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Once More, Into the Breach Once More, Into the Breach

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NJ Daily / OFF TO THE RACES

Once More, Into the Breach

When it comes to the implications of not raising the debt limit, the president and congressional leaders have a lot of explaining to do to the public.

T-bills: Default would be disastrous.(Getty Images/William Thomas Cain)

photo of Charlie Cook
April 11, 2011

The media’s recent coverage of the potential government shutdown over the past few weeks has been genuinely overcaffeinated. 

The truth is that if a deal had not been reached last weekend, we would have seen something more like a government slowdown. 

Over the years, the impact of these periodic but unfortunate incidents—the federal government has shut down five times in the past 25 years—has been lessened as safety measures have been instituted. 

 

One of the costs of the media coverage of this is that it might undermine how serious the consequences would be if there is a failure to raise the debt limit in May or June, something that would be disastrous. Failing to raise the debt ceiling, essentially letting the federal government go into default, has never happened and has consequences.

Billy Moore, a sage lobbyist and student of all things appropriations, points out that the first debt limit was established in 1917 with the Second Liberty Bond Act. 

The intention was to compel restraint when further federal borrowing would have to occur. Since then, whenever the debt limit has been reached, it has always been raised, although there is always plenty of fuss over it. 

Failure to raise the debt ceiling would mean that the government would have to make choices as to who they would and would not pay. For example, they would have to make decisions about whether to pay bondholders, including those in China and Japan who had loaned the United States money, or whether to issue Social Security checks. 

While the temptation of populists and demagogues would be to stiff the bondholders, the cost we would have to pay to borrow money would be astronomical. 

Keep in mind that we are carrying about $14 trillion in debt. Interest rates, needless to say, would soar. 

Readers of this column do not need an explanation of the consequences of failure to pay Social Security or veterans’ benefits.

While there are accounting gimmicks that could forestall judgment day—if the ceiling were reached in May it could be stalled through June and some say as late as July 8—they would run out and really bad things would start to happen. 

Political economist Tom Gallagher of the Scowcroft Group compares it to deciding not to pay your credit card bills in order to get your household expenses under control.

Those who remember the Dow Jones Industrial Average dropping nearly 778 points on September 29, 2008, after the House voted down the—since paid off—Troubled Asset Relief Program, losing $1.2 trillion in market value might look at that as a reminder of the economic consequences of dumb political decisions. 

That drop, minutes after the vote, was actually greater than the 684-point drop on September 17, 2001, the first trading day after the September 11 attacks.

It was made quite clear in the latest NBC News/Wall Street Journal poll—conducted March 31-April 4 among 1,000 adults, with a 3-point error margin—that most Americans do not understand what the debt limit is or the consequences of not raising it. 

Pollsters Peter Hart (a Democrat) and Bill McInturff (a Republican) told respondents, “Now, talking a moment about something called the federal debt ceiling. The federal debt ceiling acts as a check and limit on the country’s overall liabilities, including the federal deficit and other debts. When the U.S. Treasury needs to issue debt above the ceiling, Congress needs to vote to raise the ceiling. Congress is again currently considering whether and how much to extend the debt ceiling.” They then asked, “Do you think Congress should or should not raise the debt ceiling?  If you don’t know enough to have an opinion, please just say so.”  

Only 16 percent said that Congress should raise the debt ceiling, 46 percent said they should not while 38 percent admitted they didn’t know enough to decide.

Hart and McInturff then followed up by telling respondents, “And, thinking some more about the debt ceiling,” then asked, “Now, I’m going to read you two statements about the debt ceiling and please tell me which comes closer to your point of view. (Other/some) people say raise the debt ceiling because otherwise the government will be unable to pay the nation’s bills, including making payments to people who participate in various government programs, government workers cannot be paid, and the government will default on its current debt payments,” (the order of statements was rotated).  Even then, those supporting raising the debt ceiling rose to only 32 percent, while 62 percent were opposed and 6 percent were not sure or had mixed views.

It’s clear that President Obama and congressional leaders of both parties as well as opinion leaders of all stripes have an enormous amount of educating to do. The public seems to see raising the debt ceiling as being a question of whether we should go further into debt or not, even when it is explained to them. 

It would be interesting to see how the public would have responded if it had been made clear that Social Security and veterans’ checks wouldn’t be going out, that the government’s credit rating would drop, and that the implications for Medicare and Medicaid would be enormous.

Solace can be taken that when the shutdown or slowdown deadline was imminent, the adults in the room took over and a deal was made, as messy as it was. Maybe that’s a good omen for the bigger challenge that lies ahead with the debt ceiling.

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