Is a Debt Ceiling Showdown Worth the Risk?
The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.
A think tank called the Bipartisan Policy Center has been updating a thorough and dispassionate consideration of what exactly will happen if there is no deal to raise the debt ceiling. The Center’s 48-page slide deck predicts that absent a debt ceiling increase the “X Date” — the first day that the Treasury will no longer have sufficient funds and daily income to pay all of its bills on time — will arrive between February 15 and March 1. That’s five to seven weeks from now.
The potential consequences are scary stuff. It’s never happened before, so there is no template. The Treasury has two basic alternatives: 1) prioritize some payments and refrain from paying others; or 2) pay each day’s bills in full only after enough tax revenue has been collected to cover all of them. By then, of course, the next day’s payments will already be late.
Regardless of what the Treasury does, it will at least arguably be breaking the law. If it elects to pay certain bills in full and delay others, it will be picking winners and losers on a chaotic daily basis, as Congress and unions and suppliers and every imaginable interest group pursues every remedy available to them to get on the priority list. BPC quotes Fed Chairman Ben Bernanke as saying that going past the X Date “would no doubt have a very adverse effect very quickly on the recovery. I’m quite certain of that.” Not to mention the stock market, and the country’s credit rating. Also, are the Treasury’s information and processing systems sophisticated enough to thread all these needles day after day? In the face of all of this, I’m persuaded that I was far too dismissive of the potential effect of hitting the debt ceiling in 2011.
So why would House Republicans risk all that by refusing to raise the debt ceiling? Because they believe they have no better option.
America is on an unsustainable financial path. When a financial system is unsustainable, eventually it blows up in costly and chaotic ways. Recall the bubble that burst in September 2008, when Lehman went bankrupt and Merrill Lynch sold itself over a weekend to Bank of America. The longer the day of reckoning is postponed, the worse the carnage will be.
The 60-plus Representatives who self-identify as members of the Tea Part Caucus believe, correctly I think, that their constituents have sent them to Congress to reverse the growth of spending and taxation now, rather than let our children and grandchildren deal with a bigger mess later.
Don’t be taken in by arguments that the debt ceiling has nothing to do with future spending, only with past spending. Capping the debt ceiling is analogous to when a credit card issuer refuses to make any further increases in a family’s credit limit. Whatever already has been paid is water under the bridge. The family will have to prioritize what it pays going forward. The difference with the debt ceiling, of course, is that the family’s financial fate will have very little impact on the overall economy.
Republicans were dealt a losing hand last month in the misnamed fiscal cliff crisis, where holding the line would have meant income tax increases for nearly all working Americans. Digging in here is more easily defensible as a refusal to let the country go deeper into debt. Yes it will hurt the economy, which is fragile just now. But there will never be a convenient time to begin the necessary, wrenching, fundamental changes in the way America conducts its business.
In the Wall Street Journal, Karl Rove describes how House Republicans should approach the negotiations:
For their part, Republicans finally appear reasonably united around something practical and reasonable—the “Boehner Rule,” named after its author. It requires matching any debt increase dollar for dollar with spending cuts. Here, the GOP will likely find wide public support.
It’s going to be an interesting few weeks.
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