Austerity: Behind door number three: Calamity

By Mark Trahant
News From Indian Country  - January 2013
The goal of this blog is to help tribal leaders, and tribal communities, prepare for the austerity ahead. Over the next few weeks I want to explore how tribal governments might adapt to this cycle. And look for ways for tribes to mitigate the worst of shrinking budgets.

As I have been writing the choice ahead is severe austerity or austerity light. Either way it's going to be rough on the poorest communities in North America. Today's post is about the worst of austerity.

There are three significant fiscal policy debates underway. By the end of March there will have to be some kind of resolution to each. Behind door number one: What to do about the sequester. The legislation that "solved" the fiscal cliff pushed sequester back a couple of months. So now it will either happen at the end of March or there will be a thoughtful review of all federal spending followed by budget cuts that equal sequester. (Well, I thought it was funny.)Behind door number two: The legal budget authority for the federal government is a Continuing Resolution. That expires March 27. And, Behind door number three is a fight over increasing the limit of debt that the United States is authorized to borrow.

Peek behind doors one and two and you'll see the deep divide that is our body politic; lots of options (ranging from unreasonable to smart), lots of policy differences to debate, and, for me, lots of future posts.

However behind door number three is economic calamity. It's much like Sheriff Bart in Blazing Saddles pointing a gun at his own head and warning people to back off or he'll shoot. When the trick works, Bart says, "ooh, baby, you are so talented! And they are so dumb."

But the United States Congress pointing a weapon at itself is not an expression of talent. It's just so dumb.

Even former House Speaker Newt Gingrich has been warning Republicans to stay way from door number three. He said on MSNBC's Morning Joe last week that the issue is a "dead loser. Because in the end, you know it's gonna happen. The whole national financial system is going to come in to Washington and on television, and say: 'Oh my God, this will be a gigantic heart attack, the entire economy of the world will collapse. You guys will be held responsible.' And they'll cave."

What makes this option so bad? The debt limit is not about spending, it's about borrowing and paying bills already obligated. There are all sorts of serious international consequences, but consider just one, interest rates.

The one good thing about the current state of United States finances is low interest rates. Last week, for example, even with the $16.4 trillion debt load, interest rates were just a little better than zero. On the other hand, if Congress formally defaults on the debt number could quickly spike because interest rates are set at auctions. (Already the cost of debt is expected to more than double from fiscal year 2010 to 2017).

Already debt is a fast growing federal "program." So rising interest rates will make it worse.

It's already a difficult challenge for Congress to cut domestic discretionary spending without hurting programs people care about, but if the cost of debt service takes away money, just staying even will be that much more difficult.

Paul N. Van de Water, a senior fellow at the Center on Budget and Policy Priorities, says a failure to increase the debt limit could force abrupt spending cuts of about one quarter. "The Treasury, Secretary Geithner says, could be "forced to stop, limit, or delay payment on obligations to which the Nation has already committed - such as military salaries, Social Security and Medicare, tax refunds, contractual payments to businesses for goods and services, and payments to our investors."  If the situation continued for very long, the drag on the economy would be far worse than the "fiscal cliff" that policymakers have just avoided,"he writes. But the damage from a default would not just impact federally-funded tribal programs. It would increase the cost of debt across the board (because so many commercial loans are based on the Treasury rates). Everything from economic development loans to personal credit card rates would jump.

This is not a close call: For the good of the country, the policy options behind door number three should be slammed closed.

Mark Trahant is a writer, speaker and Twitter poet. He lives in Fort Hall, Idaho, and is a member of The Shoshone-Bannock Tribes.

*The cost of borrowing: Federal net interest payments on the debt between 2010 and 2017. (Source: OMB)