5 Disasters To Expect If Congress Doesn’t Raise The Debt Ceiling
While the American economy has been chugging along through most of 2013 in a recovery that has been great for investors and painful for workers, the House GOP has been plotting.
House Budget Committee Chairman Paul Ryan (R-WI) convinced a cabal of powerful Republicans — which calls itself “the Jedi Council” — in February that battling over the debt limit right after the president was re-elected would be “suicide.” Instead, they would leave the sequester’s automatic cuts in place. In exchange for their patience, Ryan would introduce a new version of his already draconian budget that balances within 10 years while gutting Medicare, Medicaid and Obamacare, though the taxes that pay for them are all left in place. Then Republicans would prepare themselves to fight for Ryan’s cuts at the end of summer.
That fight is set to begin in September.
According to The National Review‘s Jonathan Strong, “…leadership will follow the original plan to force a debt-ceiling brawl.” Republicans recognize the incredibly shrinking budget deficit will make battles over the so-called debt limit far less frequent. So they’re more determined than ever to put the budget on a “path to balance” before the debt limit is hit in mid-October. To do this, they’re willing to cut anything — except, of course, tax breaks for the rich and corporations. By promising this, the House leadership hopes to get their caucus to keep the government funded after September 30 without a standoff they know they can’t win over Obamacare.
The problem for the GOP is the president has vowed not to negotiate over the debt ceiling and is unwilling to consider any large budget deal that does not include new revenues.
The problem for the president and America is that he has negotiated before over the debt limit in 2011, when the GOP threatened his re-election with a financial meltdown and a default on the U.S.’s debt. And if Republicans get the sense they’ve been tricked, it may become impossible for Boehner to present any debt limit deal that wouldn’t cost him his job.
Even toying with the debt limit in the aftermath of a financial crisis has costs. So as Republicans prepare to do exactly that, here’s five things to expect if this trillion-dollar game of chicken goes terribly wrong.
Stock Markets Crumble
During the last debt limit crisis, the Dow Jones average lost more the 2,000 points and shook markets around the world. Of course, market conditions affect millions of Americans’ retirement funds as the Baby Boomers begin retiring in numbers the nation has never seen. The volatility continued for weeks after the crisis as the United States’ credit rating was downgraded and the world questioned, for the first time, if America would pay its bills.
It Becomes Impossible To Fund Medicare, Social Security, Defense…
At the beginning of 2012, the Bipartisan Policy Center issued a report about the consequences of a debt default. They described an “X date” when the government would be unable to pay all of its bills on time. At that point, the government would have to raise taxes immediately or begin prioritizing how it pays its bills. That means a choice between sending seniors their Social Security checks, doctors their Medicaid disbursements, soldiers their paychecks and on and on and on. Even if we did manage to swing all this in some reasonable manner, as Rep. Michele Bachmann (R-MN) suggested we can, we’d still have to keep paying interest on our debt. Because if it even appears that we can’t pay our bills, suddenly the dollar begins to nosedive.
“We don’t know what will happen because this hasn’t happened before,” budget expert Stan Collender explains. “But if the debt ceiling isn’t raised and the government runs out of cash, at some point the president may decide he has to stop doing certain things, like paying government contractors, for example. That may not sound like such a big deal, but it is if someone in your family, or someone you know, is working for that contractor, or for the supplier of that contractor, or if that contractor is a big employer in your neighborhood or your state.”
Photo: Screenshot of Bipartisan Policy Center
Interest Rates Skyrocket, Exploding The Deficit, Demanding Higher Taxes
The greatest irony of threatening a debt default because the debt is so high is that a default would explode the deficit, which, as you can see, is shrinking nicely.
The last debt limit crisis is expected to cost taxpayers $19 billion in higher borrowing costs over the next 10 years. Right now borrowing costs are at an almost historic low. A default would explode interest rates and increase the costs we pay on our debt to unsustainable rates. This would lead to the second greatest ironic consequences: higher taxes. Unless Republicans are willing to make cuts beyond anything voters have been willing to tolerate, Congress will need to raise taxes to keep up with the inflated costs of borrowing.
Another Financial Crisis
The Bipartisan Policy Center predicts that within weeks of a default, the economy would shrink by 10 percent, which would be worse than the peak of the last financial crisis. Increased borrowing costs would lead to another foreclosure crisis and a nightmare for those with private student loans that cannot be dissolved, even in bankruptcy. An explosion in layoffs would again lead to an explosion in the costs of unemployment insurance, Medicaid and the Affordable Care Act, which would, of course, also explode the deficit.
Photo: Matthew Knott via Flickr.com
A Complete Meltdown Of The Republican Party
Okay, maybe this isn’t a disaster for anyone but the GOP and its friends.
In the summer of 2011, more than 70 percent of Americans did not approve of how House Republicans were handling the debt limit crisis. Nearly 50 percent said they would blame them specifically if a default actually happened.
President Obama’s approval ratings may be near his all-time low but they are generally about double those of House Republicans and triple those of Congress in general.
Congressional Republicans know they will be blamed for a default and — unlike President Obama — they actually have to run for re-election again. That’s why they’re trying to come up with an escape plan. Senate Minority Leader Mitch McConnell (R-KY) has previously proposed a plan that would allow Republicans to vote against raising the debt limit but allow the president to raise it anyway. This way they get to blame Obama and not actually repeat the legacy of George W. Bush, which includes destroying the economy, increasing the deficit and making tax increases necessary.
Or Republicans can risk disaster again, knowing the president loses the moment he begins to negotiate.
Photo: amarine88 via Flickr.com