The Great Debt Scare, by Robert J. Shiller, Commentary, Project Syndicate: It might not seem that Europe’s sovereign-debt crisis and growing concern about the United States’ debt position should shake basic economic confidence. But they apparently have. And loss of confidence, by discouraging consumption and investment, can be a self-fulfilling prophecy, causing the economic weakness that is feared. ...
The ... Thomson-Reuters University of Michigan Surveys of Consumers ... has included a remarkable question about the reasonably long-term future, five years hence...:
“Looking ahead, which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?” ...
Those answers plunged into depression territory between July and August, [the period when US political leaders worried everyone that they would be unable to raise the federal government’s debt ceiling and prevent the US from defaulting,] and the index of optimism based on answers to this question is at its lowest level since the oil-crisis-induced “great recession” of the early 1980’s. It stood at 135, its highest-ever level, in 2000, at the very peak of the millennium stock market bubble. By May 2011, it had fallen to 88. By September, just four months later, it was down to 48. ...
The timing and substance of these consumer-survey results suggest that our fundamental outlook about the economy ... is closely bound up with stories of excessive borrowing, loss of governmental and personal responsibility, and a sense that matters are beyond control. That kind of loss of confidence may well last for years.
That said, the economic outlook ... may hinge on ... our finding some way to replace one narrative – currently a tale of out-of-control debt – with a more inspiring story.
How did this narrative arise? Paul Krugman:
It took bad thinking and bad policy by many players to get us into the state we’re in; rarely in the course of human events have so many worked so hard to do so much damage. But if I had to identify the players who really let us down the most, I think I’d point to European institutions that lent totally spurious intellectual credibility to the Pain Caucus.
And the actions of politicians in the US (along with the economists providing cover for them) didn't help one bit. The debt fear was, for some in the GOP, a deliberate strategy in the ideological war against social insurance programs such as Social Security and Medicare, and against government intervention in the economy more generally. By creating debt fear, and by blocking all tax increases, cuts in these programs would be more likely. The false promise that austerity would produce good times was part of the ideological game.
We can pay our bills -- ability to pay is not at issue, and we can do it without harming the econmy in the short-run -- it's the ability of Congress to reach the necessary agreements in light of the GOP's intransigence that is in question.