Publication Type

Flirting with Default: Issues Raised by Debt Confrontations in the United States

PIIE Briefings 14-1


The willful US fiscal crackup of 2012-13 will impose costs unless politicians change their behavior and return to practicing good governance. In the past, the United States ran deficits, or put off some harder long-term choices, but basic budgetary processes worked. Everyone worldwide, whether a VA patient in Louisville or a US Treasury bondholder in London, could count on the US government making its payments. As a result, the US economy had lower interest rates and greater stability than anywhere else, and the dollar was everyone's envy and safe haven, which brought more investment into the United States.

But the repeated failure of Congress to pass budget legislation, or to bring the debt ceiling into line with spending, and ultimately explicitly threatening default on US government debt, has made US fiscal politics no better than anyone else's—and in some ways a lot worse, damaging the US reputation for safety and stability. In fact, there is no other known example of a solvent democracy flirting with default through sheer political stubbornness. While many democracies with fragmented party systems spend themselves into crashes, the crashes only came when they had run out of credit, not as a self-inflicted wound.

The essays in this volume make clear that the direct costs of the recent fiscal follies are already substantial. David J. Stockton argues, for example, that the fiscal uncertainty of 2013 took 1 percent off of US real GDP and increased unemployment by 0.5 percent. The continuing uncertainty about US fiscal decision-making, and the recurrent risk of a repeat, has dragged down American productive investment. Worse still, global markets have priced in a default risk on US treasuries, where there had been none. US taxpayers will consequently foot the bill for higher rates demanded by markets on newly issued US government debt from now on.

The most overlooked and perhaps most lasting harmful effect of the fiscal follies will be the severely diminished ability of the United States to conclude international economic negotiations. People and their elected representatives can legitimately disagree with each other about the speed and seriousness needed to tackle US public debt problems. There is no room for disagreement, however, that a budget process that threatens recurrent deadlock and even possible default on US government debt is seriously harmful to American wellbeing and international standing.