There is a long history, dating to the Smoot-Hawley Tariff of 1930, of Congress ignoring self-important proclamations from dozens of eminent and not-so-eminent economists. So it is unlikely that a new letter from 235 economists urging Congress to increase the federal debt ceiling without "attaching drastic and potentially dangerous reductions in federal spending" will much affect the course of events. But the letter, organized by two liberal think tanks, does offer an instructive window on the peculiar budget politics that might prevent Congress from raising the debt ceiling from its present $14.3 trillion.
Let it be said that knowledgeable observers across the political spectrum think this would be a calamity. Here's Treasury Secretary Timothy Geithner in a letter to Sen. Michael Bennet (D) of Colorado (May 13): "Failure to raise the debt limit would force the United States to default. ... This would be an unprecedented event in American history. A default would inflict catastrophic, far-reaching damage on our nation's economy." Or consider the comment of Keith Hennessey, an economic adviser to President George W. Bush, on his blog (April 11): "All the financial market and economic policy types (including me) are terrified. ... The worst case scenarios are really, really bad."
At his Wednesday news conference, President Obama echoed similar fears. What would happen?
Well, the government couldn't borrow to pay its bills. The Bipartisan Policy Center has just done a study of a hypothetical default on Aug. 2, the day the Treasury says it needs new borrowing authority. After examining government cash flows for August in 2009 and 2010, the study estimated that federal spending for this August would total $306.7 billion against tax revenues of $172.4 billion, leaving a monthly deficit of $134.3 billion. The shortfall means the Treasury could honor about 56 cents on every dollar of government obligations.
No one knows who would get paid and who wouldn't. Estimated monthly commitments for August include $29 billion in interest on Treasury securities, $49.2 billion in Social Security benefits, $50 billion in Medicare and Medicaid payments, $34.6 billion in defense spending (including military pay) and $12.8 billion in unemployment benefits, says the study. Shortfalls would force Treasury into "picking winners and losers." There would be a "public uproar."
Almost certainly, interest rates on outstanding Treasury securities would rise, and that would (as Geithner warns) drive up rates on "mortgages, car loans, student loans, credit cards, business loans, and municipal bonds." Rating agencies, having already threatened to downgrade U.S. debt, would probably do so. This would impair the value of Treasury securities as capital for banks and other financial institutions. There would also be a "massive economic shock," a Standard & Poor's analyst warned this month, as the budget swung from a deficit equal to 9 percent of gross domestic product to zero. Read: probable double-dip recession.
Considering this, you might think that raising the debt ceiling would be a snap politically. Who'd want to turn the United States into a banana republic? In an ideal world, Congress would routinely increase the debt ceiling. But in the real world, Republicans have tied support for an increase to reductions of long-term budget deficits. This is hardly irresponsible, and to see why, it's only necessary to examine the economists' letter, which was organized by the Economic Policy Institute and the Center for American Progress.
The truth is that most liberals have no stomach for cutting spending, especially on the Social Security and Medicare programs that dominate the nation's long-term budget problems. There's a legitimate argument over the size and timing of spending cuts. It may well be, as the letter contends, that too many cuts too soon would imperil a "fragile" economic recovery. But the letter doesn't say one word about ever cutting spending; it doesn't mention that huge long-term budget deficits might pose an economic threat (a position held by many economists); it doesn't suggest that Social Security and Medicare benefits might have to be curbed.
For many liberals, the economy's present weakness is just another excuse to avoid facing these issues forever. The Republicans have linked the debt ceiling and changes in government spending, because — without some forcing event — it's impossible to have a negotiation. Republicans are correctly criticized for making any tax increase (no matter how small or how dubious a tax break withdrawn) a reason to oppose a higher debt ceiling. But long-standing Democratic intransigence over curbing social spending is the underlying reason why the nation is perilously playing debt ceiling roulette.