This time around, the approaching debt ceiling deadline is frightening.
It’s old news that crisis government is the order of the day in Washington, and that’s especially the case in a Congress deeply divided across party lines on virtually major issue. But now that another crisis looms at the beginning of next month, when America will default on its bills unless Congress raises the debt ceiling by November 5, it’s time for panic mode.
It’s not the first time that the far-right caucus has dredged up this particular brand of madness, threatening arbitrary economic calamity unless an unwilling country meets its demands. It’s not even the first time this year. We’ve seen three debt ceiling crises since the Tea Party arrived in 2010, but this time might frighteningly be different.
This time, the insurgents actually have a pretty good argument for going over the cliff.
For those who’ve ignored it or blissfully managed to forget, the debt ceiling is a cap on government borrowing that was created back in 1917. Prior to that, Congress had to authorize every new bond issuance, so the system was changed to allow the Treasurer to issue public debt as necessary within a fixed limit.
Why the limit? Mostly as a matter of political posturing. The debt ceiling has nothing to do with government spending, which is set during the budget process; it’s just a chance to showboat about paying for things Congress has already bought. The Treasury only borrows money when it doesn’t have the cash on hand to pay for pre-existing obligations.
It’s getting the check at the end of dinner. The lobster was great but someone has to pay for it, even if that means calling the bank and raising your credit limit.
Noting the contradiction in the late ’70s Congressman Dick Gephardt passed what was known as the Gephardt Rule, which automatically raised the debt ceiling to meet the budget. (The rule said that a debt ceiling hike was “deemed approved” as necessary to pay for any budget that passed Congress, unless specifically voted otherwise.) Although it didn’t end the grandstanding, this rule did effectively eliminate the debt ceiling as a substantive issue until 1995, when House Republicans suspended it pending an ultimate repeal in 2001.
Compare this with the right’s signature Hastert Rule, designed to make bipartisan legislating impossible and which gives about 40 members of the House’s far right enough power to keep manufacturing this crisis.
Although several major politicians, including some presidential candidates, are posing this as a spending issue, it’s really about restructuring debt. This government has already spent this money on thousands of greater and lesser obligations, such as to contractors, retirees, existing bond holders, soldiers and more. Now it needs to borrow in order to cut the checks.
Two countries in the world use this parliamentary device (the U.S. and Denmark), and it’s because, not to mince words, the idea is catastrophically nonsensical. With the money already spent, Treasury must borrow in order to avoid default, so why allow even the smallest chance that it can’t?
Mostly because for almost 100 years, the debt ceiling was a very quiet bit of legislative arcana. Politicians used it as an opportunity to rail against spending by the other party while understanding its role in keeping the lights on. Some would cast symbolic “no” votes on a sure-to-pass bill, and the system chugged quietly along. Nobody fixed what wasn’t broken.
That was then. Today that understanding is broken with a breathtakingly radical group of House Republican legislators who see their prime duty not as functional governance but as “standing up” to President Obama and the Democrats. (See: more than 50 votes to repeal the Affordable Care Act.)
To them the debt ceiling is a made-to-order hostage situation. It’s not that they disagree with the widespread misery a default would cause. It’s that they see in those unemployment lines an opportunity.
So what exactly would happen if America breaches the debt ceiling? According to UCLA economist David Shulman, at first it would look very much like a government shutdown.
“My guess is what will happen is the government will make payments on the debt and not default on that, but might default on Social Security checks, Medicare checks, accounts to defense contractors and salaries to federal employees,” he said. “That’s where the balance will come from. I don’t think you’ll have a default in a financial sense, but you will have a default in the sense that people who expect to get paid are not going to get paid.”
Even that might not be so bad. It might just more closely resemble previous debt ceiling crises as far as financial markets are concerned: a scare, maybe a credit downgrade that doesn’t affect interest rates, but everyone gets paid in the end.
A default that winds on this form of “financial triage” would hit its limits and the Treasury would begin to default on interest and loans. That, Shulman, said “is the squeeze.”
“That’s what makes the economy worse, [when] you have pressure on the banking system,” he said. Interest rates would feed on the uncertainty, bringing borrowing down to a crawl and taking with it business spending on new equipment and buildings. Those industries would start laying people off, which would suck purchasing power out of the economy and what economists call a negative feedback cycle would begin. Getting interest rates back down to stimulate more spending would be incredibly hard, because once a deadbeat, always a deadbeat.
Of course any prediction, Shulman emphasized, comes with the caveat that no one necessarily knows how Treasury would prioritize its payments or how the market would react. It’s anyone’s guess.
In 2011 and 2013, Tea Partiers bet big that Democrats, unwilling visit that kind of harm on the American people, would cave in to extraordinary demands as a condition for new debt. In 2015, with a Presidential election in the offing, the stakes are higher. Frighteningly so, because this time around it would actually be politically rational for Republicans to pull the rip cord on calamity.
We’ve been to this dance so many times since 1994, it’s begun to feel routine. Each time the GOP shuts down the government or takes America to the brink of default, it takes a beating in the polls, losing the public relations battle despite its very best spin doctoring. By the time of the next election, though, voters have moved on to other things.
It happened in 2013, when the Republicans did both in one month and still won big in the 2014 elections. We voters are fickle creatures. It takes something on the order of the Iraq War to make an issue stick long-term, and even then only when it manages to stay in the headlines.
A sabotaged economy certainly would stay relevant, but not the mess that caused it. That would fade into the background against the drumbeat of bad news: return to recession, high unemployment numbers, hemorrhaging retirement accounts and all on Obama’s watch.
Presidents get the blame when the economy turns south, fair or not. Happy voters tend to stick with the status quo; unhappy ones throw the bums out. For Republicans hoping to take back the White House after eight years of Democratic rule, a rocky economy would be just the thing to shore up their electoral bid, especially after a difficult primary).
For a party that has made clear that “the single most important thing we want to achieve” (Mitch McConnell, 2010) is defeating Obama, the political calculus of a bad economy in 2016 is a frighteningly rational option.
Or maybe not. As Shulman reiterated, voters do properly appoint blame when conservatives shut down the government.
“They can’t win the PR battle,” he said. “If anything happens, the government shuts down or we run out the debt limit, the Republicans get blamed.”
Maybe. But a plan doesn’t need to be foolproof to sound appealing, especially to legislators borderline desperate for the Oval Office. It might reasonably work, and that’s enough to make it a politically rational choice for the opposition.
Like we said, the debt ceiling is back. This time it’s scary.
Written by Eric Reed of TheStreet