Did the S&P Downgrade of USA Debt Bruise the National Psyche?

August 17th, 2011
in Op Ed

Guest Author: Karl Smith is Assistant Professor of Public Economics and Government at the School of Government at The University of North Carolina at Chapel Hill. He works primarily in the areas of Public Finance and Public Revenue and Expenditure forecasting. Prior to joining the School he was a graduate fellow at the Institute for Emerging Issues, where his work was focused on state and local tax reform. Smith holds a BA and a PhD in economics from North Carolina State University.  He writes at the blog Modeled Behavior and at Seeking Alpha.  Vita.

On Meet the Press Alan Greenspan said:

"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default"

"What I think the S&P thing did was to hit a nerve that there’s something basically bad going on, and it’s hit the self-esteem of the United States, the psyche"

Follow up:

In many ways Alan Greenspan and I are cut from the same cloth. I know that statement won’t win me many friends but its important to put what I am about to say in perspective.

We are both come from a philosophically libertarian, small government, low regulation, efficient markets, balanced budget background. That instinct, however, was in both our cases tempered by the daily grind of looking through data series and trying to figure out the best practical advice to give to government officials to deal with the real problems facing people every day.  And, of course in Greenspan’s case eventually a stint as the most powerful bureaucrat in the world.

I think I began to doubt before he did and have been more transformed by the events of the past five years but nonetheless we are coming from similar places.

I say all that to point out the extent to which what happened in the government has not fully sunk in with Alan Greenspan. His statement about the United States having zero probability of default reminds me of something I might have said six months ago.

Its something that is predicated on a government that works with the Federal Reserve, trusts its experts and is committed above all else to global stability.

That, however, is not the government we have. We have a government where partisans are committed first to attempting to win the war over the future of the United States.

This is something that is hard for technocrats to swallow because in our world politicians have no control over the future of the United States. No deals, or demands or hostage taking is going to change the basic fact that when push comes to shove, the public will not take kindly starving old people, or grandma being denied chemo because she can’t afford it.

The future is in our minds more or less deterministic. Its set by human nature. Politics are just a veil.

What politicians can do, however, is manage society on its journey. They can see to it that the ship keeps an even keel and that the water is pumped out of the lower decks. They can maintain financial and political stability. They can create a climate of quiet certainty.

Our political system, however, has rejected that task. Instead they have decided to take fool errand into changing what cannot be changed and putting the global financial system at risk as they attempt to hold back the tide.

In that world its not the technical ability of the United States to avoid default has come under question. It’s the pratical ability of our politicians to keep their act to together and focus on the things over which they have actual control and to do their duty to ensure that steady march of the Enlightenment does not go down in flames on their watch. To put out the fires when they begin and to above all keep the peace.

They have shown a willingness to shrink this responsibility that is simply beyond the pale.

That is the essence of a nation downgraded and a world a few inches closer to default.

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