Powell: Default threat runs unacceptable risks for the markets, the economy, and U.S. standing in the world

By Jay Powell, BPC Visiting Scholar and former Under Secretary of the Treasury for Finance

Letter to the editor: Wall Street Journal

The Journal encourages the idea that the threat of a debt default might help force entitlement reform (“The Weekend Interview with Stanley Druckenmiller: What if the U.S. Treasury Defaults?,” by James Freeman, May 14). A companion editorial, “The Armageddon Lobby,” wryly dismisses the views of most market participants, business leaders and current and former Federal Reserve and Treasury officials of both parties who oppose this strategy. As an investor and former undersecretary of the Treasury for finance under President George H.W. Bush, I suppose I am a member of that “lobby.” In any case, I believe that the whole discussion is a sideshow, because the U.S. is not going to default on its debt.

While I strongly support deficit reduction, I also disagree with the tactic of threatening a debt default. Any credible threat of a default would run unacceptable risks for the markets, the economy and our standing in the world.

Mr. Druckenmiller posits a choice between two outcomes. In the first case, we default on the debt for “six, eight or 10 days,” but the default forces Democrats to agree to fundamental entitlement reform. In the second case, we fail to address the deficit and run the risk of “a Greek situation . . . in six or seven years.”

But these are not the only alternatives, nor even the most likely ones. That strategy rides on the premise that a brief default would force reluctant Democrats to agree to entitlement reform that they would otherwise strongly oppose. Are Democrats likely to blink in a crisis transparently created to make them do so? Are Democrats more reluctant to default than Republicans? What if they call the bluff? What if foreign investors leave the market and stay away, as they did when the housing GSEs were put into conservatorship in 2008? There are a lot of ways to lose this bet.

We must fix our entitlements. It won’t happen in “six, eight or 10 days.” Threats of default will not help to build the broad public support and bipartisan agreement that will be necessary.

This is not the time to give up on our democratic institutions. We are finally having a serious debate about entitlement reform. There is good reason to think that the American people, our elected leaders and our democratic institutions will come together in time to avoid disaster.