Debt Limit Madness

By :: July 14th, 2011

Let me see if I have this right: Senate Republican Leader Mitch McConnell (R-KY) has effectively embraced the debt limit plan first offered months ago by President Obama. Under the McConnell/Obama scenario, Congress would extend the government’s borrowing authority through next year without agreeing to a dime’s worth of spending reductions or tax increases.

As the deadline for action nears, the partisan rhetoric heats up, and the consequences of Congress’s failure to increase the debt limit become clearer, senators of both parties seem to be climbing aboard McConnell’s do-nothing-and-get-out-of-town bandwagon. But the tea party House Republicans are spitting mad. And Obama, who senses new political advantage on the deficit issue, is publicly cool. Somehow, the president, who spent his first two-and-half years in office studiously ignoring the deficit, has now become Fiscal Hawk-in-Chief.  

McConnell’s proposal is devilishly complicated, with its multiple congressional votes, supermajority requirements and, perhaps, creation of another bipartisan deficit reduction panel (oh, the forests that give their lives for budget commissions).

Why would McConnell, who a week ago was demanding steep spending cuts as his price for extending the debt limit, now abandon the field without getting any reductions at all? Mostly, I think, because the tea party is scaring him half-to-death. As he candidly acknowledged yesterday, McConnell fears a default would destroy the GOP brand.

But the veteran lawmaker also seems to have recognized the severe economic consequences of the government defaulting on its obligations. In a new report, the Bipartisan Policy Center does a careful day-by-day cash flow analysis of what would happen if the government exceeds its borrowing authority on Aug. 2. And the results are frightening.

From Aug. 3-31, the government would have to reduce spending by $134 billion. That is to say, it would pull $134 billion out of the economy in just 29 days—more than 10 percent of monthly GDP.

The economic effects at a time of 9 percent unemployment would be catastrophic, even if the bond market did not demand higher interest rates on Treasury debt—which it very likely would.

The BPC looked at what would happen if the government tried to preserve its bond rating by paying the $29 billion in interest it will owe on Treasury securities in August, and prioritized the rest of its spending. You might call this the Bachmann model of governing.

Such a step would leave only about $143 billion to pay $277 billion in non-interest bills. Let’s say Obama paid Social Security, unemployment, and veteran’s benefits, met the military payroll, and kept the courts and the FBI running. Those programs alone would take up about $70 billion, leaving only $73 billion to run the rest of government.

With those remaining funds, Washington would have to make some exceedingly unpleasant choices: It could pay doctors, hospitals, nursing homes, and home health agencies what it owed for Medicare and Medicaid services, but that would cost $50 billion and leave just $23 billion to pay all other bills—everybody from defense contractors to senior day care center operators to disaster relief. And keep in mind that these are for goods and services the government has already bought.

Sure, McConnell sees some political advantage in forcing Obama and the Democrats to increase the debt limit unilaterally (I can see the attack ads now). But mostly, he seems very worried about the real world consequences of a fiscal train wreck in part of his own making. And it looks as if he’s looking for a way to stop the locomotive.

8Comments

  1. Gerhard Randers-Pehrson  ::  7:35 pm on July 14th, 2011:

    How much could we save by not paying any part of the legislative branch?

  2. Michael Bindner  ::  9:19 pm on July 14th, 2011:

    The other option is the Bartlett-Epps plan, but Obama would rather not act unilaterally.

    Avoiding the big deal is probably wise at this point. Until the consequences of health care reform fully play out, dealing with Medicare and Medicaid is premature – and until these are dealt with, dealing with Social Security is premature.

    The debate has been ill served by the advocacy sector. It should have stressed that no action is necessary to let the Bush/Obama tax cuts expire. Until the GOP comes to that realization, there will be no deal anyway – likely a good thing. I suspect they know, but if they acknowledged it, they would have to actually deal. Just like Obama would have to do if he admitted that health care reform is likely to gut private insurance – although it is not clear whether he is being caging or is just in denial.

    Of course, another baby boom is the real answer to the aging crisis – so tax reform should not be done for deficit reduction but to instead give more money to families and less administrative burden to the poor and middle class (while reducing the size of the IRS). THAT could provide compromise – or at least provide the spectacle of pro-life Republicans arguing with the deficit hawks and the libertarians. Such a radical change, however, should be prefaced with an election.

    Defense offers a big source for cuts, however we are at war and even with war spending held constant, such cuts in modernization would sink the recovery unless some of them were offset by really big initiatives in the Space program.

    Expect a Senate deal in the dead of night on Friday, followed by House action soon after – either with modest reforms or the whole McConnell package.

  3. some guy  ::  12:16 pm on July 15th, 2011:

    “Somehow, the president, who spent his first two-and-half years in office studiously ignoring the deficit…”

    You’re kidding, right? If this is how “experts” see it, then why should Obama have even bothered instituting cost controls in the ACA? Why bother including cuts in his proposed budget? Why bother freezing pay for federal employees?

  4. The Latest Ideas on What Happens If the Debt Ceiling Isn’t Raised « Tax Australia  ::  2:45 pm on July 15th, 2011:

    […] So what happens if Washington can't get it done by August 2? Bad things.  Tax Policy Center's Howard Gleckman looks at the Bipartisan Policy Center's report on the Treasury Department's post-August 2 […]

  5. What Happens If We Don’t Raise The Debt Ceiling? | LesRiches  ::  7:14 pm on July 15th, 2011:

    […] Gleckman runs the […]

  6. Michael Bindner  ::  9:40 am on July 16th, 2011:

    not much. not much at all

  7. Tom  ::  9:54 pm on July 18th, 2011:

    The president has a plan? In writing? Could you provide the link to this plan? The only plan Obama has presented was defeated 97-0 in the senate.

  8. Republican divisions help President Obama « Politics on Toast  ::  12:23 pm on July 19th, 2011:

    […] in direct contradiction to what President Obama said. It is certain that a U.S. default would be apocalyptic with world markets going into free fall and the interest on US debt soaring, while the ability of […]