Default threat erodes U.S. confidence

July 3, 2011


At a time when America’s economy is hurting, Republican presidential hopefuls call for “restoring American greatness.”

So why are Republicans in Congress bent on policies that would hasten U.S. decline?

America’s strengths — which made it the unchallenged global leader — were based on democratic institutions and economic successes. Other nations sought to copy our economic and political systems because they worked better than any other model. That’s what was famously known as our “soft power.”

Yet Republican brinkmanship over hiking the U.S. debt limit is endangering those already troubled institutions, and signaling the world they could fail.

Few Americans grasp the dangers of the congressional battle over the debt ceiling. Somewhere between 33 percent and 40 percent of every dollar the U.S. government spends is financed by borrowing. Under Republican and Democratic administrations alike we have been able to finance this debt because U.S. Treasury bills are considered the world’s safest investment. Countries such as China and Saudi Arabia keep their excess funds in T-bills because of their unqualified faith in U.S. institutions.

That could change.

The debt ceiling needs to be raised at the latest by early August — not to spend more, but to cover current obligations. Republican and Democratic leaders have been locked in talks to find $2 trillion in federal savings to offset a rise in the debt limit.

Seeing a political opportunity to push for Medicare cuts, Republicans insist the entire amount must come from slashing the federal budget, with no increase in revenue. This wholly unrealistic stance is dictated by politics, not economic reality.

Republicans have rejected Democratic pleas to eliminate some tax breaks, say, for oil and gas companies making windfall profits. House Majority Leader Eric Cantor, R-Va., even walked out of the talks in a dramatic gesture of displeasure.

From such political posturing, disaster can come.

“Right now investors and other governments are scratching their heads in disbelief. They have a hard time understanding this,” I was told by Princeton University economist Alan Blinder, a former vice chairman of the Federal Reserve System’s Board of Governors.

“If we actually started defaulting, this would be a big shock to the financial system … on a par with, and maybe beyond, the impact of (the collapse of) Lehman Bros.” That event triggered the 2008 global financial crisis.

“There is a tremendous concern about what might follow a Greek default,” says Blinder, “but Greece is a tiny country compared to the United States, and it has no role in the financial leadership of the world. How much greater would be the impact of … the U.S. defaulting.”

The mere thought of a U.S. default makes waves.

Republicans claim we would not have to default if we failed to raise the ceiling. But, as President Obama pointed out with visible frustration in a news conference Wednesday, that would present impossible choices. Without new loans, any effort to pay the interest on existing foreign debt would rule out meeting our domestic obligations.

“Are we really going to pay interest on Treasury bills to China,” asked the president, “and not pay Social Security checks or not pay veterans? We’re the greatest nation on Earth, and we don’t act that way.”

If we do act that way, however, world markets will take note.

Global faith in American institutions, already weakened, will tank if we appear ready to default on our financial obligations, including domestic ones. If bond markets begin to think T-bills are the least bit risky, we will have to pay higher interest rates to attract investors. This will make our economic recovery much, much harder.

“This might lead to a situation where the world can’t regard the U.S. as a safe haven,” says Robert Solow, a Nobel laureate in economics. “This would be a terrible blow to the leadership role of the United States.”

Which brings us back to Republican tropes about restoring American greatness. American leadership is already being challenged abroad by China, which is promoting an alternative governance model to ours: state capitalism plus political repression. The Republican flirtation with default plays into Beijing’s hands.

“The spectacle of U.S. democracy being so dysfunctional will reinforce the narrative ... of the rise of state capitalism as an alternative to free-market capitalism,” says Sebastian Mallaby, of the Council on Foreign Relations. “It plays into the hands of autocrats in Russia and China who say democracy can’t promote growth.”

I’d add that this display of U.S. dysfunction also undercuts the appeal of democracy for Arab revolutionaries. Further, it reaffirms radical jihadis’ convictions that America is in decline.

So Republicans who say they want to restore American greatness — including tea party hard-liners — should look hard at what they are actually doing. By pushing America toward default, they risk destroying what they claim to admire.

Trudy Rubin is a columnist and editorial-board member for the Philadelphia Inquirer.


