By Mike Konczal

Another Reason To Kill The Debt Ceiling: Conservative Think Tanks’ Responses To Default

December 6, 2012 1:46 pm Category: Memo Pad 13 Comments A+ / A-

House Republicans are looking to weaponize the debt ceiling again, while the Obama administration is trying to make removing the threat of default part of any agreement.

Here’s one reason why the debt ceiling needs to go: the conservative intellectual infrastructure cheered on a potential default. I had imagined that there would be a good cop/bad cop dynamic to the right. Very conservative political leaders would be the bad cop, saying that they weren’t afraid to default on the debt, while conservative think tanks would play a version of the good cop, warning of the dire consequences of a default for the economy if their bad cop friend didn’t get his way.

For instance, here’s bad cop Sen. Pat Toomey (R-PA) saying that the markets “would actually accept even a delay in interest payments on the Treasuries,” especially “if it meant that Congress would right this ship, address this fiscal imbalance, and put us on a sustainable path, and that the bond market would rally if it saw we were making real progress towards this.” Missing interest payments is fine; in fact, it is great for the country if it is used to pass the Ryan Plan.

Financial analysts, to put it mildly, disagreed. JP Morgan analysts wrote that “any delay in making a coupon or principal payment by Treasury would almost certainly have large systemic effects with long-term adverse consequences for Treasury finances and the US economy.”

Here’s where the think tanks are fascinating. You could imagine them saying “our partner Toomey is nuts, we can’t control him, and you’d better do what he says or there’s going to be real damage.” But that’s not what they did. It’s best to split the work they did on the debt ceiling in two directions:

1. Technical Default Ain’t No Thang. The first is arguing, like Toomey, that a “technical default” wouldn’t matter, and in fact it could be a great thing if the Ryan Plan passed as a result. How did James Pethokoukis, then of Fortune and now of AEI, deal with a Moody’s report arguing a “short-lived default” would hurt the economy? Pethokoukis: “I guess I would care more about what Moody’s had to say if a) they hadn’t missed the whole financial crisis, b) didn’t want to see higher taxes as part of any fiscal fix and c) if they made any economic sense.” Default doesn’t matter because Pethokoukis doesn’t want taxes to go up, and there’s no economic sense because of an interview he read in the Wall Street Journal.

Others went even further, arguing that the real defaulters are those who, um, don’t want to default on the debt. Here’s the conservative think tank e21 with a staff editorial arguing that “policymakers need to stay focused on the real default issue: whether the terms of the debt limit increase this summer will be sufficiently tough to ensure that the nation’s debt-to-GDP ratio is stabilized and eventually sharply reduced.” All these people who want a clean debt ceiling increase are causing the real default issue. As someone who used to do a lot of credit risk modeling, this is my favorite: “Indeed, those demanding the toughest concessions today actually have a strong pro-creditor bias.” S&P disagreed with whoever wrote that editorial and increased the credit risk (downgraded) based on the threat of this technical default.

The Heritage Foundation wrote a white paper saying that you could just “hold the debt limit in place, thereby forcing an immediate reduction in non-interest spending averaging about $125 billion each month,” and that “refusing to raise the debt limit would not, in and of itself, cause the United States to default on its public debt.” Dana Milbank noted that these kinds of shuffling plans would still leave the government short and likely cause a recession. Milbank: “Without borrowing, we’d have to cut Obama’s budget for 2012 by $1.5 trillion. That means even if we shut down the military and stopped writing Social Security checks, the government would still come up about $200 billion short.” The Cato Institute also jumped in with the technical default crowd here.

But that was the reaction from the number-crunching analysts. What about the bosses?

2. Civilization Hangs in the Balance of the Debt Ceiling Fight. Here’s the president of AEI, Arthur C. Brooks, in July 2011: “The battle over the debt ceiling…is not a political fight between Republicans and Democrats; it is a fight against 50-year trends toward statism…No one deserves our political support today unless he or she is willing to work for as long as it takes to win the moral fight to steer our nation back toward enterprise and self-governance.”

Even better, the president of The Heritage Foundation, also in July 2011, compares Democrats to Japan during World War II and then argues: “We must win this fight. The debate over raising the debt limit seems complicated, but it is really very simple. Look beyond the myriad details of the awkward compromises, and you see an epic struggle between two opposing camps….Congress should not raise the debt limit without getting spending under control.”

So the the conservative intellectual infrastructure, which consumes hundreds of millions of dollars a year, looked at the possibility of a debt default and determined it was both inconsequential and also the only way to stop statism in our lifetimes. No wonder the time period around the debt ceiling in 2011 was such a disaster for our economy, killing around 250,000 jobs that should have been created. There’s no reason to assume all the same players won’t play an even worse cop this time around.

There’s no good reason for the debt ceiling, and now there are really bad consequences for its existence. Time to end it.

