Brinkmanship or Statesmanship?

The Political Economy of Debt

For the sake of argument, let us stipulate that the United States is solvent but that Greece is not. What is remarkable to me is how little this apparently fundamental difference helps us to understand events on the ground, in either case.

In both countries, the problem is not economics but politics, or better yet political economy because a narrowly political frame—focused on electoral prospects, without connection to economics—does not help us much either. Intellectual progress requires renewal of older intellectual traditions that once joined what academic, and career, specialization has put asunder.

Consider Greece, and consider the plan put forward by the former central bank governor of Argentina. He calls in effect for explicit Europeanization of the Greek debt in a new agency (Esdra), and asserts plausibly that such a solution would be eagerly embraced by Mr. Market. The economics are perfectly sound, but the politics are not. All very well for an outsider to assert, in effect, “You owe it to yourselves!”, but for a European insider the distribution of Greek losses is exactly the sticking point.

And even this European political frame falls short for ignoring the political economy internal to Greece itself. Tony Barber’s column begins to say what needs to be said, but what has tragically remained unspoken until this 11th hour. Put bluntly, the Greek debt has been engaged by Greece’s near-hereditary political elite and their clients, while IMF-EU sponsored austerity plans would force repayment by “the Syntagma protesters, who speak for the squeezed middle classes of the private sector as well as Greece’s jobless youth.”

I have said it before and I’ll say it again. “The road forward is for Eurozone holders of Greek debt to make common cause with the Greek taxpayers who are on the hook for that debt.” Europeanization of the debt is the beginning, not the end, of that particular road.

Consider now the US, and the debt limit kerfuffle. Mr. Market has shrugged it all off as merely politics—the world seems to want Treasury bills and, in the absence of an alternative, is even willing to pay a negative expected yield to accumulate more of them. Meanwhile economists weigh in on one political side or the other, depending on their sense of which is the more important immediate policy emphasis, long-term fiscal balance or short term fiscal stimulus.

Both the narrowly political and the narrowly economic frames miss the underlying political economic dimension of the problem. Already cutbacks in federal stimulus funds are gutting Medicaid, the state-level health plan for the poor and elderly. If this is any indication of what commitment to long-term fiscal balance means, no wonder it is so difficult to arrive at that commitment.

My point is a simple one. The problems of sovereign debt, both in the US and in Greece, are not fundamentally economic problems, to be dealt with by fiddling with the dials of the aggregate economy, the G (government spending) and t (tax rate) of simple macroeconomic models. They are political economic problems, and everyone knows it, even if economists have lost the language we need to speak about it.

For lack of a robust tradition of political economic debate, we get brinkmanship not statesmanship, both in politics and in economics, and we are the poorer for it.

What does all this have to do with the money view?

The point is this. The survival constraint—the requirement to make payment when payment is due—is the binding constraint, for states as well as individuals, not the intertemporal (solvency) budget constraint which is always conjectural, the future being always conjectural. The brinkmanship we are seeing in politics is a (negative) consequence of the survival constraint. The statesmanship we might see, in our own world or in some alternative universe, is also a (positive) consequence of that constraint.

How the hangman’s noose focuses the mind.

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