The Debt-Ceiling Doomsday Device

Even if you're a political junkie, chances are you never gave much thought to the debt ceiling before the last couple of months. It was nothing more than an occasion, once a year or so, for a brief and little-noticed protest vote on the part of some members of the opposition party. They could make a floor speech about the administration's misplaced priorities, proclaim their hope that federal spending and taxes would be reordered to their liking, cast their not-so-dramatic no vote, and move on to the rest of the day's business. Members of both parties were able to cast this protest vote (as President Barack Obama did as a senator in 2006) safe in the knowledge that the increase would pass and no actual economic damage would result.

But today, for the first time we stand in a place where Congress might actually fail to raise the debt ceiling, an action that could have truly catastrophic consequences. The debt ceiling will be raised -- of that, there is no question. The question is what happens, politically and economically, before we get there. But before we answer that question, a little history is in order.

Why do we have a statutory limit on the amount of money the government can borrow? It has its roots in the eternal tension between the legislative and executive branches. In 1917, the government needed to issue bonds to finance our participation in World War I, but the legislation that created the Liberty Bonds included some constraints on the Treasury Department's ability to issue as many bonds as it wanted. Congress later went further, passing a law in 1939 to set a limit on how much the government could borrow overall. This gave the Treasury Department the ability to determine what kinds of securities would be issued, but set an upper limit on borrowing. Ever since, the debt ceiling has been Congress' way of maintaining some control over the country's borrowing, even as the details are handled by the Treasury (you can read a history of the debt limit in this Congressional Research Service report). In the last 50 years, the debt ceiling has been raised no fewer than 75 times -- always just enough to cover the immediate shortfall and guarantee that Congress will have to give its permission again within a year.

The reason we're now seeing an unprecedented amount of attention paid to a vote that ordinarily passes with little notice is that the Republican Party's agenda is being set by a group of ideological radicals who seem quite willing to cripple the American economy if that's what it takes to strike a blow against the government they hate so much.

Unless Congress votes otherwise soon, sometime in May we will reach the debt limit. Disaster won't ensue exactly on that day, since the Treasury Department has some accounting tricks it can use to move money around and make sure there are no defaults -- but only enough to carry us for a few weeks. Fairly soon, much of government operations would have to cease; although revenues would still be coming in, they would cover only a portion of what government does, and since the government won't be able to borrow any money, it won't be able to fund the rest of its operations. Among other things, this would immediately suck money out of the economy, from things like benefit payments, the salaries of federal workers, and payments to contractors. Once it becomes clear that the U.S. may not be able pay its debts, demand for U.S. Treasuries will decline rapidly. This in turn will push up interest rates, making it more expensive to borrow money, further hampering economic growth. This would increase the deficit Republicans are claiming to want to reduce by lowering revenue and raising the interest we're paying on the debt.

It's important to realize that this chain of events could be set in motion even before we reach the ceiling, meaning an 11th-hour deal might not avert many of the economic consequences. That lack of confidence in our ability to pay will grow with each day we get closer to the ceiling. And the effects could be long-lasting. "The cornerstone of the global financial system is that the United States will make good on its debt payments," says Mark Zandi, chief economist at Moody's Analytics. "If we don't, we've just knocked out the cornerstone, and the system will collapse into turmoil." Even Republican Sen. Lindsey Graham says the result of failing to raise the ceiling would be "financial collapse and calamity throughout the world."

Our ability to solve this problem without wounding the economy is hampered by the rather uninformed state of public opinion on the issue. The debt ceiling is something most Americans have never heard of, and it tends to get conflated with all the other facets of the economy. Pollsters have recently begun asking whether the debt ceiling should be raised, and the results are clear. An NBC/Wall Street Journal poll found only 16 percent of respondents saying the ceiling should be raised; a McClatchey/Marist poll pegged the number at 24 percent (see more here). It isn't surprising; after all, asking whether the ceiling should be raised sounds a lot like asking whether we should be borrowing more money, and borrowing more money doesn't sound like a good idea when we keep being told that we're being crushed by debt and that government should "live within its means." At the moment anyway, most Americans have no idea what the consequences of failing to raise the debt ceiling would be.

This is why I've been arguing (see here and here) that President Obama needs to adopt a fundamentally different negotiating strategy than he has, to change the terms of this debate. Republicans have essentially taken the American economy hostage, but to most Americans, this just seems like ordinary Washington squabbling. As long as the catastrophic consequences of not raising the ceiling remain unclear, Republicans have the advantage. So Obama's position should be simple: There will be no negotiations on raising the debt ceiling. There will be no, "I'll give you some budget cuts if you'll raise the ceiling." It simply needs to be done, full stop, and if Republicans try to extract ideological concessions in return for not wrecking the economy, everyone must understand the implications of their actions. Obama's tone should be less "Let's talk" and more "How dare you?" If he took that unambiguous, unmoving position, the discussion would be about the Republicans' recklessness, not about how much the budget should be cut to get over this hump.

But if you think Obama is going to do that, you'll be disappointed, for neither the first time nor the last. His make-concessions-before-negotiations-begin style sometimes yields political benefits, but in this case he's already demonstrated his weakness, and Republicans are emboldened. They think they'll be able to squeeze him for more cuts, and he won't make them pay a political price.

Richard Nixon once said to his chief of staff H.R. Haldeman, "I call it the Madman Theory, Bob. I want the North Vietnamese to believe I've reached the point where I might do anything to stop the war. We'll just slip the word to them that, 'for God's sake, you know Nixon is obsessed about Communism. We can't restrain him when he's angry -- and he has his hand on the nuclear button' and Ho Chi Minh himself will be in Paris in two days begging for peace." Today, certain elements of the Republican Party may be operating on the same theory. The difference is that they may just be crazy enough to drop the bomb.

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