In a rational world, speculation about the U.S.--or at least some U.S. policy makers--deliberately choosing not to pay obligations to which the nation agreed would not be necessary. Unfortunately, when it comes to Washington, one cannot automatically assume rationality for all policy making cases. Not surprisingly, U.S. fiscal policy has remained firmly embarked on a bipartisan course of unsustainability for the long-term. Instead of a medium- and long-term fiscal consolidation program, one finds rhetoric where various political leaders each posture to claim a stronger commitment to fiscal responsibility. In terms of substance, the rhetoric is not matched by actions.
Despite having some fifteen months to reach a fiscal consolidation package following the creation of the fiscal cliff sequester, Washington punted. As is typical, it chose the course of accommodation in renewing tax provisions, in this case making them permanent. When it came to balancing them with spending-related reforms (discretionary savings and mandatory spending reforms), they chose to punt.
That brings us to the current situation. Now almost two weeks after the fiscal cliff legislations was adopted, not a single comprehensive fiscal consolidation proposal has been tabled. Not one. Instead, certain political leaders are talking about not raising the debt ceiling. In other words, they are refusing to pay for obligations they approved in an act of tough posturing. There is no courage in that reckless course. The courageous course would involve providing substantive legislation to reform the policies and programs driving the nation's long-term fiscal imbalances.
Should the debt ceiling not be raised in a timely fashion and should the nation wind up having to prioritize, no matter how those who refused to raise the debt ceiling posture, they will have put the nation into partial default. They, alone, will have pushed the nation across a threshold for which risk perceptions would be altered for an extended period of time. Their act of irresponsibility would elevate the nation's risk profile, as they would have demonstrated that the nation's meeting its obligations in a timely fashion is not a binding constraint. Elevated risk would lead to an increase in interest payments above what would otherwise have been the case. As a consequence, those policy makers, far from demonstrating fiscal responsibility, would be solely responsible for increasing the present value of the nation's long-term imbalances. They would have made a deliberate and conscious choice to increase the nation's spending and through a mechanism that provides no benefits to the nation's taxpayers.
If the Congress is serious about stabilizing and then reducing the nation's debt relative to GDP, they would have used the nearly 15 months available to them to design and implement a credible fiscal consolidation program. They didn't. They would immediately have engaged in developing a fiscal consolidation program in the nearly two weeks that followed the fiscal cliff deal. They haven't. If they wanted leverage in a responsible fashion, they would have suggested that they would deduct a significant portion (perhaps 10%-20%) from every appropriations funding request until a fiscal consolidation program were adopted. They have shown no such creativity.
Hopefully, reason will prevail among enough of the nation's policy makers to avert a partial default. If not, those who engineered it should be held directly accountable for their damaging the nation's credit rating and the interest rate premium that follows.