Dean Baker: USA Should Default To Save SS and Medicare

Discussion in 'Economics' started by cstfx, Apr 10, 2011.

  1. cstfx


    Defaulting on Debt Is Not the End of the World

    The NYT had a piece on the implications of the United States hitting its debt ceiling and running the risk of defaulting on its debt. The article exclusively presented the views of people who portrayed hitting the debt ceiling and defaulting on the debt as being an end of world scenario.

    It would have been useful to present the view of people who do not consider a default on the national debt to be the worst possible outcome. While there can be little doubt that a default on the U.S. debt would lead to a financial crisis and would likely permanently reduce the role of the U.S. financial industry in world markets, it is also likely the case that the United States would rebound and possible rebound quickly from a default.

    The experience of Argentina may be instructive in this respect. Argentina defaulted on its debt at the end of 2001. Its economy fell sharply in the first quarter of 2002 but had stabilized by the summer and was growing strongly by the end of the year. By the end of 2003 it had recovered its lost output. Its economy continued to grow strongly until the world recession in 2009 brought it to a near standstill.

    While there can be no guarantee that the U.S. economy would bounce back from the financial crisis following a default as quickly as did Argentina, it's unlikely that U.S. policymakers are too much less competent than those in Argentina.

    Readers should be made aware of the fact that countries do sometimes default and they can subsequently recover and prosper. Many people may consider the short-term pain stemming from a debt default to be preferable to the long-term costs that might come from policies adopted to prevent default.

    For example, if Congress were to approve a Medicare plan along the lines proposed by House Budget Committee Chairman Paul Ryan, this would be subjecting tens of millions of middle class retirees to a retirement without adequate health care insurance and potentially devastating medical bills. Plans being put forward to cut Social Security could have similar consequences. Compared to these outcomes, a financial crisis and the subsequent slump that follows may seem like a relatively small cost.

    It is also worth noting that two of the people whose views were presented in this article, Jamie Dimon, the CEO of J.P. Morgan (JPM) and Robert Rubin, a former top executive at Citigroup (C), are both individuals whose situation is likely to make them view a debt default as an end of the world event. Both institutions would likely not survive a debt default. For the people whose wealth depends on the health of Wall Street financial firms, a default on the U.S. debt is probably one of the worst conceivable events in the world, however this group is a tiny minority of the U.S. population.

    Is this guy actually an economist?
  2. zdreg


    "it's unlikely that U.S. policymakers are too much less competent than those in Argentina."

    times have changed. in the past if anybody mentioned Argentina and the US together in an economics thread a certain mod, whose sensibility, was offended would bounce it to chit chat.

    the 1st question that should be asked: are social security and medicaid worth saving. the reflex answer yes may upon thought prove to be not true. the pt. is that people in the US are soft and are unwilling to take the necessary steps to prevent the ship from sinking ie cut wages in the public sector and change the reimbursement structure of social security , medicaid and medicare.

    when inflation comes back and the government moves the printing press ever faster in order to pay the automaticliving cost adjustment to the above mentioned programs the $US will be well on its way to becoming another Argentinan peso during their crisis or zimbabwae dollar.

    look up the economic term ride the bicycle. people will be spending money faster and faster as the pace of the decline in the value of the dollar increases. that is the reason that gold has moved 3x to 4x in recent years.
  3. I'm confused. How can anything save 2 Ponzi schemes?
  4. Why would the USA need to default? The fed can print money and buy any debt required. The liability problem will be solved with under-reported inflation.
  5. As long as people like the idiot who wrote this article exist, I doubt the US will be able to rebound quickly from a default. As quickly as we rebounded, these people would be dreaming up new ways to get us into debt with their unsustainable entitlement schemes.
  6. It will go from being "unthinkable" to "do-able". :eek: :(
  7. xiaodre


    As intriguing as it sounds, this is not a good idea!

    It should only lead to about 15 to 30 seconds of real thinking before one comes up with quite valid reasons why its not...
  8. rew


    Default is inevitable, as the debt is unpayable.

    The only question is what form it takes:

    1. Explicit default -- saying "Tough luck, sucker!" to anyone who bought a treasury bond and refusing the pay the interest and principal.

    2. Implicit default -- paying the principal and interest back in full, but with dollars that buy much less.

    #2 is the most likely scenario, as it enables the politicians and court economists to pretend that the United States is still a good credit risk. The massive inflation that results will be blamed on greedy oil companies, greedy farmers, greedy landlords, and evil speculators in the futures markets. These nasty people will then be brought to heel by more laws passed by our saviors, the politicians. It works every time.
  9. No, he's a Progressive thinker driven only by ideology.
  10. US defaults.

    Trade war with China

    Full scale war with China.
    #10     Apr 11, 2011