Need To Know: Budget

On the Brink

Are Republicans serious enough about the deficit to default on U.S. loans and wreck the economy?

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Peter Cohn
Nov. 11, 2010, 1 p.m.

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.

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.

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