A Limit to Their Insanity
Why Republicans will eventually vote to raise the debt ceiling.
House Speaker John Boehner says that Republicans need to see "trillions of dollars" in spending cuts in order for Congress to approve an increase in the federal government's debt ceiling. But framing the issue this way creates a major problem for Boehner: It will antagonize corporate America, one of the party's most important constituencies.
Focusing on the debt ceiling creates a political trap for Boehner and the Republicans. It is true that the Treasury will still be legally able to borrow money until early August. It is also true that whenever Republicans rattle their sabers about the debt ceiling, and threaten not to raise it, the bond market yawns and there is no significant impact on yields. If Republican threats were credible, any news that increased the likelihood of a problem with the debt ceiling would send Treasury bond prices down and yields up. This is not happening, because bond traders cannot imagine that the Republicans would be able—or even willing—to follow through.
After all, the consequences of failing to increase the debt ceiling would be catastrophic. The entire credit system in the United States—and in much of the rest of the world—is based on the notion that there is such a thing as a "risk-free asset," and that these assets are U.S. government securities. There is no provision in the Constitution to guarantee that the United States will always pay its debts, but the American Republic has proved itself for 200-plus years to be about as good a credit risk as has ever existed.
American fiscal resolve has been tested at least five times: at independence, in the war of 1812, during and after the Civil War, and in World Wars I and II. We can debate the exact fiscal pressures in each case, and precisely how various kinds of bondholders were treated, but the simple fact of the matter is that when the going gets tough, the United States pays its debts. At least in the near term, the chance that the United States will not service its debt is vanishingly small—perhaps in the same order of probability as a large meteor striking the earth.
Yes, there are big fiscal questions to be sorted out, including how much the government should spend and on what, as well as how much tax it should collect and by what means. There is also the vexing question of how much debt is too much. In a world where international investors (from both the private and official sectors) routinely wring their hands about U.S. fiscal deficits—and then go out and buy more U.S. government debt—who knows the answer?
Countries never default because they can't pay their debts; there are always ways to decrease expenditures or raise taxes. Countries default because their political systems bring them to the point where the people in power decide, for whatever reason, not to pay the government's debts. It is not difficult to identify who would bear what costs if the United States did not pay—or if it disrupted markets by not increasing its debt ceiling. Everyone who borrows or interacts with the credit system in any way would suffer a shock that would make the crisis of 2008 look small.
Among others, the U.S. corporate sector—big and small business—would be livid. To be sure, executives and entrepreneurs like to shake their heads over the current U.S. fiscal deficit. And some of them engage constructively in debates about the real issues: how to control health-care costs, prevent future financial crises, and end America's expensive foreign wars. But these are the issues for the 2012 presidential election, in which one hopes for debates that will set a more encouraging fiscal agenda for the next 20 to 30 years. How and when America's budget problems will be resolved is unknown, but U.S. fiscal history is encouraging: The republic has managed and survived crisis before.
Simply put, America will not score what is known in soccer as an "own goal" over the debt ceiling—and Boehner must know it. Symbolic gestures are to be expected, as with the threatened government shutdown earlier this year, which merely created fodder for political advertising by both parties. But any manufactured debt crisis now would deeply antagonize the corporate sector—and most of the electorate. In the wake of economic disaster, the party held responsible could be exiled from power for a generation.
The Republican leadership is making threats that are not credible. If President Obama's administration plays its hand well, the result will be a last-minute extension of the debt ceiling with no significant concessions. It is unclear how Boehner or anyone else would be able to portray that as a political victory.
This article comes from Project Syndicate.
Simon Johnson is a professor at MIT’s Sloan School of Management and the co-author of White House Burning: The Founding Fathers, Our National Debt, And Why It Matters To You.
Photograph by Chip Somodevilla/Getty Images.