Hitting the debt ceiling would be disastrous for the U.S. economy, at least according to economists, government officials, and the CEOs of major corporations.
Last week, the Treasury Department claimed that defaulting on its debts could send the United States into another recession, perhaps even worse than the Great Recession of 2007-09.
President Obama, speaking at a press conference on Tuesday, compared default to a "nuclear bomb" that would "undermine the world's confidence in America as the bedrock of the global economy." Oh, and it would "permanently increase our borrowing costs," sinking the U.S. deeper into debt, Obama warned.
Yet there is one group that is conspicuously unfazed by the prospect of financial Armageddon: House Republicans. And the deadline to raise the debt ceiling, Oct. 17, is coming fast. Why are they so sanguine? Here, four theories:
1. They don't think it will actually hurt the economy
Not everyone in the GOP is convinced that a default would be all that bad. Indeed, at least one member of Congress is advocating that the U.S. take precisely that course.
"I think, personally, [not raising the debt ceiling] would bring stability to the world markets," Rep. Ted Yoho (R-Fla.) recently told The Washington Post. His reasoning? Financial markets would be relieved that the United States has finally gotten serious about spending, and is no longer "running 100 miles an hour toward socialism."
It should go without saying, but Yoho is not even remotely correct.
2. They think the government can just prioritize its debts
This is the pseudo-wonky argument used by conservative groups like the Heritage Foundation. The idea, basically, is that the United States can make interest payments to foreign creditors and write Social Security checks, while delaying other payments until Congress comes to an agreement on the budget.
"There's always revenue coming into the Treasury, certainly enough revenue to pay interest," says Rep. Justin Amash (R-Mich.). "Democrats have a different definition of 'default' than what we understand it to be. What I hear from them is, 'If you're not paying everything on time that's a default.' And that's not the traditionally understood definition."
The problem is that it has never been tried before. Indeed, nobody is even sure it's legal. Furthermore, prioritizing debt involves huge logistical challenges. The Washington Post's Brad Plumer explains:
When everything is running smoothly, the Treasury Department typically receives around two million invoices a day from various agencies… The Treasury's computers make sure the figures are correct and then authorize the payment. This is all done automatically, dozens of times per second.
The Treasury Department maintains that it has no ability to pick and choose which bills to pay if it's short of cash… Under this view, if Congress fails to lift the debt ceiling, the U.S. government will only have money to cover about 65 percent of its bills. Some payments will simply fail to clear. [Washington Post]
Finally, how bond markets react to a breach of the debt ceiling is entirely out of the Treasury's hands. If bondholders like China decide to dump U.S. Treasuries as if they're high-risk bonds, no one can stop them from doing so — which would result in a massive spike in U.S. interest rate payments, as well as the unraveling of a global financial system that is tied to the U.S. bond market.
3. They think Democrats will cave
Obama has explicitly told Republicans that he isn't willing to negotiate on the debt ceiling.
Yet there are still some Republicans who think the president will do just that. "The public awakening to what is happening here is going to ultimately compel the Democrats to negotiate and compromise," Rep. Tom McClintock (R-Calif.) told National Review on Tuesday — after two weeks of polls that steadily show a strong majority of voters blaming the GOP for the shutdown debacle.
The GOP's insistence that it is "winning" the argument bears all the hallmarks of the conservative echo chamber that surrounded the 2012 election, which left Republicans shocked when Obama won a second term over Mitt Romney. They might be equally surprised when the mid-October deadline hits and the White House hasn't repealed ObamaCare.
Still, at least there is some precedent to back this theory: Obama did allow Republicans to use the debt ceiling as leverage in budget negotiations in 2011, which resulted in the much-maligned sequester. Also, plenty of smart observers are arguing Obama will have to give the GOP something to help the party walk back from the ledge, even though it will likely be far more modest than what the Tea Party expects.
4. Wall Street isn't freaking out
During the financial crisis in 2008, when an intransigent Republican caucus helped scuttle a bill to rescue Wall Street, the Dow Jones tanked, leading then-Treasury Secretary Hank Paulson to literally beg on his knees for Democratic support from Speaker Nancy Pelosi (D-Calif.).
In the debt ceiling crisis of 2013, however, markets have been eerily calm, putting no pressure on Republicans to soften their stance.
The reason is that investors don't believe Congress has grown so irresponsible that it would actually do such a monstrously self-destructive thing. And therein lies a big problem, says Andrew Ross Sorkin at The New York Times:
Here’s the perversity of Wall Street’s psychology: The more Wall Street is convinced that Washington will act rationally and raise the debt ceiling, most likely at the 11th hour, the less pressure there will be on lawmakers to reach an agreement. That will make it more likely a deal isn’t reached. [The New York Times]
If the big banks don't speak up, it could be their turn to get down on bended knee.
THE WEEK'S AUDIOPHILE PODCASTS: LISTEN SMARTER
- How academia's liberal bias is killing social science
- How to be the most productive person in your office — and still get home by 5:30 p.m.
- Hey, bosses: Stop giving bonuses to your employees
- 10 things you need to know today: December 18, 2014
- Why torture doesn't work: A definitive guide
- Could better U.S.-Cuban relations thwart baseball's human smuggling problem?
- 43 TV shows to watch in 2014
- Dick Cheney's America is an ugly place
- Capitalism isn't a cure-all for Cuba
- The Hobbit: A disappointing set of movies, but a worthy set of prequels
Subscribe to the Week