This article first appeared in the St. Louis Beacon, July 9, 2011 - The current debate over raising the debt ceiling has barely attracted notice in the mass media. More TV time has been devoted to the Casey Anthony murder trial this summer and more of the public knows what the Anthony verdict was than can tell you what the debt ceiling is and why it's important.
Within a month, the public's memory of the trial will fade. But the debt ceiling crisis will either be resolved or we will find ourselves in a worse financial mess than the one that has preoccupied us since 2008.
In this article, I will briefly outline the situation we find ourselves in and why dithering for partisan reasons is a certain recipe for economic disaster.
The facts are simple enough. On Aug. 2, the federal government will reach its borrowing limit, which is currently capped at $14.3 trillion. This basically leaves the U.S. with two options if nothing gets done before Aug. 2:
- it can default on its debt (a very bad idea)
- or it can stop paying its bills (above what it collects in taxes) except for its interest on its debt.
Washington is forced into this corner because Congress, in 1917, passed the Second Liberty Bond Act, which imposed a statutory debt limit. In theory, the debt limit is supposed to hold the federal government to account for its spending because Congress and the president must take action to allow more borrowing to go forward.
This situation did not have to happen for several reasons.
First, virtually no other country has a debt ceiling. Bruce Bartlett, a former Reagan adviser and Fiscal Times columnist, said in an interview in the Atlantic: "There's no need to have a debt ceiling, and there's no evidence that the debt limit has limited spending. It serves no purpose except to look as if they're being fiscally responsible ['Hey look, I voted against raising the debt limit!'] While they act fiscally irresponsible ['Also, I'm voting to cut taxes by $4 trillion']."
Second, the Treasury Department has never been in a situation where the debt limit has been reached and it is unable to fulfill its obligations. The United States has, up to now, always raised the debt limit long before debt reached the limit. This time is different, however, because of the next reason.
Third, previously, fear of economic catastrophe has been sufficient to bring Democrats and Republicans to the negotiating table long enough to raise the limit. This time, however, the GOP is dominated by fiscally conservative tea party types, who view the 2010 election as a vindication by the voters of their hard-line stance on the budget and the national debt. They see using the debt limit as their best means to bring down long-term spending and the debt.
Of course, the consequences of not raising the debt limit are still the same no matter why it isn't raised.
The results of allowing the Aug. 2 deadline to pass would be felt on two fronts, both of which would have a direct and lasting negative impact on the economy.
First, government spending and services would immediately need to be cut. The $125 billion a month the federal government would need to cut would affect everything from homeland security to Social Security. In addition, to make the deep cuts necessary just to pay its creditors, the federal government would need to layoff thousands of employees.
Second, defaulting on the debt would shake the financial sector to its foundation. There would be a collapse in the Treasury bond market leading to skyrocketing interest rates. Wall Street would register its displeasure by selling off Treasury bonds, assuming anyone would buy them. The long-feared double dip recession would become a reality as record interest rates deprive small business owners and homebuyers of needed capital.
Can this happen? It can, but hopefully it will not. I like to think that cooler heads will prevail. But history provides many examples where the previously unthinkable has happened.
Robert A. Cropf chairs the Department of Public Policy Studies at Saint Louis University.