Chart by PBS
If the don't-raise-the-debt-ceiling diehards fretting about the supposed horrors of deficit spending had their way, we'd be seeing even more deficit spending to deal with the intolerable mess they would have created with their ignorant intransigence. With Republicans turning on each other, President Obama taking a more forceful public stand, and dealmaking in Congress still being trial-ballooned, how this will ultimately play out remains unknowable.
But if the diehards were to hold together enough numbers and manage to keep the ceiling from being raised, the administration would, as Zach Goldfarb writes this morning in the Washington Post, have to make some "extraordinarily difficult choices" about who gets paid with the amount of revenue the government will have on hand.
Who would it be? Social Security and disabled veterans? Medicare patients? Treasury bondholders? The generals and grunts in the military? Defense vendors? Senators?
But we aren't going there.
The diehards could have had a winner if they weren't such … diehards. They could have had a "grand bargain" that would have damaged New Deal and Great Society programs. But their stubbornness, encouraged by Grover Norquist and other right-wing ideologues, ran afoul of the "business community," which delivered a message that non-tea party Republicans understand fully: Don't screw with Wall Street.
It's not because the plutocrats don't want to eviscerate social programs and other government spending that doesn't directly benefit them. They'd be happy to. It's been on their wish list since 1936. But they know that if it doesn't happen now, they'll get another chance at it. And another if the next one fails. They are persistent. The class war is their long war. They always seem to find some willing partners in both parties, although the Republicans have been their most loyal allies for decades.
A default, on the other hand, would not just hurt grandma when her piddling Social Security check doesn't arrive. It would cost the moneybags real money, both from easily foreseen and unforeseen consequences. Does anybody who has observed these guys in action think they would stand quietly for that? Perhaps the tea partiers would enjoy the chaos and destruction of a Pyrhhic victory, but not Wall Street.
Of course, there is still a contingent of blockheads who think there's maneuvering room:
“You do not have to default and you don’t have to shut down the government if you choose not to,” said Peter Morici, an economist at the University of Maryland. If Congress raises the debt ceiling without a long-term plan for reducing the federal deficit, he added, “they’ll never solve the problem, and we’ll end up like Greece.”
Nonsense.
Dean Baker nails it:
It would have been worth pointing out [in the Post] that the United States cannot end up like Greece because the United States, unlike Greece, has its own currency. Greece is like the state of Ohio. If it has a shortfall it has to borrow in financial markets. Ohio can appeal to the federal government for assistance, just as Greece can turn to the EU, the ECB, and the IMF, but both have to accept whatever terms these bodies impose as a condition for their support.
By contrast, the U.S. government is always free to buy up debt issued in its own currency through the Fed. In principle, this could lead a problem of inflation, however the economy is very far from reaching this point with a vast amount of unemployed labor and under-utilized capacity.
Of course, the U.S. government also has no difficulty whatsoever borrowing in financial markets. It is currently able to sell long-term debt at interest rates just over 3 percent. This means that the people investing trillions of dollars in these markets do not share Mr. Morici's assessment of the fiscal situation of the U.S. government.
Unfortunately, it's not just the advocates of drowning-government-in-the-bathtub that have bought into deficit spending shrieking. In the long run, there is a need for caution. Inflation can become a big problem. But right now, there is only a manufactured crisis in this regard. The real crisis, the jobs deficit and other fallout from the housing bubble, have created a lack of demand for which there is a remedy: creating more demand. The government should, in fact, be spending more money now, providing jobs to restore and innovate its infrastructure, which is in disgraceful condition. It should be taking action to really resolve the housing problem, which means spending still more money. What it should not be doing, as Rahm Emanuel famously said, is wasting a crisis. Yet that is exactly what all the energy expended on deficit spending hysteria amounts to.