.

Boonton writes:

If we raise taxes for the short run cost, we'll never repeal them in the long run. Instead we'll find somewhere else to spend the saved money. Bigger government would be the unintended consequence.

You've forgotten Milton Friedman's mantra that the size of gov't is measured by its spending, not its taxing. If Medicare D really reduces spending $2 for every $1 it increases then its a reduction in gov't size over the long term. A tax increase of $1 for every $1 in spending has no impact on gov't size except for a small reduction in interest spending.

I wonder how many other places we could expand spending by x and reduce spending somewhere else by 2x.

Again there's no increase in gov't size under the hypotheticals you're proposing. If gov't spends $1 to save $2 then spending nets to a reduction of -$1. Gov't has gotten smaller. If, though, Congress spends $1 on something else then Medicare Part D has no net impact on the size of gov't, gov't hasn't expanded. One could say, though, that gov't is more efficient since most people would rather take a pill than have to go to a hospital. A world where gov't spends $1 more on roads and $1 on a pill is probably a better, more enjoyable world where gov't is spending $2 only on major hospital operations.

Boonton writes:

Tom,

I also think your invoking what I like to call the 'ATM Fallacy of Gov't'. Imagine you think you have $400 in your account and you go to the ATM. You discover your balance is actually $440. You were going to take out $40 to have a good night but now you take out $80 because you have more money than expected!

The idea that gov't works like this, doesn't follow IMO. Congress doesn't view gov't's 'balance' in a checking account and decide how much to spend. More often than not spending decisions are made before revenue decisions are made. In recent history it feels like efforts to restrict spending got more, not less intense after tax increases (for example see Clinton's tax increase and the GOP Congress takeover after that). Likewise it seems like the freedom to boost spending is felt more when taxes are cut, for example Obama's stimulus package cut taxes and increased spending....spending increased in the Reagan years after large tax cuts and in Bush's years after his tax cuts.

Your 'ATM idea' of gov't is just a variation on the 'starve the beast' idea that has been demonstrated to be a 100% failure over the last few decades when applied to the Federal gov't.

Dan Weber writes:

More often than not spending decisions are made before revenue decisions are made.

Eventually revenue decisions must be made. Just like I can more often than not ignore my gas tank, eventually I can't.

NB that I don't think "starve the beast" has any evidence to support it. Revenue and spending have been inversely correlated over the past generation.

.

. . . Also, under PAYGO (like in the 1990s), spending decisions and revenue decisions are made at the same time.

Boonton writes:

PAYGO, though, only applies to a subset of spending. As you point out revenue and spending are inversely correlated.

This makes sense if you think about it. First of all, tax increases are more likely to happen in a booming economy. Resentment for the tax increase (whether by voters or exploited by other politicians trying to win office) might be countered by an effort (or the appearence of an effort) to control spending. Pushing through added spending just makes it look like the tax increase was enacted to pay for the spending which is awkward for the political class in power.

In a slack economy, both left and right have narratives to enable spending and deficits. The left has Keynesian theory, the right has discredited supply side theories that favor tax cuts. Supply side "theory" is nowadays more of a religion designed to vindicate everything that its adherents like to imagine happened during the 8 years Regan was President. As a result, one of its side doctrines is that 'deficits don't matter' as tax cuts will generate the growth and revenue to make them irrelevant over the long run. This makes for a perfect synergy between left and right. The left can get its spending by offering the right some tax cuts in a recession.

Long story short the 'ATM Theory' does not hold. Revenue rushing into the Treasury is more likely to result in slower spending and vice versa. This is the opposed to most individuals who pick up their spending if they suddenly get an influx of revenue and vice versa.

Kevin writes:

I don't think Bartlett was calling Tamny a crackpot. At first glance and upon further reflection, I have the same reading as Steve Reilly.

kharris writes:

Bartlett thinks default is bad. As another commenter has pointed out, Bartlett is on record saying so. When one chooses to take on Bartlett in general, as well as in the specific instance in question, one ought to go to the trouble of looking up his views. He doesn't hide them.

A commenter complains that Bartlett seems to be in the business of criticizing "conservative economics". Well, to the extent that "conservative economics" is merely a label used by self-proclaimed conservatives, that is a fair comment. On the other hand, if we take the two - "conservative" and "economics" - words at face value, Bartlett is defending "conservative economics" against a bunch of radical know-nothings. There is nothing "conservative" about abrogating commitments. Defaulting on debt when one has the wherewithal to pay that debt is tantamount to lying. Nothing new about lying, I guess. There is nothing "conservative" about structural budget deficits, but that seems to be the legacy of the GOP since Reagan took office.

Bartlett has tacitly admitted that he had no gripe with Straussian tactics when he worked for Kemp and Reagan. If Kemp wanted to claim tax cuts were fully self-financing, well that's politics. Bartlett seems to have matured out of Straussianism, and is now in the business of defending conservatism against Straussian scheming.

Tom Grey writes:

Despite Boonton's constant trashing of "starve the beast", I haven't seen an alternative in practice working better to reduce gov't spending.

On default, as long as the USA is the main world's financial currency, it will print money first.

In fact, it can right now, and I think it should. The inflation tax is pretty fair and widespread. The huge costs of it are when it's over 5% or so; or more than the unemployment rate?
(Higher unemployment plus negative inflation does NOT reduce the misery index!)

Default fears will be more relevant when the US is borrowing from the Chinese ... in Renminbi, not USD. The Chinese might be offering much, much lower interest rates if the US does do "too much" printing of cash to fund spending.

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