nless Congress acts, the U.S. will run out of money to pay its bills in late February or March — at which point, economic chaos would (at least theoretically) break loose. And yet, more than half of Republicans in the House are willing to allow such a catastrophe as a way of forcing President Obama to agree to steep spending cuts, according to Politico:
Republican leadership officials, in a series of private meetings and conversations this past week, warned that the White House, much less the broader public, doesn't understand how hard it will be to talk restive conservatives off the fiscal ledge. To the vast majority of House Republicans, it is far riskier long term to pile up new debt than it is to test the market and economic reaction of default or closing down the government…
[House Speaker John] Boehner's own staff has warned conservative lawmakers that deficits will soar, as interest rates rise, the markets will tumble and the economy will face catastrophe if they truly follow through on default. They will walk members through a presentation on this scenario this week, and the hope is conservatives will conclude it would be economic and political suicide to go all in. But GOP leaders have made similar pitches before, and most House Republicans didn't buy it. They are willing to take that risk because they believe the future consequences of more spending are more severe. [Politico]
These lawmakers appear to be severely underestimating the fallout from a default. The U.S.'s budget deficit — mainly driven by entitlement programs, and exacerbated in recent years by the Great Recession, the Bush tax cuts, and the wars in Iraq and Afghanistan — is indeed too big, but the deficit's short-term impact on the economy has so far been negligible, and pales in comparison to what would happen under default. Matthew O'Brien at The Atlantic explains:
[A] world without a debt limit increase is a world where the government has to stop paying 40 percent of its bills overnight. Everything from food stamps to defense spending to maybe even Social Security benefits would go unpaid. Now, Congress would presumably relent after a few weeks of this, but if it didn't, the economic damage would be mind-blowing. Here's the depressing math. The government spends about $3.6 trillion a year, which means going past the debt ceiling will suck about $1.4 trillion out of the economy over a year. Yet it gets worse. With the Fed already doing about as much as it will, the multiplier on government spending is almost certainty quite high — say 1.5 — so that $1.4 trillion less is more like $2.16 trillion less. To put that in perspective, that's -14.4 percent GDP growth on an annualized basis. Yes, that's a negative sign there. And this probably understates things, since we haven't even tried to account for the negative wealth effect from the inevitable market meltdown. [The Atlantic]
House Republicans are demanding a "dollar-for-dollar decrease in spending in the time period covered by the debt increase," reports Politico. That means a $1 trillion increase in the ceiling would, in an ideal House GOP world, result in $1 trillion in spending cuts — right now. Even some conservative writers are baffled by this suggestion. As Conn Carroll at The Washington Examiner writes:
[C]utting government spending by 44 percent right now would cause severe economic pain — pain for which the country would rightly blame Republicans…
[T]here is only so much spending that can be cut right now. House Republicans need to come up with a more realistic price for raising the debt limit, otherwise they are setting themselves up for certain failure. [The Washington Examiner]
If the House GOP really is as adamant as Politico reports, the Obama administration's best hope may be to negotiate a deal with Republicans in the Senate, and shame the House into allowing the bill to come to the floor. Or perhaps the White House may want to reconsider its decision to take the $1 trillion coin off the table.
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