As many have already commented, the raising of the current limit of $14.294 trillion, which has already effectively occurred as the Treasury has been doing by borrowing from funds in its control to keep government going (see the debt clock if you don't believe me), involves a balancing act based on commitments that both republican and democratic parties made to their electorates. Grover Norquist though, has the republican signatories to his "tax pledge" over a barrel - he made most (235 Representatives and 41 Senators) of the GOP elected representatives sign a pledge that states that "I will oppose any and all efforts to increase the marginal income tax rate for individuals and business" and "oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates". Clearly this really boxes in the GOP - it cannot vote to get rid of wasteful subsidies, nor can it vote for an increase in the taxes for the uber-rich. So that is why this looks like it will become a full blown US crisis pretty soon.
When asked recently whether elected representatives should continue to follow the pledge not to raise taxes if it is against the interest of the country, his response was "Thank you for your comments. You are wrong". He is basically telling elected representatives that if they vote for anything that raises taxes ( - and his interpretation of raising taxes involves even eliminating subsidies) that he will campaign against them when they are next up for election. Now, whether you think that Norquist is a lunatic or a visionary, the consequences of a default would undoubtedly raise interest rates significantly and would also likely have far-reaching consequences.
Like what? Well as Ben Bernanke made clear on Capitol Hill yesterday, the first thing would be massive cuts in federal expenditures - military ( - although some republicans have already passed legislation detailing that troops should get paid first), social security and pretty much all federal government expenditures across the board. That would immediately cause a "Greek-style" recession as austerity reverberates through the economy with federal government workers being laid off or suffering large pay cuts. Bernanke also said a default would "throw shock waves through the entire global financial system", meaning that US government bonds and T-bills would suddenly become much less attractive to foreign investors and would immediately be downgraded by the rating agencies. That means a large increase in interest rates as foreigners dump their holdings of US bonds and swap them for something else. That increase in interest rates would also be apparent in the US, which would automatically reverse the Federal Reserve's current monetary policy, making loans for housing and anything else much more expensive. That would hurt the housing market, and therefore consumers, and would also hurt any US business looking for a loan for business expansion.So how bad could it get? Well the US is also the world's trading currency and most sought after currency in other parts of the world - so that would also be under threat, leading to a giant boost for the euro, perhaps a boost that it could really do with right now after all the bad news in the last few months. So the stakes are extremely high, and although there is always brinkmanship involved in cutting these political deals, in my view the chances are around 50:50 that a default will happen.
As I've already argued, apart from a few republicans who haven't signed up to Norquist's pledge, the rest are completely boxed in, and unless they all decide to go against the pledge they signed, I don't see any way out for them. The alternative is that democrats give way and agree to massive cuts - and of course that hurts their constituency the most, so they will resist this at all costs. The republicans have already suggested a short-term stop-gap, whereby "three times between now and the 2012 presidential election, the White House would send a request to Congress for a debt-limit increase of $700bn or $900bn. Congress would each time vote to reject the request and the president would then veto the denial" (see the FT on this). In other words the debt limit gets lifted by default as the proposed increase is denied and passed by the President vetoing the denial. In other words the GOP want to be seen to vote against lifting the limit so that they don't break their pledge - but once again this is just "kicking the can down the road" as what happens after the 2012 presidential election?
You're right. Why even have a debt ceiling? Just raise it as we've done every time in the past. What can it hurt? Eventually maybe the government will on it's own decide to shrink itself, right? Interesting this article is paired with the article about the EU problems. True, the US default would be voluntary.. this time..just as I'm sure Greece, at one time, had control of it's destiny and budget, and made bad, populist decisions.
ReplyDeleteThat said, I think the Republicans should get what little they can in exchange for raising the debt ceiling without giving the Democrats any of their purely symbolic, face saving tax increases. I'd rather they use a govt. shut down as the hostage rather than the debt ceiling because of the international repercussions. Then they should concentrate on winning the Senate, House, and White House. And actually do something with it, unlike the Democrats who frittered away 2 years of a super majority.
I enjoy your blog. Never really had the time or money for a college education, so I try to get smart on the cheap reading as much as I can.
Thanks again.