Mike Konczal is a Fellow at the Roosevelt Institute.

Cross-posted from Rortybomb

The Roosevelt Institute is a nonprofit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.

Another Reason To Kill The Debt Ceiling: Conservative Think Tanks’ Responses To Default Reviewed by on . House Republicans are looking to weaponize the debt ceiling again, while the Obama administration is trying to make removing the threat of default part of any a House Republicans are looking to weaponize the debt ceiling again, while the Obama administration is trying to make removing the threat of default part of any a Rating:

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Comments

  • http://www.facebook.com/people/Daniel-Jones/827014412 Daniel Jones

    Look, guys, in the time leading up to the elections, the Republicans said they were trying to protect voting by blocking dissenting voters.

    They defined compromise as having the other guy agree with them.

    They are “conservative”, as they will literally throw away good deals to have their backers keep all their money… and ours.

    OF COURSE they define everyone else as the defaulters as we commit the sin of disagreeing with them and actually working off fact and analysis as opposed to blind faith and ass-talk.

  • Sand_Cat

    Maybe people who commission papers from these clowns should start defaulting on their payments, citing these rationalizations.

  • http://www.facebook.com/dominick.vila.1 Dominick Vila

    The sudden focus on the debt ceiling by people who did not hesitate to raise it 18 times when Ronald Reagan was president is the epitome of cynicism, and one of many reasons for the losses suffered by the GOP on 11/6. The issue is not whether or not accumulation of debt should be reduced, of course it should, but how to do it in an orderly manner without impacting our credibility in global markets, affecting our credit ratings and ability to borrow, affecting foreign and domestic investment, and impacting our economic recovery.
    The fiscal cliff solutions that are likely to be agreed upon within the next two weeks will not produce enough positive results to preclude raising the debt ceiling two months from now. Those solutions, and hopefully additional solutions to be implemented during the remainder of this fiscal year, will have a long term positive effect on our fiscal solvency, credibility, and our economy, but that is bound to happen slowly and will not be apparent until the start of the next fiscal year or even later.

  • 13observer

    no “debt ceiling” in Greece……………. it’s working ok for them………… I think???????????
    try this with your checking account.

    • SaneJane

      Comparisons to Greece are ridiculous. Greece is monetarily non-sovereign and must obtain it’s currency from outside the country. The US on the other hand is monetarily sovereign and the sole creator of dollars in the world. The “debt ceiling” does not control spending and should be abolished. How does “debt ceiling” apply to a personal checking account? You cannot create dollars so you are like Greece.

      • 13observer

        nice try professor, but no one is buying your liberal “snake oil”!

    • http://www.facebook.com/dominick.vila.1 Dominick Vila

      The USA is not Greece. The USA has the largest GDP in the world, our economy dominates the global market, our military is second to none, and we can afford to pay for our substandard social programs if we wanted to. Try a more rational argument next time.

    • TheSkalawag929

      Simplistic thinking on a subject magnitudes above your capacity to understand.

    • http://www.facebook.com/warren.nicholson.77 Warren Nicholson

      Greece is doing exactly what the neocon want us to do and it is not working any better then trickle down did.

  • http://profile.yahoo.com/C22AJV5GXSF4QE3YJY5IGBTULU TSB

    Having a debt ceiling cap is like waiting for the sky to fall and makes no more sense than a wage cap on the collection of social security. It is always adjusted upward and only the social security hasn’t been raised enough to cover the excess in fund use, that’s why the caps need to be abolished, removing the political game playing that arises over their function.

  • adriancrutch

    The republicans are trying desperately to refloat the TITANIC. Which was the bush era where they ran cheerfully naked around the fire. Now they wear their other mask,the gollum type amokness that shows who they really are=Actors in a duallist play that just the rich watch play out and change the pieces as the players falter and are snubbed out by their illogical money gods. Pretty sad! Gruesome to bear witness to. LOL!

  • http://www.facebook.com/jdlogspook Jd Logsdon

    Daniel, that is funny, since you are skewed 180% about the party that lies, cheats and steals…

  • http://profile.yahoo.com/H2RYK7EC3VPEM7DBXCKSJAQXIA Andrew

    BONER AND COMPANY READ OLD NEWS WHEN GINGRICH TRIED THIS TACTIC AGAINST CLINTON, HE TOLD THEM TO SHOVE IT……….DIDN’T WORK………..AND IF OBAMA WAS SMART ………….HE TOLD BONER, RYAN, CANTOR,LIMBAUGH, ROVE AND NORQUIST……………GO AHEAD AND DO IT………………..I BELIEVE THAT’S WHEN THE DEMOCRATS RETAINED BOTH SIDES OF CONGRESS AFTER THAT. IF THE REPUKES THINK THE TEABAGGERS CAN SAVE THEM …….THEN DO IT AGAIN…………….

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