‘Sensible’ vs. ‘crazy’ views on debt

My brilliant, sure-to-be-Nobel-winning Split The Difference idea hasn’t caught on, inexplicably. I would have expected it to be showing up in Paul Krugman columns by now. James Kwak. Barry Ritholtz at the very least. Mark Thoma the great econ-blogger linking to Barry Ritholtz or James Kwak, excerpting entire posts of theirs, talking about me and my earth-shattering Split The Difference plan. This should be fully on the table and hashed out. Then it should filter on up and out of the blogosphere to the point where we have a National Conversation about it. All the Sunday Shows should have Round Table Discussions about it. (Are there still Sunday Shows?)

See, and I mean this quite sincerely, it’s literally the only approach to the Debt Ceiling Crisis that makes a whit of sense. Literally. The fact that this has not been widely recognized is a testament to how dumb everyone else is and how smart I is.

But I suppose this is to be expected given that we’re observing one of those curious inversions, in which Smart People go around saying one point of view is ‘crazy’ and another (theirs) is ‘sensible’, when it’s precisely the opposite. Let me illustrate.

First, to set this up, let me remind you that this is the Smart People orthodoxy:

The ‘crazy’ view. It’s ok (i.e. not good but arguably better than alternatives) to have the Treasury, like, not violate the debt-ceiling laws, therefore not borrow more money than allowed, and therefore not make 100% of the payments Congress declared a desire to make in whatever 2012-ish spending bills got passed.

The ‘sensible’ view. That’s crazy! It would mean the United States ‘defaulting’ on its ‘obligations’ to make every single payment Congress threw into a spending bill somewhere. That’s a ‘default’ and not-at-all distinguishable from a bond default and the bond market and the financial markets would treat it as such and there would be chaos. CHAOS.

Now, let me illustrate how strikingly inverted the above really is – because I’m not sure you, the reader, are getting it – by a hypothetical.

A Hypothetical

Suppose a frat brother of mine made it into Congress. He’s a joker, that guy, and one drunken evening the night before a big vote, he sat at his computer and slyly snuck a sentence into the text of an unrelated bill saying,

Section 2732(b). And also, the United States shall immediately make a one-time, non-refundable $1 trillion payment to The Crimson Reach.

He figured it would never make it into the final bill, obviously. Ha ha! Just a joke. That guy. Then he falls asleep without telling anyone about it.Then he dies (alcohol poisoning). The next day no one notices, and the bill is approved and signed by the President.

What to think about this situation?

The Smart People ‘sensible’ view. The moment the President signed that bill, that $1 Trillion payment became an obligation of the United States. If Treasury doesn’t make that payment to me, that’s a default. This isn’t just some future promise; the United States now owes me that money. Indeed, I am equivalent to a creditor of the United States now. It’s exactly as if I own $1 trillion worth of T-bills. In fact, I should probably be able to go to a bank – any bank – and obtain a $990+ billion loan on the basis of Section 2732(b), using the $1 Trillion claim I have against the United States as collateral. Why wouldn’t the banks accept Section 2732(b) as collateral? A spending item in a Congressional statute is just as good as a T-bill. There’s no important or meaningful difference. Not to fulfill a spending item is the same thing as to default on a T-bill. If the latter shouldn’t happen, then the former shouldn’t either. So a failure to fulfill that $1 Trillion payment to me will be interpreted – by everyone – as a ‘default’. Which would be terrible! Chaos! Bedlam! Hence, the US Treasury should bend over backwards and do whatever it takes – violate other laws on the books (e.g. the debt ceiling) for example – to fulfill its new, sudden, accidental $1 Trillion obligation to me, The Crimson Reach, whom the United States owes $1 Trillion. Anyone who doesn’t agree with this is a stupid idiot.

The ‘crazy’ view. That’s silly. Congress should just rescind Section 2732(b) and not pay me that money. The US doesn’t have the money, and it wouldn’t be worth borrowing just to pay it to me, let alone borrowing above a statutory limit. So Congress should go ahead and reduce that spending item. To $0. It’s a no-brainer. They could do it in 2 minutes on a voice-vote. Problem solved. If you want to call that a ‘default’ go right ahead, I don’t give a shit, and that has nothing to do with actual default on credit. Why are we even talking about this?

Understand now, this difference between ‘sensible’ and ‘crazy’? Because it’s highly counterintuitive when you think about it. Assuming one does think about it. Many apparently haven’t.

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3 Responses to ‘Sensible’ vs. ‘crazy’ views on debt

  1. Tim says:

    That’s an interesting new way to look at it. The problem is where that stupid spending is going.

    One thing that everyone who talks about the debt hasn’t seemed to have done is look at where the spending is actually going. I have a post scheduled for Friday where I rectify that.


    The highlights:

    “The federal spending on “human resources” (social security, medicare, medicaid, etc) exceeds the total revenues of the federal government.

    2011 Total revenues: $2,303,466,000,000

    2011 Human resources expenditures: $2,414,738,000,000″


    “Cranky John and I have cut the deficit in half by eliminating the departments of: Education, Justice, Transportation, Homeland Security, Agriculture, Commerce, Energy, Housing and Urban Development, Interior, Labor and the EPA.

    That’s halved the deficit, not spending.”

    • Right, because treating not-spending as a GASP DEFAULT *prevents* one from looking at where the spending is going. In fact, it’s an assertion that it *doesn’t matter* where the spending is going – even if some of that spending is on $1 trillion for Crimson Reach, it *doesn’t matter* and we are *obligated* to pay it.

      Obviously, this mode of thinking makes perfect sense to the left, to whom not-thinking-about-where-spending-is-going-so-you-can-indefinitely-argue-for-cranking-up-taxes is a feature, not a bug. Less so for the rest of us, however.

  2. Pingback: The Absurdity of the Platinum Coin and Other Absurd Absurdities « Philosophy « PostLibertarian

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