You might have noticed the negotiations between President Barack Obama and House Republicans to raise the federal debt ceiling have not been going so well. Despite a very public awkward side-hug between Speaker John Boehner and Majority Leader Eric Cantor--the latter wants the former's job--and talking-points discipline from both sides Thursday that the latest talks were "cordial," the possibility that Congress will blow the deadline is real. Rank-and-file Republicans don't like Senate Majority Leader Mitch McConnell's Plan B, which would require a two-thirds majority to disapprove of Obama's request to raise the debt limit. And the White House is insisting on some ways to raise revenue by closing loopholes or raising taxes on the rich and corporations, which Tea Party-backed lawmakers hate. So what happens if Washington can't get it done by August 2? Bad things.
From Aug. 3-31, the government would have to reduce spending by $134 billion. That is to say, it would pull $134 billion out of the economy in just 29 days--more than 10 percent of monthly GDP.The economic effects at a time of 9 percent unemployment would be catastrophic, even if the bond market did not demand higher interest rates on Treasury debt--which it very likely would.
Let's say Obama paid Social Security, unemployment, and veteran's benefits, met the military payroll, and kept the courts and the FBI running. Those programs alone would take up about $70 billion, leaving only $73 billion to run the rest of government.With those remaining funds, Washington would have to make some exceedingly unpleasant choices: It could pay doctors, hospitals, nursing homes, and home health agencies what it owed for Medicare and Medicaid services, but that would cost $50 billion and leave just $23 billion to pay all other bills--everybody from defense contractors to senior day care center operators to disaster relief.