26 July 2011

America’s Sublime Debt Ceiling Crisis

For many watching the ongoing debate in American politics about raising the level of the debt ceiling, the experience has been sublime — to use Edmund Burke’s definition to describe ‘whatever is in any sort terrible, or is conversant about terrible objects, or operates in a manner analogous to terror’.

At the heart of the debate are fundamental questions of politics: How much government do Americans want? Are they willing to pay for it? What are the socio-economic repercussions of the Welfare State?

Democrats see more government as an aid to individual freedom and self-realisation, whereas Republicans argue that more government is a detriment to those ends and will benefit primarily the political class alone. It becomes an existential contest between equality and liberty, respectively.

In the short term, the issue of increasing the federal government’s borrowing limits has been an opportunity for partisans to mount their favourite hobby horses, whether it’s spending cuts to grow the economy or in taxing the rich to make them pay their fair share — rationalising expenditure priorities and the possibility of the U.S. defaulting on its debt obligations have been relegated to the periphery.

One side only, I offer, has economic fundamentals in its favour, and they manifest themselves in the long-term consequences for capitalism and the free economy.

Click here for my full argument at the Institute of Economic Affairs.

ADDENDUM: The negative impact of tax rises beyond the ‘governing optimum’ of the Rahn curve — and more specifically, the ‘tax burden’ of the Laffer curve — has been brilliantly summarised by Harvard economist Jeffrey A. Miron: ‘By reducing the income of households and the profits of businesses, higher tax rates discourage consumption and investment, slowing the economy in the short run. By reducing hiring, savings, and investment, they reduce economic growth in the long run. And higher tax rates are undermined by tax evasion and avoidance, making them an inefficient way to raise revenues.’

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