Monday, July 18, 2011

Fear No Default: Dr. Drew Comments on John Lott, Jr.'s Seven Myths About the Debt Ceiling

I used to teach political economy at Williams College and it sort of annoys me when we allow Democrats to say silly, obviously false things about the workings of the U.S. economy and the state of knowledge we have about politics and economics.  Nevertheless, I ran across a great article by John Lott, Jr. who is an economist and author of the revised edition of "More Guns, Less Crime" (University of Chicago Press, 2010).

I thought it might be fun to repeat his take on these seven myths that he asserts the Obama administration is pushing on the American people and add my own comments:

1) Not increasing the debt ceiling means the U.S. government will default on its debt. This is probably the biggest lie that almost all other claims arise from. Default occurs if the government stops paying interest on the money that it owes. Not increasing the debt ceiling only means that the government can't borrow more money and that spending is limited to the revenue the government brings in. And, with interest payments on the debt making up less than a ninth of revenue, there is no reason for any risk of insolvency. Time after time, congress and the president have failed to agree on a debt ceiling increase and still there has been no default. Examples include: December 1973, March 1979, November 1983, December 1985, August 1987, November 1995, December 1995 to January 1996, and September 2007. Indeed, this really shouldn't even be a point of debate. The 14th Amendment to the Constitution requires that the debt payments come first before any other spending.

Dr. Drew adds: Obama is trained as a Constitutional scholar.  We can be sure that he is aware of this portion of the 14th Amendment and that he can rightfully be expected to abide by it.

2) Until the debt ceiling is raised, uncertainty over the payment of U.S. debts will create chaos in financial markets. Given that the Constitution mandates U.S. debts be paid before any other spending and that sufficient money will be available to cover our interest payments, the only uncertainty arises from Obama's actions. Will he try not to pay the interest? Even a delay of a day in paying this interest will create a default. Court action could eventually force Obama to follow the Constitution but a default would have already occurred. But there is a simple way to end this uncertainty: have the president declare now that he will indeed follow the Constitution and make those payments. Failure to increase the debt ceiling clearly doesn't mean default. During one three week period at the end of 1996 and the beginning of 1996, some of the government shutdown when a similar battle over the debt ceiling occurred, but there was no default. President Clinton used the revenues that were coming in to pay the interest on the debt.

Dr. Drew adds: Even if Obama chooses to default, it will be easy for Republicans to blame his excessive spending and poor priorities as the cause of the default.  I knew the young Obama and I've studied the contemporary Obama.  I suggest he holds tightly to John Rawl's A Theory of Justice and that the reason we are in this crisis is that Obama does not want to give up his long-standing hatred of the rich or his desire to redistribute income.  He has never explained how, if at all, he dropped the commitment to Marxist thought I observed in him when he was a sophomore at Occidental College.  See, my article, Meeting Young Obama in American Thinker, February 24, 2011. 


3) Obama doesn't know if there is money to send off Social Security checks on August 3. The president knows very well how much revenue will be available to send out checks on August 3. Indeed, enough money will be available to not only pay the interest, but to also cover all Social Security, Medicare, Medicaid and children's health insurance, defense, federal law enforcement and immigration, all veterans benefits, Response to natural disasters. Terrifying elderly people who are dependent on their Social Security checks may make good politics, but it is unconscionable. Yet, these scare tactics aren't really very surprising. The Democrats behaved no differently when they ran television ads bizarrely depicting Rep. Paul Ryan (R-Wis.) as pushing an old lady in a wheel chair off a cliff.

Dr. Drew adds: If my take on Obama is correct, then he will - reflexively - seek to defend those aspects of redistribution which he thinks are most widely supported by the American people, whether or not these aspects of redistribution are really in play for not.

4) Mortgage interest rates will rise dramatically if the debt ceiling isn't increased. Not true. Indeed, the opposite is more likely, for not raising the debt ceiling stops the government borrowing more money. Less borrowing by the government could lower mortgage rates as there would be more lending available for potential homeowners. The interest rate paid by the government might go down for a second reason. Just as banks charge individuals a lower interest rate for those who have less debt compared to their incomes, the same is true for governments.

Dr. Drew adds: One of the main reasons the stimulus package failed us is that it sucked up resources that would be better spent and more efficiently spent by by private sector.  Freeing up that capital and keeping it in the private sector would help turn around the economy. 

5) Time is Running Out on Debt Deal, and it must be done immediately. Despite Obama’s insistence that a deal be completed by July 15 and Geithner’s claim that a deal had to be reached by July 22, as already noted, there have been many times over the last few decades where negotiations have extended past when the debt limit has been reached. The longest delay lasted three weeks. Besides claiming that there will be a default, no explanation has been offered for why the debate is any different this time.

Possibly all these claims of urgency are part of some grand strategy to scare people, but that strategy depends on voters not knowing what is necessary for a default to occur.

Dr. Drew adds: I don't feel any sense of urgency about this myself.  My sense of urgency is based on the idea that big government is dangerous and that Obama is using his executive power to grow it.  If Obama were more honest about his past and more honest about his future intentions for us, then I'd feel safer with him as president.  For now, however, I'm deeply afraid he is taking us in the wrong direction.  Now is the time to use all the tools in our power to fight big government.  The last time the government got shut down, we enjoyed substantial economic prosperity later on.

6) If government spending is cut, there will be a depression. Obama promised that a "temporary" increase in government spending would "stimulate" the economy, but he is now telling us that we can't cut that "temporary" increase -- that we are stuck with it.

If Obama's program -- including a 28 percent spending hike since 2008 and more than $4 trillion in deficits -- worked so well, why has our unemployment rate risen more than elsewhere? The European Union, Canada, South America, Japan, and Australia have all had smaller increases in unemployment compared to the U.S. after Obama's "stimulus." We have also had these shutdowns before and the numbers don’t show any negative impact on unemployment or GDP. Figures for the longest shutdowns during the fourth quarter of 1995 and the first quarter of 1996 are available here.

Dr. Drew adds: This one is just plain silly. Based on what we know about monetary policy it is physically impossible to ever have another Great Depression. Moreover, Burton Folsom's book, Raw Deal, teaches us how FDR made the Great Depression worse through frightening off business owners and investors.

7) The value of the dollar will plummet. Again, the supposed collapse occurs when we default. But there won't be any default. In addition, less government borrowing means lower future taxes, thus making the U.S. a more attractive place to invest. More foreign investment will actually cause the dollar to rise.

Dr. Drew adds: The value of the dollar is based on our political culture, economic power and military strength.  Clipping Obama's spending wings will provide great benefits to us and to all the people that want to invest in the safety and security we provide to them and ourselves.

John C. Drew, Ph.D. is an award-winning political scientist.

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