01.09.13

Republicans Who Threaten to Have U.S. Default on Debt Are Nihilists

It’s fine to have an argument about the size and scope of the U.S. government. But it’s very dangerous even to discuss the prospect of a government debt default.

For decades, fiscal conservatives have used congressional debates over raising the debt ceiling to vent their frustrations with big government. But no one seriously questioned the need to raise the ceiling—not until 2011, when a band of Tea Party über-conservatives resolved to make the debt limit a bargaining chip in budget talks. Now, they’re doing it again, and this time they’ve recruited their party’s Senate and House leaders to the cause.

This is dangerous and wrong. Wrong because it ignores the fact that the debt limit simply allows the Treasury to borrow the funds to finance spending that past Congresses and presidents already have undertaken.  In other words, it has no impact on future spending or taxes. Wrong because raising the debt ceiling is a ministerial act that grants the government the technical legal authority to maintain the full faith and credit of the United States. And dangerous because the Treasury securities that comprise that credit underpin much of the operations of the American economy. The spectacle of virtually the entire leadership of a major political party embracing a tactic that puts the U.S. and global economies at terrible risk, to push their partisan preferences on the budget, heralds something new in our economic debate—namely, a new form of political nihilism.

Conservatives have serious and sincere differences with progressives over certain federal programs and functions. Whether Republican leaders recognize it or not, putting at risk the government’s legal authority to issue new bonds as a lever to press their budgetary preferences is a textbook example of political nihilism. The Tea Party found its following by rejecting the value and avowed purpose of government itself. If you place little value on government, it becomes both easy and acceptable to dismiss the costs of wrecking its operations. This new form of political nihilism is as far from genuine conservatism, which seeks to preserve traditional political arrangements, as it is from a progressivism that would use government to reform those arrangements
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To understand why this approach is so dangerous, start with the basics. When Washington runs a deficit, the Treasury has to borrow money from investors, not only to fund the new deficit but also to cover interest payments on existing debt and the regular refinancing of much of that debt, all on a continuing basis. A failure to raise the debt limit, as the Tea Party’s denizens in Congress now call for, could therefore force the Treasury to default on those obligations.

Now, sovereign debt defaults have well-known and very unpleasant consequences. Interest rates spike, stock and bond markets fall sharply, the value of the currency declines dramatically, and the country quickly falls into a deep recession. That is what happened to Argentina in the first half of the last decade. With some bad luck, it could happen to Greece and Spain over the next year. Given those consequences, no government would ever default voluntarily. Rather, the only reason any country has ever found itself unable to pay the interest on its bonds or to issue new government debt is that domestic and foreign investors won’t lend it the funds to do so. 

If beyond all reason or economic necessity, Congress forces our government to default on the national debt, the results would be very nasty, indeed. Trillions of dollars in U.S. Treasury securities are held by financial institutions here and abroad, so the default would quickly freeze capital markets around the world. Private lending to businesses and households here and in many other nations would halt. The reserves held by many of the world’s central banks also include trillions of dollars in U.S. Treasuries, so a U.S. default also could quickly bring on a global financial crisis that would dwarf the chaos of late-2008. The result would be job losses or reduced incomes for tens of millions of people.

Even if the debt-limit debate merely increases the concerns of investors that a U.S. debt default somehow might occur, their heightened apprehension could have serious effects on interest rates, the dollar, and the stock and bond markets. In 2011 political games over the debt limit led one of the three major credit-rating agencies, Standard & Poor’s, to downgrade U.S. debt from triple A to double A. S&P didn’t cite any pressures on the U.S. economy, but rather dysfunctions in the American political process. Similarly the International Monetary Fund warned last week that the greatest threat to the U.S. recovery lies, once again, in political deadlock rather than in any economic weaknesses.

Indeed, the debt ceiling provides a direct route from political deadlock to economic weakness. Even before a technical debt default could set in, the government would be forced to drastically cut current federal spending. Federal borrowing today covers between 35 percent and 40 percent of all federal spending. If Congress prevents the Treasury from legally borrowing any more funds, the government will have to slash spending, at once, by 35 percent to 40 percent. Such unimaginable cuts—more than 10 times those contemplated under the sequester provisions of the 2011 Budget Act—would force the president to shut down many parts of the federal government, including some national security operations, and even cut income-support programs for tens of millions of retired Americans. A deep recession would quickly follow. And since the president and the Treasury would determine the distribution of these cuts, failure to raise the debt ceiling also would effectively shift the power of appropriations from Congress to the executive branch.

As a final defense for this indefensible tactic, some Tea Partiers argue that failure to raise the debt limit should be seen as a “preemptive default” intended to head off a real one. That is nonsense. Global investors continue to lend the United States whatever funding we require—and judging by the low interest rates they accept, they are eager do so. That leaves bare the real circumstances: a handful of radical members would have the Congress refuse to raise the debt limit, knowing that the country would face another recession as government programs are slashed, followed by the chaos of a sovereign debt default. Republican leaders have no alternative but to join the president in rejecting such nihilism.