A Moment of Truth in the Debt-Ceiling Impasse?

The difference between a conservative and a classical liberal/libertarian once again is manifest.

The conservative wants to get the debt crisis over with even at the cost of some tax increases and not so reliable budget cuts. He thinks that, in the end, there will be some budget cuts, the deficit will be lowered and we can go on to real reform some way down the road.

The radical classical liberal realizes that the government keeps expanding over the long run and that the ordinary politics of compromise has not changed the fundamental course. We now have a moment of truth or perhaps simply of anxiety. This can be used to “force” the system toward real change. The danger, of course, is that the debt ceiling won’t rise in time. In time for what?

First, the debt servicing costs (interest payment) will be prioritized and so the US government will not default on its debt. Other expenditures would eventually have to be cut in perhaps an arbitrary and disorganized way. Hospitals and doctors will have to wait for payment.  Perhaps Social Security benefit checks would go out with less than the full amount. If we are in luck payment the US will cut off its contributions to the NATO Libya operation, and so forth.

A very disruptive picture, to be sure, but a teaching moment?  The problem is what will people learn? That the system is dysfunctional? That the GOP is intransigent about raising taxes on the rich? That the Democrats won’t really cut spending?  It is kind of a wildcard.

My late colleague Ludwig Lachmann used to say that we know people learn from experience but we do not know what they learn.

I guess the lesson I wish people to learn is just how much they have allowed themselves to become dependent on government. And how unreliable government can be.

The continual duplicity of the US government is evident especially when it comes to foreign policy. Most Americans don’t care about that very much so they can get away with it. (However, why the parents and spouses of killed or wounded Iraq veterans have not been more outraged is a mystery to me.)  If the dysfunction, dishonesty, unreliability and so forth are revealed in the interruption of middle-class “entitlements,” the message might hit home.

But even if the disruptive cuts had to be made it would not be for long. The major political parties have an interest is restoring people’s faith in government.  Without that faith, they are nothing.

I don’t pretend to know the political ramifications of failure to raise the debt ceiling. They might be terrible for the advocates of free markets and limited government. The macroeconomic consequences will be small if the impasse is resolved over a few days to a week. To be sure, markets will react but they will be only slightly affected in the medium run.  The rating of US Treasurer securities would probably be hurt.  This might be a good thing – it would act as a tax on further deficit spending.

• Become A Funded Futures Trader