Last January, Senate Republicans came within one vote of forcing the government into a financial apocalypse. In a chest-thumping protest against Democratic spending, every single Republican in Congress chose to filibuster against raising the government's borrowing limit.
It was a symbolic protest, because GOP leaders knew they didn't have the votes and didn't actually want to win. Had the protesters prevailed, even temporarily, the result would have been catastrophic"”far beyond forcing a government shutdown. The Treasury would almost immediately have been forced to default on payments to creditors around the world. That would have sparked panic in global markets, where investors have always looked to Treasury securities as the ultimate safe harbor, and sent interest rates soaring everywhere"”especially in the United States.
None of that happened. But starting in January, Republicans will have more than enough votes to take a real look into the abyss. Treasury officials predict that the government will once again bump up against the legal debt ceiling"”now $14.294 trillion"”sometime next spring. And while GOP leaders have made it clear that they don't want to push the government over the brink, they are mulling an audacious power play: Their price for preventing Armageddon will be big concessions from Democrats on taxes and spending cuts.
To get what they want, Republicans are already suggesting a credible threat. Asked on Meet the Press whether he would vote to raise the debt ceiling, Sen. Jim DeMint, R-S.C., answered bluntly: "Not unless this debt ceiling is combined with some path to balancing our budget, returning to 2008 spending levels, repealing "˜Obamacare.' "¦ We're not going to continue to raise the debt in America." In effect, Republican strategists say, they want to attempt something similar to what antiwar Democrats tried in 2007 to limit President Bush's involvement in Iraq.
Their strategy involved attaching a series of requirements to supplemental spending that made it all but impossible for Bush to send more troops. The "slow-bleed" plan, though unsuccessful, assumed that Bush would compromise to prevent war funding from being shut off. This time around, Republicans would demand deep budget cuts and new spending controls. To preserve their leverage, some Republicans want to approve only small increases in the debt ceiling in order to have additional "must-pass" votes right up until the 2012 elections.
It's a powerful threat, because the alternative is unthinkable"”but it's a dangerous one. Treasury can forestall reaching the debt ceiling with accounting moves, but sooner or later the moment of truth would arrive. Absent congressional action, eventually the government would have to stop borrowing money.
That could mean suspending interest payments on the debt"”undermining the nation's credit rating and sending bondholders running for safer havens. Chinese investors held $868.4 billion worth of Treasury securities at the end of August, the largest amount of any foreign country. Fears over the U.S. situation are already mounting: This week, a Chinese credit-rating agency downgraded U.S. debt. None
Running the government on a cash-as-you-need-it basis would force draconian cuts unlike any that American lawmakers have ever even proposed before. Using the just-ended fiscal year as a baseline, the U.S. would have to slash all noninterest spending by $1.29 trillion, or nearly 43 percent. Nothing would be spared"”not uniforms and ammunition for troops, not Social Security checks, not veterans' disability payments, not life-saving medical research, not early-childhood education for the poor.
Analysts debate whether this kind of choice is even necessary. The credit-rating firm Standard & Poor's notes that among the 123 nations it evaluates, only the United States has to vote to raise its debt limit. Former Reagan administration economist Bruce Bartlett, among others, has called for abolishing the practice, arguing that federal borrowing capabilities are too important to leave to the whims of Congress. Breaching the debt ceiling would mean that Treasury could only pay bills with new tax revenues coming in, which wouldn't cover existing obligations. "You move to a pure cash-flow budget," Bartlett explained last week to The Atlantic.com's Derek Thompson. "You have to create a line. We don't want to piss off investors, so they come first."¦ Maybe Social Security recipients come second, but eventually, you run out of money."
What really makes the Republican gamble dangerous is that some of the party's newly elected members think that running out of money would have its advantages. Sens.-elect Rand Paul of Kentucky and Mike Lee of Utah are among those who have said that they won't vote for a debt increase, period. So the risk of an actual default, though highly unlikely, isn't unthinkable. And there is a partial precedent: In 1995 and 1996, then-Treasury Secretary Robert Rubin was forced to stop borrowing for about five months in a famous standoff with then-House Speaker Newt Gingrich, R-Ga. Rubin played for time by invoking a series of arcane financial maneuvers, but he still had to get a special exemption to send out $29 billion in Social Security benefits in March 1996.
That kind of maneuvering might not buy as much time now, though. The government raises about $150 billion per month in new borrowings, 10 times the amount during Rubin's tenure. And, according to G. William Hoagland, a veteran congressional budget analyst now with Cigna, Treasury accounting gimmicks wouldn't sustain the agency much longer than June. Either way, the moment of reckoning will be at hand sometime in the first half of 2011, before which Obama will either have to give Republicans what they want or face the prospect that they'll pull the trigger.