Ron Holzwarth 6 years, 7 months ago

I want to repeat a comment I made earlier on this forum:

The real problem is that we have politicians in the House and Senate, instead of statesmen.

Ron Holzwarth 6 years, 7 months ago

From: Cambridge dictionary:

politician: A member of a government or law-making organization.

statesman: An experienced politician, especially one who is respected for making good judgments.

cato_the_elder 6 years, 7 months ago

"At a time when America’s economy is hurting, Republican presidential hopefuls call for “restoring American greatness.”

So why are Democrats in Congress bent on policies that would hasten U.S. decline?"

Fixed. Trudy, please stick to covering the Middle East.

Steve Jacob 6 years, 7 months ago

I think if we we at any risk to default on our loans, the Dow Jones average would not have had the big week it had, so if those people are not worried, we should not be.

George Lippencott 6 years, 7 months ago

Our long term debt can not be sustained. Continuing on our current path will lead to an even bigger disaster than a technical default on our bills. Ms Rubin hardly mentions that.

The Democrats need to accept big cuts in services to a level we can afford. The Republicans need to accept tax increases on the wealthy to restore equity in our system. If there are public service shortfalls we need to prioritize. Tax increases on the middle, while simplistically attractive, will further erode our economy.

Our revenues are low at the federal level for the same reason they are low in Kansas. People are not making money we can tax. Raising taxes when income is down is a backwards solution pushed in the end only by ideologues.

beatrice 6 years, 7 months ago

But it will be fair if we all sink together?

Has it really been "fair" to the middle class to give tax breaks to the wealthiest at levels that far exceed anything we have seen in the past 60 years while our debts soared?

Personally, I didn't think it fair to wage wars while giving tax breaks. We should have been paying our way all along.

George is correct. It will take big cuts, and it will take tax increases on the wealthy. That is just reality.

true_patriot 6 years, 7 months ago

False. The Bush tax cuts for the rich are the biggest contributors to our deficit and if they were allowed to lapse (as was ostensibly intended when they were first pushed onto the American public) our long term problems would largely disappear overnight.

By giving welfare to the wealthiest sliver of the American population we are miring ourselves in deficit and debt, while that capital outlay generates a very poor return on the dollar and largely leaves the American economy. It's ridiculous that either party continues this charade rather than calling it what it is and moving to protect America's economic might in the world rather than throwing it under the bus due to immaturity and ignorance.

George Lippencott 6 years, 7 months ago

Apparently we have no ability to make them bring it home. Perhaps they earned it there and the local government may not be disposed to them bringing it home. Problem wiht muti-nationals - whose laws drive??

Crazy_Larry 6 years, 7 months ago

An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages.

Experts believe that as much as half the world's capital flows through offshore centers. Tax havens have 1.2% of the world's population and hold 26% of the world's wealth, including 31% of the net profits of United States multinationals. According to Merrill Lynch and Gemini Consulting's “World Wealth Report” for 2000, one third of the wealth of the world's “high net-worth individuals”—nearly $6 trillion out of $17.5 trillion—may now be held offshore.

"offshore tax evasion alone costs the United States government more than $70 billion annually. Left unchecked, these rogue jurisdictions have the potential to do a great deal of harm to the world’s truly productive economies."


Crazy_Larry 6 years, 7 months ago

"The longer we put off the economic pain all this government spending has caused"

OMFG. You could at least (gratuitously) mention the OTHER side of our failing economy equation. Crony Capitalism! That's where the vast majority of our (and the world's) economic problems come from. Wall Street and insurance company fraud/corruption triggered the latest round of economic strife, which in turn triggered even more government spending.

George Bush took us to war in Iraq by deceiving the everyone...Clearly, he, his administration, and a large chunk of our legislators are/were in cahoots with Wall Street, the petroleum companies and the military-industrial complex. Obama is no different.

You need to refocus...

(rated pg-17: for one quick f-bomb) http://www.youtube.com/watch?v=Q3eW3T...

