The conventional wisdom about the Republican threat to refuse to raise the debt ceiling is that this is just another hostage-taking scenario. They can't actually want to force the US into default, because the results wold be catastrophic, so they must just be using the threat of such a catastrophe to extort some policy ransom from our side. They're just bluffing, as Jed Lewison concludes in discussing the debt ceiling fight yesterday.
Perhaps the conventional wisdom is right, and they are just bluffing. But the conventional wisdom is systematically ignoring the growing numbers of Rs, of whom Pawlenty was only the latest, who offer a theory of how we could have a no-risk national bankruptcy, one that wouldn't result in an economic meltdown.
I'll explore how credible or incredible that is below the fold...
If you think they're bluffing, you're assuming that we're in the same sort of hostage situation that we were in with the annual budget bills. The Rs were able to extort some concessions from our side by threatening to not pass the budget bills, forcing a govt shut-down. They didn't really want to shut down the govt as any sort of end in itself, they were just using their advertised greater willingness to see this happen than the Ds were willing to see it happen, to collect some ransom from our side. It wasn't much ransom that they got, because everybody knew they didn't really want the govt to shut down, so the threat to kill the hostage wasn't very credible.
Now, it is almost certainly true that the clear majority of the Rs do not want the US defaulting on its debt to creditors. Maybe some of them would not be unhappy to see our credit rating damaged by such a default, because they imagine this would be a sort of "tough love" way to make it impossible for us to continue to feed our addiction to what they think of as "borrow and spend". But almost none of them want the more serious problem that would result from the US not meeting all of its obligations to all of its creditors, the downstream financial, then economic, havoc that would ensue when our inability to pay our creditors would force many of them into insolvency. The vicious cycle would feed on itself in a chain reaction that would only stop who knows where.
So, sure, the idea that they're just bluffing again on killing the hostage of the debt ceiling, has this going for it -- we can safely assume there is a consensus among Rs to avoid causing the US to default on its creditors. They won't actually kill the hostage, therefore they must be bluffing.
The problem with that line of reasoning, is that the Rs have been telling us that they believe that we can have a risk-free national bankruptcy. They believe that, when the crunch comes, and the US can't meet all of its obligations because it can't borrow more, we will choose to continue to honor all of our oblgations to actual creditors scrupulously, and will choose instead to fail to honor obligations to the social safety net. Sure, even that failure might have a negative impact on our credit rating (the Banana Republic Effect), but:
1) the worsened credit rating is the part of the downside that the teahadists think is a feature not a bug
2) they believe that the reward from confidence fairies for being hard-nosed about safety net austerity will more than counterbalance any credit rating problem.
The important feature of this theory, is that whatever happens to the credit rating, we avoid downstream havoc by not failing in any way to pay actual creditors on time.
Now, it is perfectly possible that they are professing a belief in this theory for the sole purpose of enhancing the rather weak credibility of their threat to kill the hostage, and that we don't have to abandon the conventional wisdom that this is just Act II of Hostage Kabuki. That's certainly a possible explanation of their espousal of this idea of a risk-free bankruptcy. Well, free of risk to what they value, if not to people who depend on the safety net.
But isn't it the simpler explanation for their claiming to believe these things, that they actually believe these things? Compared to birtherism, or Ryanomics, the idea that the US, even with a D president, would choose to stiff the safety net over stiffing creditors, seems starkly sane and reasonable. And if it's credible that the US would do this in the event that the House's refusal to raise the debt ceiling puts us, on 8/2/11, in a position of having to stiff somebody, where is the big catastrophe that would result that the Rs would not like to see? They assume (and is not this assumption reasonable?) that the Ds would fold quickly, and agree to the Ryan/Catfood Commission plan to end the safety net in a gradual and orderly fashion long-term in order to get the checks mailing again in the short term. They won't even have to deal with the PR problem of having stopped SocSec checks for very long, and that PR hit will be quickly lost in the long-term hit for ending the safety net, a hit that will be shared on a bipartisan basis. They will have the Holy Grail they have been seeking for generations -- bipartisan cover for ending the social safety net.
Where's the downside for the Rs in this? If there is no downside for them in the end-state, and if the mechanics leading to the end-state would work -- why would they be bluffing? Why not seize this opportunity to end the social safety net. They will never get another opportunity to end it in as low-risk a manner as this plan offers them.