At this point, it matters a bit, but only a bit, whether a deal is cobbled together, whether Obama uses the constitutional option, or whether we mint a bunch of huge platinum coins. Much of the real damage has, it seems to me, already been done. The interest rates at which a nation can borrow are an inverse function of the strength of bond investors' belief that the nation will pay the money back. And the events of this debt ceiling crisis have brought new information to light that will deeply shake investors' belief in the creditworthiness of the U.S. government.
In particular, one piece of information is crucial above all others. This is the fact that the Republican Party is willing to seriously entertain the option of a sovereign default.
Before this crisis, it seems to me that most people believed the Republican Party to be the "party of business" - that is, that corporations and businesspeople held ultimate sway over the party's decisions. Whatever happens with the debt ceiling, it is now clear, as Brad DeLong points out, that the GOP is not the "party of business." They are the party of Someone Else (more on this later).
This fact is not precisely "new information." There were many, many warning signs. Most recently, there was the rebellion of the House Republicans against the TARP bailout. Before that, there were the massive deficits run up by the Bush 2 and Reagan administrations - deficits that the Nixon or Eisenhower (or Coolidge, or Harding, or Hoover) administrations would never have contemplated. Yet despite these troubling signs, a bedrock belief in the "party of business" label persisted. Conservatives and liberals alike believed that Republican tax cuts were rewarding today's rich people rather than penalizing tomorrow's rich people.
Now that people are finally starting to question the political priorities of the Republican Party, the U.S. Treasury market, and a bunch of other markets that use the Treasury as the risk-free benchmark, are going to be disrupted, platinum coins or no platinum coins. Whether we default this week or in five or ten years, the bond markets now know that it will be the GOP that pulls the trigger.
Without patting myself on the back, I have to say that I always strongly suspected that the Republicans were not the "party of business." This is not because of any knowledge of political theory on my part, but because I grew up in College Station, Texas, one of America's most conservative towns (and the home of Texas A&M, which is sort of a feeder school for the Republican Party). College Station has a few businesspeople, but they tend to be pretty moderate. The real movers and shakers in local politics are "social conservatives."
This has national-level implications. Social conservatives dominate the South, and the South dominates the GOP. Since 1992, the Republicans have won 21 percent of the electoral votes outside of the South. You heard that right: one fifth. The GOP lives and dies not by the campaign contributions of CEOs and investment bankers, but by the votes of Southern white middle- and working-class social conservatives. This is a fact that the world, and bond markets, are just now beginning to understand.
I haven't looked at the names of the House Republican rebels who are blocking John Boehner's attempts to cut a deal on the debt ceiling, but I:m willing to bet dinner that they are even more Southern than the GOP as a whole. I have some evidence to this effect, so you probably shouldn't take the bet.
And this is why we have a debt crisis.
Which leaves one big question: Why are Southern white middle- and working-class social conservatives so eager to embrace a debt default? The effects on the real economy of a U.S. debt downgrade would hit every Southerner in the pocketbook. I suppose this is generally the case in debt default situations - the same working-class populists who think a default represents "free money" end up being the people who lose their jobs. But usually this only happens in poor countries with sclerotic political systems - Latin America, etc.
It seems to me - and this part is a guess and a supposition - that white Southern conservatives just don't have a lot of nationalism - at least, not for the nation they currently inhabit. They seem to feel, instinctively, that the United States of America is only "their country" when one of their own is in power. As soon as a liberal takes office, off come the U.S. flag bumper stickers, and on go the Confederate flag bumper stickers. When Southern white conservatives talk about the "real America," or cry "I want my America back!", my instinct says that they are talking about an America that the United States has never been - a white racial nation. That America did exist, briefly, before it got stomped by the United States. But its flag still flies, and now it is getting its revenge.
Like I said...just a hunch. But do you have a better explanation why 60 house Republicans are dead-set on ending America's status as the center of the global economy?
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