GOP-Tea Party Play Chicken With U.S. Credit, Courting Catastrophe

Risking catastrophe to score political points in a premeditated spasm of hypocrisy and recklessness not seen since the Bush-Cheney GOP started three wars and funded them with tax cuts for the Super-rich. Will the idiot wind subside as markets tremble? … When George W. Bush was President, Republicans regularly voted to raise the debt ceiling seven times

By Faiz Shakir, Benjamin Armbruster, George Zornick, Zaid Jilani, Alex Seitz-Wald, Tanya Somanader, and Pat Garofalo in The Progress Report

Earlier this month, Treasury Secretary Tim Geithner warned Congress that the U.S. will, in the coming months, reach its legal debt limit unless members vote to raise the debt ceiling. “Never in our history has Congress failed to increase the debt limit when necessary,” Geithner wrote. “Failure to increase the limit would be deeply irresponsible. For these reasons, I am requesting that Congress act to increase the limit early this year, well before the threat of default becomes imminent.” Geithner’s predecessor, Henry Paulson, agreed with the necessity of raising the debt limit long before this political controversy, saying that it is “vital to protect America’s creditworthiness, and therefore I’m confident Congress will act to increase the debt limit well before it is reached.” The U.S. Congress first imposed a debt ceiling in 1917, and has raised the debt limit 74 times since March 1962, according to the Congressional Research Service, with ten raises occurring after 2001. However, a growing number of Republicans have made it clear that they intend to play chicken with the debt ceiling, risking the credit worthiness of the United States in order to score political points or extract demands from the Obama administration. “The American people will not stand for such an increase unless it is accompanied by meaningful actionby the president and Congress to cut spending,” said House Speaker John Boehner (R-OH). But by playing games with the debt ceiling, the GOP is inviting a variety of harmful consequences that come with even hints that the U.S. might default on its debt.

HOSTAGE TAKERS:  When George W. Bush was President, Republicans regularly voted to raise the debt ceiling with little debate. In fact, during Bush’s presidency, the debt limit was raised seven times, including in 2006, when it was raised with the support of 52 Republican senators. Yet, as OpenCongress’s Donny Shaw notes, there was a “sudden drop off in Republican support for raising the debt ceiling as soon as Obama took office. A little number-crunching shows that under Bush the Republicans provided, on average, 39 of the 50 votes that were generally needed to raise the debt ceiling. But under Obama, the Republicans have provided only 1 vote on average each of the three times the Senate has voted on it.” This is by no means only a Republican phenomenon, of course, as Democrats voted in large blocks against the debt increases of 2003 and 2004, and even 2006. But what is different this time is that Republicans are demanding concessions from the Obama administration in return for what used to be a routine task, and many members have explicitly said that they will not support an increase at all. Sen. Lindsey Graham (R-SC), for instance, said that he won’t vote to raise the debt ceiling unless regressive cuts to Social Security are adopted. Sen. Rand Paul (R-KY) wants the U.S. to balance its budget “from here on after ” in return for his vote on the debt limit, which would entail 44 percent cuts to every single government program this year. A slew of Republicans from both chambers want to begin the process of implementing a balanced budget amendment to the Constitution in exchange for agreeing to raise the limit. House Budget Committee Chairman Paul Ryan (R-WI), meanwhile, asked for unspecified “fiscal controls.” “We do not want to just have some naked debt ceiling increase,” Ryan added.

SHAKING FINANCIAL MARKETS: However, the same Republicans who are making demands in return for raising the debt ceiling freely admit that failure to raise it is simply not an option. “Does it have to be raised? Yes, you can’t not raise the debt ceiling,” Ryan said. Graham added, “Default is the unworkable solution, or the alternative, I guess I’d say — the unworkable alternative.” “Let me tell you what’s involved if we don’t lift the debt ceiling: financial collapse and calamity throughout the world. That’s not lost upon me,.” As David Min, Center for American Progress Associate Director for Financial Markets Policy, wrote, “The financial markets are on edge today, with U.S. Treasury bonds being the safe haven for most investment capital. Refusing to raise the debt ceiling would recklessly disrupt the sale and purchase of new Treasury bonds, and could potentially cause a run on outstanding Treasurys as well, as investors sought other investments. This could have catastrophic consequences for our economy as well as the economic stability of the rest of the world.” As Bruce Bartlett, former economic adviser for both President Reagan and President George H.W. Bush, explained, “U.S. bonds have been the gold standard, with zero risk of default. You introduce even the tiniest little bit of doubt into the minds of ultraconservative investors, and that’s potentially disastrous.” Analysts at Morgan Stanley noted that a default threat in the mid-90’s led to a “significant move in the dollar and a rise in Treasury bond yields.”

SHUTTING DOWN GOVERNMENT: If the debt limit is reached, the government is forced to move to a purely cash-flow budget, paying bills with only the tax revenue that comes in. Interest payments on the debt would get paid first, but what is the order of payment after that? Government activities that could fail to be funded range from Social Security and Medicare to military actions in Iraq and Afghanistan. In 1995-96, when House Republicans, led by then-House Speaker Newt Gingrich, refused to raise the debt ceiling for a short time, it caused “two temporary shutdowns of all ‘nonessential’ federal government activities, including a cessation of toxic waste cleanups, disease control activities, and a suspension of many law enforcement and drug control operations,” ultimately costing the U.S. taxpayer more than $800 million. The Clinton Treasury Department was required to employ some creative accounting — “including a temporary use of retirement fundsfor former government employees” — to stave off even worse outcomes. Analysts at Deutsche Bank have found that such efforts would not work as well today, and the government would “not be able to stave offa government shutdown (or possible suspension of bond payments) for long” if the debt ceiling isn’t raised. But still, some Republicans, such as former Minnesota governor Tim Pawlenty (R), have said this is the routeCongress should choose. As Austan Goolsbee, chairman of the Council of Economic Advisers put it, “If we get to the point where we damage the full faith and credit of the United States, that would be the first default in history caused purely by insanity.”