Crazy_Larry 6 years, 7 months ago

Watch the award winning documentary "No End In Sight" for a better understanding of just how nefarious our Crony Capitalists are. The Iraq War could and should have been finished quickly...George Bush and his Crony Capitalists made sure that it was not. Prepare to be outraged:


Complete film here:


Crazy_Larry 6 years, 7 months ago

The spending would not be occuring were it not for the Crony Capitalists who've bought and paid for the legislators.

Crazy_Larry 6 years, 7 months ago

You blame it soley on the government when it's a cabal whichi includes the government.

jayhawklawrence 6 years, 7 months ago

We have been cutting taxes on the people with most of the money ever since Reagan and it has finally caught up with us.

The only sensible path is a mixture of cuts and roll backs on tax cuts that should not have been passed in the first place.

But have you ever heard so much whining in your life?

That is the difference between politicians and statesmen in my view; politicians lie to benefit themselves and statesmen lead to benefit others, even if they might lose everything to do the right thing.

America has always found statesmen in times of crisis. Let's pray we find a few more.

Crazy_Larry 6 years, 7 months ago

Yes. We. Did. (thanks to G. W. Bush and Co.)

Crazy_Larry 6 years, 7 months ago

Yes. We. Did. (thanks to G. W. Bush and Co.)

pizzapete 6 years, 7 months ago

America, I feel sorry for your grandkids.

Richard Heckler 6 years, 7 months ago

Moving to IMPROVED Medicare Single Payer Insurance for All would save about an estimated $400 billion annually. Probably about $4 trillion in 10 years. There they have it.

Improved Medicare Single Payer Insurance for All is THE solution.

  • Easy to Implement: Medicare has been in existence since 1966, it provides healthcare to those 65 and older, and satisfaction levels are high. The structure is already in place and can be easily expanded to cover everyone.

  • Simple: One entity – established by the government – would handle billing and payment at a cost significantly lower than private insurance companies. Private insurance companies spend about 31% of every healthcare dollar on administration. Medicare now spends about 3%.

  • Real Choice: An expanded and improved Medicare for All would provide personal choice of doctors and other healthcare providers. While financing would be public, providers would remain private. As with Medicare, you choose your doctor, your hospital, and other healthcare providers.

  • State and Local Tax Relief: Medicare for All would assume the costs of healthcare delivery, thus relieving the states and local governments of the cost of healthcare, including Medicaid, and as a result reduce State and local tax burdens.

  • Expanded coverage: Would cover all medically necessary healthcare services – no more rationing by private insurance companies. There would be no limits on coverage, no co-pays or deductibles, and services would include not only primary and specialized care but also prescription drugs, dental, vision, mental health services, and long-term care.

  • Everyone In, Nobody Out: Everyone would be eligible and covered. No longer would doctors ask what insurance you have before they treat you.

  • No More Overpriced Private Health Insurance: Medicare for All would eliminate the need for private health insurance companies who put profit before healthcare, unfairly limit choice, restrict who gets coverage, and force people into bankruptcy.

  • Lower Costs: Most people will pay significantly less for healthcare. Savings will be achieved in reduced administrative costs and in negotiated prices for prescription drugs.


Flap Doodle 6 years, 7 months ago

Have you copy/pasted that over 1000 times yet, merrill?

beatrice 6 years, 7 months ago

snap commenting on the copy and paste habits of others at 7:11pm, then making a copy and paste at 7:12. Too funny.

Richard Heckler 6 years, 7 months ago

High dollar medical Insurance is unfriendly to business across the board.

It is unfriendly to retirees who retired from their jobs after 20-30 years.

The medical insurance industry is unfriendly across the board. Which is why the USA is the only industrialized nation on the planet subscribing to such a reckless notion.

1957 6 years, 7 months ago

You do know that Medicare is bankrupt don't you?

If you believe everything you have listed I have a bridge I Brooklyn I would like to discuss with you.

Charles McPheeters 6 years, 7 months ago

What a wonderful???conundrum!.. We have borrowed more than the dwelling is worth. And so we ask the bank to loan us more so we can pay the bank more interest. Does this mean the bank owns less of the dwelling? Ah, but we will just tax the occupants more, especially those who have jobs and more especially those who have been most successful. My taxes are not lower, inspite of what Obama promised and says, my dollars are worth less in the store and service stations. Yet congress and the administration says we must share the sacrifice. Show me a congressperson or top administration employee who is sacrificing. It is time for term limits and less non-elected bureaucrats. Sending more money to Washington will end up increasing a non-functioning federal govt.

