Three Reasons Default is Possible

Three Reasons Default is Possible

Printer-friendly version
a a
Type Size: Small

As I write this comment I am in Paris, where I have spent most of the past year on sabbatical. The French are not in a position to say anything bad about American politicians and politics at the moment. Not a good day for it and besides, their politicians are not looking too good.  But the French at least do not have to worry that their government will not be able to pay its debts because of the separation of powers.
A few weeks ago, checking off tourism boxes, I went to the Invalides to see Napoleon’s Tomb.  The Invalides is attached to the Museum of the Army. The French have been fighting wars for a long time now, so it is a very large museum.  The largest section, however, is devoted to World War I, which I found both educational and moving.
World War I was a disaster of epochal proportions, and much of it wasfought in northern France.  It was sobering to be reminded of the killing fields of Verdun or the Somme; and it gave me a sense of how that drained this nation.  But this horrible war was not supposed to happen; it was the unthinkable end to what had seemed a golden age of progress. 
Any reader should know the story: Archduke Ferdinand of Austria-Hungary was assassinated in Sarajevo, and that precipitated the war.  But why should an assassination in Bosnia lead to war between Germany and the British Empire?  Historians can look back and argue that tensions in the European state system had to blow at some point; that the long peace from 1870 to 1914 could not go on forever.  But the Army Museum in Paris reminds us that, to the people at the time, the whole thing looked like a giant miscalculation.  Nations made demands; nations made threats; troops mobilized; the other side mobilized; if one army was moving the other could not risk demobilizing.  Each side thought the other would surely back down; each side thought the other could not possibly believe its demands were worth a war.  But the war came.
I do not want to say that the damage from failing to raise the debt ceiling in August will be like the horrors of the Great War.  But it is too easy for the commentariat, and politicians, to think default cannot happen because it is unimaginable.  It is quite possible and here are three reasons why:

1.  Lets be clear: we are talking here about default.  There is no legal basis for the Treasury to choose what bills to pay.  At least some bonds would not be paid off.
That would happen because it has to happen.  Imagine that the federal government had to only live off its tax revenues, and made paying off debt its first priority.  That would automatically slash domestic spending, and eliminate deficit spending, without raising taxes.  It is what the majority of the Republican conference in the House of Representatives wants anyway – at least in theory and perhaps even in practice.  We know that’s what they want because they already proposed making debt payments the first priority if the debt limit is not raised. 
Because that is what most Republicans appear to want, the Treasury could not let it happen.  If the debt limit is not raised and the Treasury cooperates, why should Republicans ever give in and raise the limit?  So it’s unthinkable for the Treasury to give in – but it is also unthinkable to default.  That means, to many Republicans, that the administration will have to blink in order to get the debt ceiling raised. So they should hold out for a great deal that gives them very large spending cuts.
Hence the ceiling might not be raised because not raising it puts the Treasury in an impossible position.  Yet lets not just blame Republican brinksmanship.  Lets give the voters some credit too.
2.  Polls show that raising the debt ceiling is extremely unpopular.  I often defend public opinion, but this is a case of mass ignorance.  No policy could suddenly eliminate all net borrowing without massive social and economic dislocation.  Yet for too many voters, the question is: “should we borrow more after borrowing huge amounts already?”  Of course they say no. 
Members of Congress know they have to raise the ceiling.  They also know it is very unpopular.  So most of them want other members to vote for it.  They know CONGRESS should raise the ceiling, but that does not mean THEY should vote to raise it.   This is nothing new.  It is the reason why the House made a practice for many years of including debt-ceiling increases in budget resolutions, where they might not be as noticeable.  The House Republicans would not do that this year, because they see the debt ceiling as a bargaining chip. 
The Budget Resolution method still requires majorities in the House and Senate to vote for the increase.  In our system, the majority party in each chamber has responsibility to push through “must-pass” legislation.  Yet that will be especially hard this time because the House Majority wants to keep its bargaining chip.  Meanwhile the Senate Majority actually isn’t, really, a majority.  Senate Democrats cannot even imagine passing a budget resolution. 
Too many senators want someone else to cast the vote.   It is too easy for conservative or vulnerable Democrats to figure some other Democrats or even a few more moderate or responsible Republicans will provide the necessary votes.  Many House Democrats will surely want the Republicans to pass the increase when it finally passes, while Republicans will figure it’s the Democrats who want big government so they should pay the political price.  Most legislators may know that failing to increase the ceiling is a very bad idea – but that just means someone else should give in.  
3. Then there are the centrist budget hawks.  Call this the Maya McGuineas test: Maya, are you willing to see a clean debt ceiling increase?  Of course not: taking the debt ceiling hostage is one of their ideas.  They think a clean debt ceiling increase is not “responsible.” In other words, playing games with the full faith and credit of the federal government is the responsible thing to do.
Usually, when some sort of policy disaster happens, it is the centrists who are supposed to call for moderation.  Yet budget hawks are not moderates, even if they are centrists.  Usually when war threatens the neutrals try to prevent it.  In this case, the relative neutrals want to RAISE the tension between left and right; to RAISE the stakes of disagreement, based on a misguided idea that only a crisis will bring agreement.  Since the real economy keeps refusing to provide evidence that the deficit is an economic problem,they have to promote a political crisis.
The political crisis is the chance that the debt ceiling increase will not pass.  The unelected budget hawks dream that left and right will compromise to avoid default is highly unlikely to happen, because there is no substantive middle ground.  Meanwhile the elected budget hawks have made much of their political careers being budget hawks; it is hard for them to back down and vote for a clean increase.  They tell themselves it would be so easy if everyone else would just be reasonable.  This means the legislators who should be the voice for moderation and avoiding disaster, and the elitecommentators who should be urging them to do so, keep focusing instead on the need for big policy changes.
So, who will back down?  Why?  And how will they be convinced that they need to back down, rather than wait for the other side to blink?

Joseph White is Director of the Center for Policy Studies at Case Western Reserve University.

To visit the Capital Exchange homepage click here .