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.
A small bipartisan negotiating team of House and Senate members chaired by Vice President Joseph Biden has been meeting since May 5 in search of a compromise. They vowed to pick up the pace this week in hopes of presenting the framework of an agreement to President Obama and congressional leaders by the end of the month. A big sticking point is whether the deal will include any increases in revenue – something the Democrats want but Republicans oppose.
David Stockman , the former Reagan administration budget director, predicted that the White House and congressional leaders would reach a “toothless” spending cut deal to avoid a default, but downplayed the significance of the Treasury officially defaulting on the debt.
“The U.S. government is already in de facto default because it has no coherent fiscal policy or prospect of adopting one,” he said. “The GOP is defaulting on the revenue that needs to be raised; the Congressional Democrats are dodging long overdue IOU's for entitlement reform. And commander Obama has utterly failed to take on the military-industrial complex and the $800 billion war and security budget that is utterly unjustifiable in the real world of 2011.”
Toothless or not, Ethan Pollack, a senior policy analyst at the liberal Economic Policy Institute, predicted that Congress will miss the deadline – and that the consequences will be significant and grow over time. “I think this is almost exclusively a function of internal House GOP politics,” he said. “Even if Boehner succeeds in getting a compromise through the House, it will inevitably include tax increases . . . This would set Boehner up for a quick coup, and Cantor would gladly step in. At the end of the day, I don’t think Boehner’s willing to risk his leadership position for the sake of true leadership, though I would love to be proven wrong.”
Others who say we are headed for a default crisis include: Robert D.Reischauer, president of the Urban Institute; Joseph White, a Case Western Reserve University public policy professor; David Francis, a Fiscal Times correspondent, Henry J. Aaron, senior fellow in economic studies at the Brookings Institution, and Rudolf Penner.
Geithner has been warning for months that failure to raise the debt ceiling would trigger an economic catastrophe, and early on said the Treasury could only forestall the day of reckoning until July 8, by utilizing a series of budgetary and financial maneuvers and gimmicks. But in early May, he announced that a greater-than-expected increase in tax revenue had extended the deadline by about a month, to August 2.
Larry Sabato, a University of Virginia political scientist who believes a deal will be reached in time, blamed Geithner for undermining public confidence in the Treasury projections by repeatedly moving back the deadline for default. “That encourages the negotiators to ask for some account-juggling at the last minute if they need extra time,” he said.
Several senior Democratic senators were annoyed with Geithner for extending the deadline, arguing that from a strategic standpoint, the earlier deadline created a sense of urgency for the two parties to reach a comprehensive deal. A Treasury spokesperson said that Geithner was merely trying to be as transparent and open as possible in making the estimate.
Palin, the 2008 Republican vice presidential nominee who is pondering a race for president next year, said recently on Fox News Sunday, “I don’t believe Tim Geithner as he cries wolf for the fourth time, now telling us that there is a drop dead date [for a default] and crisis will ensue.”
Robert Bixby , executive director of the Concord Coalition and one of the nearly two dozen experts who are discounting the possibility of a default, said “Negotiators will reach agreement before the deadline because neither side wants to risk the political blame for a possible default.” Bixby added, “Leaders on both sides, if not the rank-and-file, understand that they are playing with dynamite.”
But many of those predicting an agreement warn that the end game could be messy, and that negotiations may well spill over past the current deadline. Reischauer of the Urban Institute says he’s doubtful a budget deal will be struck by August 2, but that the negations “will be fast and furious, giving indications of progress.”
“Whatever results from these negotiations will be at best 1/3 of the whole enchilada,” Reischauer said. “A bit of substance, lots of promises, iced over with procedural innovations that, when the dust settles, won’t fully work. But that’s what we call success these days!”
Maya MacGuineas , president of the Committee for a Responsible Federal Budget, predicts the White House and Congress will agree to a short-term extension of the debt ceiling and then “muddle through for a few weeks.”
“Then, if they still haven’t lifted it-- crisis,” MacGuineas added.
A small handful of those surveyed, both conservatives and moderates, voiced skepticism about Geithner’s “the sky is falling” scenario if Congress misses the deadline, and argued that there would still be plenty of things that could be done to avert a true default on the debt.
“Failure to raise the debt ceiling should not be equated with default,” said Michael D. Tanner, a senior fellow at the libertarian Cato Institute. “The Treasury takes in more than enough revenue to pay principal and interest on U.S. government debt. What would be required, if we fail to raise the debt limit, is a prioritization of other spending, leading to drastic cuts in most government operations. That would be serious but not catastrophic.”
