America the Reckless

A. Michael Spence

By A. Michael Spence

The long-run effects of the US default threat will be overwhelmingly negative. For starters, it will reinforce the notion that policies and policy disputes are to be conducted with a view to domestic issues and interests, independent of the systemic global effects – even as those effects grow larger.

By A. Michael Spence

The world’s developed countries face growth and employment shortfalls, while developing countries are confronting huge challenges in adapting to increasingly volatile capital flows while adjusting their growth patterns to sustain economic development. And yet America’s political dysfunction has come to marginalize these (and other) crucial issues. It is all very difficult to fathom.

The threat of a default on US sovereign debt has been lifted – for now – but the deeper problem persists: For America’s Republicans and Democrats, negotiating a fiscal grand compromise appears to carry higher costs than playing a game of brinkmanship, even at the risk of default. Surely this involves a collective miscalculation of the longer-term costs.

Setting aside the external impact on the global economy, the damage to domestic stability and growth from anything other than a short-term technical default would be so severe that the political system (and both parties with it) could not withstand the backlash. Domestic and foreign holders of US Treasury bills would regard a deliberate, unforced default as a betrayal of trust.

Read the full article as published in Project Syndicate