A new poll says the public's against it, but the debt ceiling's probably going to rise anyway. So much for representing the people's wishes.
A mere 18% of citizens support a higher limit on the nation's debt vs. 71% opposed to the idea, according to poll released yesterday by Reuters/Ipsos. The current ceiling is the tidy sum of $14.3 trillion. That's a chunk of change everywhere else on the planet, but it won't suffice in Washington for much longer.
In a letter to Congress dated January 6, Treasury Secretary Geithner wrote that failure raise the debt ceiling "would have catastrophic economic consequences that would last for decades." According to his missive,
Never in our history has Congress failed to increase the debt limit when necessary. Failure to raise the limit would precipitate a default by the United States. Default would effectively impose a significant and long-lasting tax on all Americans and all American businesses and could lead to the loss of millions of American jobs.White House economic advisor Austan Goolsbee is equally convinced that elevating the government's capacity for red ink is necessary. "You know, the debt ceiling is not…is not something to toy with… If we hit the debt ceiling, that's the…essentially defaulting on our obligations, which is totally unprecedented in American history," he said on ABC's "This Week" TV program on Sunday. "The impact on the economy would be catastrophic. I mean, that would be a worse financial economic crisis than anything we saw in 2008."
There's that word "catastrophic" again. That stark analysis may be meant to sway the Republicans into giving the White House the green light on a higher debt limit, but there's some debate about how to proceed. As AP reported last week,
In power scarcely a day, House Republicans bluntly told the White House on Thursday its request to raise the nation's $14.3 trillion debt limit will require federal spending cuts to win their approval, laying down an early marker in a new era of divided government.But those sentiments were expressed before Saturday's shooting rampage in Arizona that wounded Congressman Giffords, killed a federal judge, among others, and changed the political calculus in Washington. Before the shooting, the new House Speaker, Rep. John Boehner, issued a statement that observed that "the American people will not stand for such an increase [in the debt ceiling] unless it is accompanied by meaningful action by the President and Congress to cut spending and end the job-killing spending binge in Washington." But in a sign of how tricky this process will be, the Speaker also advised,
While America cannot default on its debt, we also cannot continue to borrow recklessly, dig ourselves deeper into this hole, and mortgage the future of our children and grandchildren. Spending cuts – and reforming a broken budget process – are top priorities for the American people and for the new majority in the House this year, and it is essential that the President and Democrats in Congress work with us in that effort.”It's inconceivable that the U.S. would default on its debt, and so all the posturing is somewhat hollow. The Treasury market, at least, doesn't appear worried. The yield on the benchmark 10-year Note, for instance, remains in the 3.3% neighborhood, the low end of recent weeks. That's not to say that higher rates aren't coming. But the risk of inflation, monetary stimulus and even a stronger-than-expected economic recovery in 2011 are more likely catalysts for expecting yields to rise compared with political risk in Congress.
Nonetheless, advocates for paring government largess continue to press their message as Congress finds its new political footing in the wake of last week's shooting. In an op-ed in today's Wall Street Journal, Arthur Laffer leads the charge for austerity. "Cutting spending and cutting it drastically would not hurt the economy," writes the author of Return to Prosperity: How America Can Regain Its Economic Superpower Status. "It would, in fact, help the economy, even if done now."
Political momentum for such thinking among the Republican majority in the House still seems to be on board with the idea. As The Hill noted yesterday, "Some House Republicans are expressing renewed confidence that the push for a balanced-budget constitutional amendment will gain real steam in the 112th Congress — aided by the newly elected crop of budget-slashing GOP freshmen."
A balanced budget is bound up with the debt ceiling, of course—politically as well as financially. No one expects a default, but there's also a rising tide that demands fiscal responsibility, or at least the appearance of austerity. But it still comes down to the numbers and deciding where to cut spending isn't easier today than it was last week, or last year. Meaningful cuts that make a difference are linked with entitlement spending, such as the Medicare program. Politically, it's going to be hard—very hard—to pare that puppy, at least in one fell swoop.
No wonder, then, that some veteran Republican supporters are laying the groundwork for austerity light. "We've got to do the debt ceiling," Tom Donohue, president of the U.S. Chamber of Commerce and steadfast Republican ally, said on MSNBC yesterday. "There'll be a lot of political carrying on, but it will be done."
Thy will be done? Yes, albeit by holding one's nose, predicts former Democratic Senator Evan Bayh. “The debt ceiling cannot be avoided,” he said on Wednesday, but “nobody will want to vote for it.”
That doesn't mean that the Republicans are unanimously on board with a higher debt ceiling. There are any number of Tea Party types and others who argue that this is a critical battle that will set the tone for the new austerity. Suffice to say, the Republicans are divided on how this drama should play out. Throw in the fact that the White House is adamant on raising the ceiling and you have the potential for some fireworks.
Morgan Stanley economists David Greenlaw and Ted Wieseman earlier this week wrote that "the political winds appear to be pointing to a repeat of the 1995-96 showdown between the president and House Republicans, when the US Treasury came perilously close to missing a coupon payment, auction schedules were disrupted, and the federal government shut down for weeks at a time."
Could that really happen again? Perhaps. The Republicans seem to have backed themselves into a political corner. Voting yea on a higher debt ceiling that's not funded with spending cuts will look like betrayal to the Tea Party movement. But the Republicans have to govern, and saying no to a higher debt limit is unthinkable in fiscal terms. It's also politically hazardous in the context of right-of-center constituency. The problem is that spending cuts now, at a precarious moment for the economy, come with their own risks.
There's time to sort all this out, but the clock is ticking. Estimates vary, but it's thought that the government has another $300 billion or so to spend before the current ceiling kicks in. That implies that as early as late-March the fiscal jig will be up and a new vote will be needed. Meantime, the political posturing rolls on.
This post has been republished from James Picerno's blog, The Capital Spectator.