China has come under scrutiny for its handling of the COVID-19 pandemic—the way he has stifled the freedom of the press and attempted to silence medical professionals who spoke out early on, the way he engaged in propaganda and attempted to deflect blame—and it is undeniably deserved. But a response peddled by populist conservatives in the United States would have disastrous ramifications, economists warn.
Some Republicans have let their frustration with the Chinese Communist Party drive them to adopt fringe policies such as “cancelling” the $1.09 trillion in debt our government owes to China. “If the United States did anything to harm the liquidity of Treasuries and stop them being the gold standard of the financial system, it would make this crisis look like chicken feed. It would be a collapse of the global financial system, the start of something worse than the Great Depression,” said Douglas Holtz-Eakin, economist and president of the American Action Forum.
So how did the idea come about and who is pushing it?
In April, Senator Lindsey Graham of South Carolina cast him in numerous television interviews. “China must pay,” he said. mentioned on Fox News. He argued it was time to start “cancelling some of the debt we owe China because they should be paying us, not paying us China.”
Perhaps not by chance, a few days later the Washington Post reported that several administration officials were pushing the idea behind the scenes at the White House. However, the report notes that President Trump himself has not publicly supported defaulting on debt held by China.
Still, some conservative intellectuals support the idea. For example, UC-Berkeley law professor John Yoo called for a punitive default.
“Washington could even cancel the Treasury debt held by China and [use] proceeds from the creation of a trust fund that would compensate Americans harmed by the pandemic,” Yoo wrote in an op-ed titled “How to Make China Pay for COVID-19.”
And in the American spirita conservative Claremont Institute publication, Gunnar Gunderson argued that the tactic could punish China at the same time it helped Americans.
“Cancel all US debt held by the [Communist Party of China]whether by the Chinese government or companies controlled by them,” he said. wrote. “It’s a debt that we can finance with someone else and use the money to provide relief to Americans in need and to bring manufacturing home.”
“It’s not a situation where we just write off a debt that we don’t want to pay, which would cause a credit crunch,” he said. continued. “Instead, it’s the price to pay for lying to America and the world about a global pandemic.”
These arguments are emotionally compelling. This is perhaps why, at least a little, they cling: in a recent survey32% of the public supported refusing to pay interest and therefore intentionally defaulting on the debt our government owes to China.
As alluring as the urge to punish China may be, economists warn that there would be dire consequences.
Holtz-Eakin predicted that many countries that hold our debt would worry that the United States might renege on its obligations to them the next time it incurs the wrath of the US government. He explained that this would likely lead to massive dumping of US Treasuries and a massive shift in the financial market to offerings from another country, such as German bonds.
“You shouldn’t even breathe that you care [canceling the debt],” he said. If we ever did, “interest rates would skyrocket, our credit rating would fall into the mud.”
“Congratulations, you made China pay and you made us pay even more,” he continued. “You crushed everyone for the sake of the ‘China reward.’ If you think China should pay an appropriate penalty…don’t shoot yourself in the foot.Find another way.
Those concerns were echoed by economist Jonathan Bydlak, director of the R Street Institute’s Tax and Fiscal Policy Project.
“The most obvious implication is that America’s ability to borrow would vanish overnight,” he said. “Not only would China be unwilling to lend to the United States, but other major lenders like Japan would likely interpret non-payment as a risk for them as well.”
“Businesses and individuals would find it much harder to borrow, and the market would likely crash due to the heightened uncertainty,” Bydlak warned. “Not to mention that the position of the United States in the global economic system would be forever shattered, because a significant part of our economic power rests on our economic credibility.”
Not only that, but it would immediately impose huge costs on taxpayers, according to Chris Edwards, an economist at the Cato Institute.
“A federal government borrowing default would be a neon sign that America cannot be trusted, and it would drive up government borrowing rates on its $20 trillion debt as it rolls over into years to come,” he told me. “The cost would ultimately fall on U.S. taxpayers, who would be forced to pay higher interest charges for public debt.”
Edwards says we need to get our budget under control if we’re going to reduce the debt we owe China over time: “The US government is borrowing so much from China because of the huge fiscal irresponsibility of the Democrats and Republicans over the last 20 years. ”
Brad Polumbo (@Brad_Polumbo) is a libertarian-conservative journalist and member of the Washington Examiner.
Photograph by Michael Brochstein/Echoes Wire/Barcroft Media/Getty Images.
