Decouple the Debt Service Debate from Budgetary Disputes
Thus the 2012 election should be fought not simply on the economy, but also on the longer-term picture of where America should go. Most Democrats, including President Obama and the Congressional leadership, desire a European-style welfare state with a vast federal establishment, dominant over state governments and the private sector as well. European-level spending would be financed by huge tax increases, targeting not simply the wealthy but of necessity, the middle class as well. Such requires a government of at least a 25 percent share of gross domestic product; European government GDP shares can top 50 percent.
Republicans seek a return to the historic share of GDP claimed by the federal government, around 18 percent. Taxes would be lower and flatter. Closing loopholes, which would raise tax revenues, would be offset by cutting tax rates and additional spending cuts. State governments would take over many responsibilities that the federal government has claimed over the past 80 years. While not small by any stretch of the imagination, the GOP federal government would no longer be the leviathan Democrats champion.
These public policy issues are of grand sweep, affecting those not yet born as well as those presently alive. They need not be saddled with hundreds of billions, perhaps even a trillion dollars or more, of added interest rate charges in the coming years due to a technical default, now or in the future.
While passing an automatic escalator removes the risk of technical default, the risk of a credit rating downgrade would remain, if the nation fails to solve its budgetary problems. Those problems can only be resolved, ultimately, by the 2012 election. Put simply, the conditions for a constructive grand bargain are not present. And the idea that the crucible of default pressure can force solution to budget disputes ignores vast chasms of bedrock disagreement and thus invites hasty, poorly-crafted compromises.
A national conversation on budget priorities should not be conducted under the gun of looming debt service default. The issues are too important for the two to be conflated. Doing so risks a default virtually no one wants, for inability to agree on issues only the voters can settle, come 2012.
Congress should put a permanent end to debt ceiling dramatics, by passing a mandatory debt service adjustment. Dramatics belong in the theater, with actors who on stage are more compelling than politicians playing financial chicken.