Flap Doodle 6 years, 7 months ago

Speaking of corporate jets: "...“I think it’s only fair,” he said over and over, each time in slightly altered form, “to ask an oil company or a corporate jet owner that has done so well to give up that tax break that no other business enjoys.” Never mind that in the grand scheme of things, the amount of tax that corporate jet owners are excused from paying is so minuscule that—to paraphrase Charles Krauthammer—if the government collected it every year for 5,000 years, they would cover one year of the debt that the Obama administration has run up. The point the president was trying to make, as he amps up his relentless class warfare arguments, is that all over America children go to bed hungry while greedy fat cats get a tax break on the jets they buy. So where did this odious tax dodge come from? That’s the part the White House would rather not talk about. And the reason is that the loophole was given new life by the American Recovery and Reinvestment Act of 2009 (aka, the Obama stimulus package). A Wall Street Journal article published shortly after the stimulus was signed into law provides some historical perspective, much of it positive: The aviation industry, which is cutting jobs as it suffers from declining shipments and canceled orders, hopes the tax break in the economic-stimulus bill just signed by President Barack Obama will persuade more companies to buy planes and snap a slump in general aviation that began last year...." http://hotair.com/greenroom/archives/2011/07/03/obama-was-for-tax-breaks-on-corporate-jets-before-he-was-against-them/

jafs 6 years, 7 months ago

Wouldn't it be Medicare rates, rather than Medicaid?

But, your point is a good one - if doctors can simply choose not to accept patients based on reimbursement rates, then Medicare type programs are much less useful to patients.

George Lippencott 6 years, 7 months ago

They can, do, and probably will in greater numbers if we further cut reimbursement rates. They are already quite a bit lower than regular insurance rates.

jayhawklawrence 6 years, 7 months ago

Just read the article in the Economist analyzing the Massachusetts health care system and it looks like the jury is still out on this one. Some people feel it will be a few years before they can draw conclusions although one thing is clear, they have not been able to control the rapid rise in health care costs.

Even though they have decreased the number of people without health care, some people say they planned on working on controlling costs AFTER they get everybody on board with the program. So the great unknown is whether you can actually lower overall insurance costs.

That is a big unknown.

So on the one hand we have the Democrats who are willing to try to fix the problem even though they are not sure if it will work and the Republicans who don't want to do anything but use the issue to demonize the Democrats and have had great success doing so.

George Lippencott 6 years, 7 months ago

Which problem

Health care costs coverage availability

jayhawklawrence 6 years, 7 months ago

I always cringe when I hear Obama using the "corporate jets" analogy.

Somebody needs to tell the guy that the corporate jet industry has been devastated since the financial crisis.

When you see what has happened in Wichita in the aircraft industry you have to think a lot of people would like to start throwing eggs at him right now.

I would recommend that Obama needs to start promoting the aircraft industry instead of demeaning it.

Crazy_Larry 6 years, 7 months ago

Technically, Obama is not demeaning the aircraft industry. He's saying that the people who OWN these gets can afford to, and need to, pay more in taxes. Glad I could help you figure it all out. You're welcome.

Crazy_Larry 6 years, 7 months ago

I know, I know, that's not what Hannity and Limbowel told you.... GEEEZUS!

George Lippencott 6 years, 7 months ago

Crazy_Larry (anonymous) replies…

"offshore tax evasion alone costs the United States government more than $70 billion annually

Help me sir. Just what evasion is occurring when people (business executives) put money in banks where the tax rate is low? AS far as I can tell what those countries charge is perfectly legal under their and international laws. Mullet-national companies are not American companies. They owe us no allegiance. The certainly do not owe us taxes on money made elsewhere.

Just where do the liberal ideologues on here get the notion that everybody that earns money anywhere should turn it all over to them so they can spend it as they se fit?? I know, we all have debts of conscience as postulated by those very ideologues.

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