One of the things about this whole ginned up debt ceiling fight (and we can call it nothing else when the debt ceiling has been raised, albeit with objections from the minority party at the time, without preconditions 89 times) is that it is not just defaulting that can damage the US economy and credit.
It is true that if we reach the end of our borrowing power, there are going to be severe consequences. Even if we used the incoming revenue from taxes to try to keep paying the interest on our debt, or pay our military or pay retirees their Social Security, there will still be little matter of needing to cut all other spending by 44%, and do it right then, to keep under the need to borrow any more money to pay commitments we have already made.
That is what happens if we default, but other things will happen just because we are having this hostage drama play out. The credit worthiness of nations is based on more than just the fact that they are paying their bills, it is also based on the amount of surety a bond buyer can have that they will pay in the future.
What the Republicans have done, and the White House with its desire of a “Grand Bargain of the Republic” deal has abetted, is show that there is some doubt that the U.S will pay its bills going forward. Right now we are not seeing a risk premium on our bonds, because we’ve built up 230 plus years of confidence. We’ve never even come close to default and bond buyers are still using that past performance to judge the safety of our Treasury bonds.
However, once this crisis is over, assuming the ideological madness of the Republicans does not drive our and the world economy over a cliff, there will still be the knowledge that one party in the United States not only was willing to play chicken with the debt ceiling but that they had large groups within that party who do not believe that there will be dire consequences if it is not raised as needed.
If the current fight were not enough to show that, we will be treated to the whole week in Congress being spent on the draconian Cut Cap and Balance Act. This plan has no chance of becoming law, but the Republicans will trot it out there and have votes on it anyway.
For those who have not been exposed to the “thinking” behind this scheme the premise is simple (since Republicans get confused if there is a complex answer to complex problems like funding a nation of 305 million). This plan will cut spending drastically and will cap it at 18% of GDP. Why 18%? Because that is the POMA (pulled out of my ass) number the Republicans think is a good round one. The current spending to GDP is 24%, but it bounces around all the time as the needs of the nation change. You know things like spending on unemployment in a massive economic down turn, wars, and the like occur.
How steep would the cuts need to be to get under this cap? Well you remember the Paul Ryan budget that was so heinous Republicans everywhere are running away from it? Its cuts would not fit under this new rubric. This being a dumbassed Republican plan also means there would be no cutting to our bloated Defense spending (more than the other industrialized nations of the world combined) nor would it raise a thin dime of new revenue.
The cherry on top of this policy disaster sundae is the Balanced Budget Amendment. This is a favorite (and idiotic) solution of the Republicans. They want to prevent the nation from ever spending more than it takes in, under any circumstances. Okay, they exempt their favorite pass time, war, but beyond that the nation would be stuck not spending any more money than it takes in during any fiscal year.
While we diddle around with only 15 days left to until the debt ceiling, this is what we will be seeing our Congress working on. It will get a vote in the House, where the Cap and Cuts parts will pass, but the Constitutional Amendment will fail, and then it will also get a vote in the Senate. Will it do anything to help the debt ceiling debate? No, it will all be for show, but it is the show that will contribute to the damage to our perception in the world as a safe place to put your money.
The combination of the hostage situation and the late night political science ideas will give the very real impression to the world that we have a significant number of elected officials that don’t understand the issue and have ideas which they will try to enact even in the face of an imminent financial crisis, just because they can.
There is a lot of optimism on the Sunday shows and in the news today that we will get a deal before the deadline. I am willing to accept that (though that looks like a pretty thin reed to me) and say that we’ll get past this particular bump in the road. That does not mean it will not have had its costs beyond the harsh cuts that we are sure to see in any such deal.
One of those costs is that we can’t ever go down this road like this again. If in 2013 President Obama (let’s all hope its President Obama and not President Romney or gods greater and lesser President Bachmann) needs to raise our debt ceiling again and the Republicans dust off their hostage taking, there will not be the patience from the world in terms of our debt.
It is not just Moody’s or Standard and Poor’s that can make US debt unattractive, a constant worry that our least stable law makers will force us off a cliff they believe is non-existent will take its toll too. One time is an aberration, two times is the start of a trend. Personally I don’t think that the debt buyers will put up with a second round of hostage taking, let alone a third that would confirm a trend.
The biggest damage that will come from this crisis (assuming we do raise the debt ceiling, of course) is going to be the fact that the Republicans will not have paid a price for the act of taking the hostage in the first place. Merely not getting all they want or even losing the political battle will not be enough pain to deter them from doing this in the future. That is where the real damage will be done, and there is not a whole hell of a lot we can do about it at this point.
The floor is yours.