The Bigger Picture
Published on August 1st 2011 in Metro Éireann By Charles Laffiteau
In my last column I discussed some of the misconceptions Tea Party activists and the ‘debtors’ have regarding raising America’s debt ceiling. But what dismays me even more is the fact that the Republican Majority leader, Eric Cantor, and the Republicans in Congress who are catering to these anti-tax right wing voters, refuse to challenge the ‘debtors’ utterly false notions.
The US Chamber of Commerce, a frequent foe of many of President Obama’s legislative proposals, as well as many American CEOs have spent much of the past year holding numerous educational meetings with members of Congress who are opposed to raising the debt ceiling. In these meetings they have repeatedly warned lawmakers of the adverse impact a US Treasury bond ‘default’ will have on America’s deficit as well as both the American and global economy.
More specifically, they have warned Congress that failing to raise America’s debt ceiling will not only lead to an increase in the interest America pays on its future bonds, but that these increased interest payments will also add to America’s budget deficit rather than reduce it. They have also warned legislators that an increase in the interest rate for US Treasury bonds, also known as ‘T-bills’, will do serious damage to America’s still fragile economic recovery.
This is due to the fact that the interest rates consumers pay for auto and home loans as well as their credit cards is tied to the interest rate paid on T-bills. Furthermore, the ripple effect of an increase in T-bill interest rates also extends to the interest rates businesses pay on the bank loans they use to finance their businesses as well as the corporate bonds they issue to finance expansions of their business operations. These higher interest rates have a chilling effect on the American economy because they leave consumers and businesses with less money to spend.
Economists from across the political spectrum have warned that a Treasury bond default will probably push the American and global economy back into a recession since the resulting higher interest rates act like a tax increase. Higher interest charges amount to a tax increase for American consumers and businesses with outstanding loans because they reduce the amount of money available to purchase goods and services as well as the money available to pay wages.
While the rise of developing economies in China and India has reduced the world’s reliance on the American economy as the sole engine of global economic growth, the fact remains that the American economy is still the world’s largest economy. America is not only China and India’s largest trading partner; it is also the largest or second largest destination for exports from the EU and Japan as well as many other developed and developing countries. As such, when America sneezes (economically), the rest of the world still catches a nasty cold.
Despite the pleas of economists and business executives to Republicans in the House of Representatives that they stop playing Russian Roulette with the American and global economy by refusing to raise America’s debt ceiling, lawmakers like Eric Cantor persist in doing so. They also know full well that more than 60% of America’s current debt bill is due to budget deficits Republicans ran up during better economic times to finance things like tax cuts for wealthier Americans, a prescription drug benefit for American retirees and the Iraq war.
Fortunately for holders of American bonds, less ideological Republicans have crafted a compromise measure to avoid a bond ‘default’. Thanks to a bit of legislative sleight of hand, Republicans in Congress will appease their Tea Party activists by voting against an increase in the debt ceiling. This will make President Obama solely responsible for increasing America’s debt ceiling when he vetoes their bill. Unfortunately, this bit of legislative trickery also means Republicans have decided to kick the can down the road when it comes to dealing with America’s budget deficit.