Veronique de Rugy , a senior research fellow at George Mason University’s market-oriented Mercatus Center, said that even if Congress and the White House fail to reach a deal in time, that won’t automatically result in the Treasury defaulting.
“There is a world between reaching the debt ceiling and defaulting on our debt,” she said. “The United States has enough expected cash flow (tax revenue) and assets on hand to avoid defaulting on its debt until at least the end of the current fiscal year in September, perhaps even longer.”
Conservative Fiscal Times columnist Liz Peek echoed de Rugy: “I don’t think the fall-out from the date passing would be horrific….The Treasury is taking in more money from the retirement system, for instance, to tide it over. That said, this would not be a shining moment for our crack legislators.”
Jodie T. Allen, senior editor of the Pew Research Center, added, “There are lots of things on which payment can be curtailed if not delayed entirely without major repercussion, including grants to states and payments to government contractors. While no doubt there would be some credit market reaction, after all the hoopla and dire prognostications and political posturing, the importance may well have been heavily discounted by the financial markets.”
But many others surveyed by The Fiscal Times viewed even a whiff of default as potentially calamitous.
John Berry , a veteran economic reporter and columnist at The Fiscal Times, cautions that failure to raise the debt ceiling by August 2 would trigger “a slow motion train wreck” that could cost taxpayers hundreds of billions of dollars in higher interest payments, hurt the already badly ailing economy and force the Treasury to choose between paying interest on government notes or issuing Social Security benefits.
“In other words, even without prioritizing payments, the first true default could well be on a politically explosive domestic obligation rather than on some piece of outstanding debt,” Berry said.”Or, it could be that Treasury won’t have the $30 billion needed for the August 15 interest payments. It’s impossible to know at this point.”
Steve Ellis, vice president of Taxpayers for Common Sense, said, “Missing the deadline would be more serious in the minds of investors and the world than it will be in actual fact. There are various tactics that could avoid a technical default, but the psychological impact that U.S. politicians couldn’t deal with our debts would send a financial shockwave around the world. What’s the old saying? ‘U.S. financial markets sneeze and the world catches cold.’”
“Fooling with the debt ceiling is very serious because of the uncertainty that it injects into international financing,” said Joseph Antos, a health care scholar with the American Enterprise Institute. “Bumping up against the limit has made our creditors more jittery. Default would confirm their fears and drive up interest rates.”
TFT SURVEY OF POLICY EXPERTS:
Will the government default on the debt?
Yes, we're headed for default (6)
Robert D. Reischauer, president of the Urban Institute
Rudy Penner, former Congressional Budget office director
David Francis, Fiscal Times correspondent
Joseph White, economics professor and Fiscal Times columnist
Ethan Pollack, senior policy analyst with the Economic Policy Institute
Henry J. Aaron, senior fellow in economic studies at the Brookings Institution
No, there won't be a default (22)
David Stockman, Reagan administration budget director
Robert Bixby, executive director of the Concord Coalition
Veronique de Rugy, senior research fellow at Mercatus Center
Larry Haas, Fiscal Times columnist
John Berry, Fiscal Times columnist
Brendan Daly, former spokesman for Rep. Nancy Pelosi, D-Calif.
Thomas E. Man, Brookings Institution congressional scholar
Mark Thoma, University of Oregon economics professor and Fiscal Times columnist
Tom Herman, Fiscal Times tax columnist
Joseph Antos, health care scholar with the American Enterprise Institute
Scott Lilly, senior fellow at the Center for American Progress and federal
Steve Ellis, Vice President of Taxpayers for Common Sense
Marc Goldwein, policy director for the Committee for a Responsible Federal Budget
Liz Peek, Fiscal Times columnist
Ron Bonjean, Washington corporate strategy counsel and former spokesman
for House Speaker Dennis Hastert, R-Ill.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget
G. William Hoagland, CIGNA Corporation’s vice president for public policy
and former Republican staff director of the Senate Budget Committee
Michael D. Tanner, senior fellow and domestic policy expert with the Cato Institute
Jodie T. Allen, senior editor with the Pew Research Center
Eugene Steuerle, an economist with the Urban Institute and a former Deputy
Assistant Secretary of the Treasury for Tax Analysis
Larry Sabato, University of Virginia political scientist
George Hager, USA Today editorial writer and Fiscal Times blogger
Majority of Experts Predict Government Shutdown (The Fiscal Times)
Next on the Agenda for Washington: Fight Over Debt (New York Times)
How Will the Debt Limit “Game of Chicken” End? (The Fiscal Times)