July 10, 2011
Pasquale on the Perils of Debt Brinksmanship
Over at Concurring Opinions, Frank Pasquale has put up an interesting post on Public Finance and National Security. Here's some of what caught my eye:
When the US went to war in Afghanistan and Iraq, it did not raise taxes to cover the enormous expenses involved (including spending on military services and hardware). Rather, it borrowed hundreds of billions of dollars, much of it from abroad. The borrowing has increased as conflict drags on, and as financial crises devastated tax receipts…. The financial crisis of 2008 marked a sudden lack of faith in the creditworthiness of many Western banks, including leading US-based ones. In order to maintain global confidence in the increasingly fragile and interconnected financial institutions that enable US borrowing, the US government has repeatedly “backstopped” private entities (or stepped in to alter markets) when their potential failure threatened to undermine investor confidence…. [However, as] long as the US appears capable of making political decisions to cut spending and raise taxes adequately to cover its debts, it does not appear to be in anyone’s national interest to spark a disorderly sell-off of Treasuries…. [But the] U.S. has recently proven itself incapable of achieving normal OECD-level taxation of its wealthy, in either good times or bad. A culture of tax-avoidance among America’s wealthy is approaching Greek levels…. As creditor nations watch the spectacle of a Republican party elected on deficit-cutting rhetoric immediately turn to budget-busting tax cuts, they are doubting the political seriousness of the US about repaying its debts.