With the federal debt clock ticking loudly, the Obama Administration and congressional Republicans are pressing for a budget deal to raise the debt ceiling and avert the first default on U.S. debt in history. A substantial majority of Washington budget and policy experts surveyed by The Fiscal Times predicts the negotiators will beat the August 2 deadline set by Treasury Secretary Timothy Geithner.
“They will definitely work out a deal because the consequences [of not acting] are too unknown and too ominous,” said Ron Bonjean, a Washington policy strategist and former spokesperson for top congressional GOP leaders.
But many experts said that conservative Republicans, including Sarah Palin and Sen. Pat Toomey, R-Pa., are wrong – and reckless – to assert the government could easily weather a default on the government’s debt. They do not agree that Geithner and Federal Reserve Board Chairman Ben Bernanke have exaggerated the economic and budgetary consequences if Congress fails to act in time. Palin, Toomey and others conservative lawmakers and Tea Party activists claim the Treasury can rearrange its spending priorities to focus on paying off the interest and principal on the debt to China and other creditors while cutting back on government spending and entitlement programs to keep the government afloat.
“It is a sign of our dysfunctional politics that Republicans are willing to threaten another global financial crisis to advance their tax and spending agenda,” said Thomas E. Mann, a congressional scholar with the Brookings Institution. “One of our great strengths is the perceived security of our government bonds. In the end, I believe (and pray) that the Republicans will not shoot the hostage they have taken after failing to garner their ransom.”
George Hager , a USA Today editorial writer and Fiscal Times contributor, laments that: “There’s a virulent know-nothingism about the debt that seems utterly unlike any of the partisan posturing that traditionally accompanies these votes. Maybe members of Congress are just pretending there’s no real urgency as a way to gain bargaining power. But an alarming number of voters appear to believe them.”
By a vote of 22 to six, The Fiscal Times’ panel of experts predicted a resolution of the dispute before the August deadline. Some said that a short-term extension of the Treasury’s borrowing authority might be necessary before a final deal is hammered out. But the vast majority said it would be unthinkable for Congress to jeopardize the nation’s AAA credit rating by allowing a default. Three credit agencies—Standard & Poor’s, Fitch and Moody’s--have already warned the U.S. that a debt default and inaction on lowering the deficit would lead to a downgrade of the nation’s credit rating.
“Aside from making us look like a banana republic or the state of Illinois, it would be nuts politically,” said Rudy Penner, a former director of the Congressional Budget Office, now with the Urban Institute. “Are we really going to give priority to paying interest to the Chinese while we stiff our own citizens who are owed money by the Federal government?
“It would be a disaster if we defaulted if for even for a day,” said G. William Hoagland, a former Senate Republican budget policy adviser. “The risk premium hit (even a couple of basis points) would be built into all future interest rates. The government's credit rating would be downgraded -- if not permanently at least long enough to raise future question with our creditors. It would come at exactly the wrong time as the fledgling economy is trying to take hold.”
Republican leaders, including House Speaker John Boehner of Ohio, House Majority Leader Eric Cantor of Virginia, and Senate Republican Leader Mitch McConnell of Kentucky are pressing the Obama administration for major spending cuts of as much as $2.5 trillion over the coming decade and budget enforcement provisions in return for GOP support for raising the debt ceiling by $2 trillion. A June 5th Washington Post/ ABC News survey showed that 52 percent of adults believe the deficit should be reduced by spending cuts, while 39 percent believe it should be cut by a combination of spending and tax cuts.