Dump the Debt Limit and Address the Real Problem

John T. Harvey

As everyone knows, the big economic news today is the breakdown of talks on the debt limit. Media outlets have been bombarding us with horror stories that list the catastrophic consequences of failing to reach an agreement. We are told that the government may default, programs shut down, and financial collapse follow. And, indeed, it would create myriad problems. Unfortunately, however, it’s all for no good reason whatsoever. This is political grandstanding and smoke and mirrors, and the cost will be paid by the average American.

There is no logical economic reason not to raise the limit–in fact, the real question is why we even have one. As I have explained repeatedly in this blog, it is impossible for the United States to default on debt that is denominated in dollars (check these for a sampling of the arguments):

The Big Danger in Cutting the Deficit

Why You Should Learn to Love the Deficit

Hence, the whole premise upon which these talks are based, i.e., that if we don’t get deficit spending under control then we’ll go bankrupt, is fundamentally flawed. In actuality, the real need right now is to stimulate aggregate demand by spending more. There is nothing standing between us and economic recovery but this. We have ample capacity to produce goods and services, business and finance costs are low, and there are plenty of idle resources. So why aren’t firms hiring? Because they know damn well that they can’t sell anything when we have almost 15 million unemployed workers.

And yet, we are told by Washington (both parties, but particularly the Republicans) that the "solution" is to lower sales even more by cutting back on what the government has been purchasing. That will, apparently, encourage businesses to take on new employees. This is nothing short of idiotic.

Lord help us, because apparently our policy makers are in no hurry to do so. Not only can’t they agree, they aren’t even focusing on the real problem.