The United States: Too big to fail?

There's been plenty of action today on talks about raising the U.S. debt ceiling.

President Obama and congressional leaders met in Washington, D.C., trying to come up with some sort of debt-reduction deal to head off possible financial Armageddon.

"People were frank," the president told reporters after the approximately 90-minute session, as reported by Bloomberg. "We discussed the various options available to us. Everybody reconfirmed the importance of completing our work."

The deadline for raising the $14.3 trillion debt limit is August 2, a move that the Treasury Department says is needed to avoid default on America's financial obligations.

In dramatic times like these, Simon Johnson is always worth a read.

So check out his fascinating post today on the Economix blog, where the former chief economist at the IMF frames the debate over whether the U.S. will, or should, default on its debts.

And yes, I said the U.S. — not Greece, Portugal or Spain.

Johnson says there are three camps here to ponder as the U.S. government decides what to do about the debt ceiling, as well as the larger issue of how to manage its debt longer term:

• The first camp: hopefully yes, let's default, and this August offers a good opportunity.
• The second: possibly yes, but this would be bad so we need some form of fiscal austerity.
• The third: under no circumstances, and any talk of a need for austerity is a hoax.

"The first view is mistaken," Johnson writes. That's because a default would create pain for just about everyone, from investors on global markets to U.S. small business owners whose borrowing costs would rise.

"The second view hides a dangerous contradiction," he adds, "And the third view borders on complacency."

So what's the solution, according to Johnson?

Tax reform, of course. 

"Left and right agree that as a country we spend too much relative to our income. It would make sense, therefore, to find ways to tax consumption more and income less.

This could be done in a way that is not regressive, that does not punish people at the lower end of the income scale. Some of the most progressive tax systems in the world are based in large part on consumption taxes.

Such tax reform could support either a smaller government or a larger one. With a stronger tax base, the size of government is a good debate to have, but that issue that can be completely separated from whether our current and future deficits can be sustained."

So the good news is that politicians in America are finally talking about practical stuff like lowering budgets and living within our national means.

The bad news? 

They're politicians who need to get reelected, no matter the economic arguments. 

And nothing gets simpler from a policy perspective as we move closer to the presidential election next year.