Should We Panic Over a US Debt Default?
As we press the send button on this week’s Nestmann’s Notes, Congress is engaged in what’s become a periodic ritual: fighting over increasing the federal debt limit, which currently stands at $31.4 trillion.
And like clockwork, the mainstream media is predicting all sorts of catastrophic consequences if Congress fails to act to raise the limit and forces the government to shut down.
The New Republic warns that a default:
… would likely spark panic on Wall Street and could push us into a recession, resulting in millions of job losses. The Treasury Department would be unable to make payments on Medicare and Medicaid, Social Security, military pay, and veterans’ benefits … [I]t could mean a loss of faith in the American dollar and threaten our status as the world’s reserve currency.
Not to be outdone, Treasury Secretary Janet Yellen predicts failure to increase the debt ceiling would cause “irreparable harm to the U.S. economy, the livelihoods of all Americans and global financial stability.”
As longtime readers might suspect, we take a rather different view of a government shutdown. Indeed, we’ve written that a government shutdown is the best-ever argument for privatization of functions better performed by private enterprise, not government.
For instance, if we had the power to do so, we’d eliminate the Transportation Security Administration (TSA). The sole job of the TSA is to keep weapons and explosives off airplanes. But despite its $8.5 billion budget and 55,000 employees, the agency has a long record of doing it poorly.
In 2015, undercover agents were sent to dozens of America’s largest airports to test TSA security protocols. They were able to smuggle fake explosives or weapons through security checkpoints 95% of the time. The TSA failed in 67 out of 70 tests.
Two years later, undercover teams were sent in again. The good news is that the failure rate fell from 95% to 70%. The bad news is … well, in Minneapolis, the failure rate was 94%. And a 70% failure rate is nothing to celebrate.
In 2019, the agency repeated this exercise. Only this time, we don’t know how well it performed because the details were deemed top-secret. Now, that’s reassuring!
A better way to improve airport security would be to transfer responsibility for it to the companies that have the biggest stake in making sure it’s done right: the airlines. We suspect we’d wind up with a security apparatus a lot like the one used by Israel, where every passenger is briefly interviewed before they board their flight.
But ridding ourselves of the TSA is just the beginning. About half of the 2.9 million federal employees perform jobs that have very little to do with “governing.” The Reason Foundation’s 2016 Privatization Report concluded that federal employees are engaged in a wide range of “commercial activities,” including
…architecture, apparel, construction, debt and bill collections, campground operation, engineering, equipment repair and maintenance depots, film studios and theater management, food service and security, furniture, graphics, insurance, laboratories, landscaping, laundry and dry cleaning, pest management and wildlife control, manufacturing, mapping, meeting planning, marketing research, printing and chart production, public storage, recycling and waste management, surveying, tax preparation, travel planning, and zoology. The federal government is the nation’s largest banker, insurer, homeowner, landlord, utility provider, and bus, transit, and passenger train operator.
Of course, Congress isn’t about to abolish the TSA, much less fire half of all federal employees, although doing so would go a long way toward balancing the bloated federal budget. According to the ZipRecruiter employment website, the average federal employee receives a salary of $74,061 annually. If taxpayers no longer needed to finance these positions, we’d reduce government spending by a whopping $107 billion annually.
Another way to make dramatic reductions in the federal budget would be to reduce spending on Social Security, Medicare, and Medicaid – what’s often referred to as the “third rail of American politics.” Along with the interest the US Treasury must pay on the gargantuan federal debt, these three programs are predicted to account for 86% of federal spending between 2008 and 2032.
That could mean gradually raising the retirement age, “means-testing” (i.e., reduced benefits for wealthy retirees), or a combination of both. Yet Democrats are nearly unanimous in refusing to cut entitlement spending, and Republicans are sharply divided over the issue.
Instead, we think there’s a realistic chance that an idea we derided during the last debt standoff – #MintTheCoin – could reemerge. The concept involves having the US Mint manufacture a platinum coin with a face value of $1 trillion, turn it over to the Federal Reserve, which would then deposit it in the Treasury. That would postpone the need to raise the debt ceiling. Every time a new debt ceiling approached the process would repeat.
Voila! The debt ceiling problem is solved. No more pesky budget negotiations or difficult decisions about spending cuts. Just a shiny, new coin against which Congress can continue spending.
Our take on #MintTheCoin is influenced by its supporters, which include Stephanie Kelton, the former economic advisor to the presidential candidate and “democratic socialist” Bernie Sanders. Kelton is a proponent of an old idea once called chartalism that’s been revamped and renamed “modern monetary theory” (MMT). Kelton argues that like Germany in the 1920s, the United States can simply print money to pay for its financial obligations. We all know how that went, with hyperinflation ravaging the German economy and leading to the rise of Adolph Hitler.
Earlier this month, supporters of a trillion-dollar coin held a virtual seminar to make as law professor Rohan Grey put it, “a moderate, gentle case for the coin.” Yet Yellen and other top Biden administration officials say they wouldn’t accept a trillion-dollar coin if one was presented to the Federal Reserve. In that event, Grey told The Washington Post, it might be necessary to “send troops to the Fed.”
At the end of the day, no matter how the debt ceiling crisis is resolved, we think there’s a 100% probability that Congress will continue spending huge amounts of money that we don’t have, inevitably leading to higher inflation. And we believe that reality is just one more reason to consider a “Plan B” in case things don’t work out as expected.