The United States officially hit its statutory debt limit yesterday, preventing the government from borrowing any more money, as Republicans continue to demagogue the issue but refuse to act. Since a large portion of federal spending is borrowed money, the Treasury Department has been forced to take extraordinary measures to allow the government to continue meeting its obligations, including tapping into government employee pension funds to free up cash. These measures and others should keep cash flow adequate until approximatly August 2, but if lawmakers have still failed to raise the debt limit by then, the effect could be “catastrophic,” as Treasury Secretary Timothy Geithner said yesterday in a letter to congressional leaders. In its 235-year history, the U.S. government has never defaulted, so the exact consequences are impossible to predict, but all experts agree that defaulting on our financial obligations would be disastrous for the global economy, shattering investors’ confidence in the American government and economy while increasing the cost of borrowing and possibly shutting down the government. Geithner has said defaulting on our obligations would almost certainly cause a double-dip recession, where a second dip could be worse than the Great Recession of 2008. Moreover, as Nobel Prize winning economist Paul Krugman noted, failing to raise the debt limit would “act as a terrible signal about the US political system,” telling the world “we’re a banana republic, with crazy extremists having so much blocking power that we can’t get our house in order.” Indeed, fueled by far-right tea party anti-debt dogma, Republican leaders have taken the debt ceiling — and thus the entire global economy — hostage, refusing to raise the ceiling unless they are allowed to enact their partisan agenda of radical spending cuts. Many conservative lawmakers have said they will not vote to raise the limit under any circumstance, while others have demanded extraordinary concessions.
HOSTAGE TAKING: Hate radio host Rush Limbaugh said yesterday that the debt limit is a “manufactured crisis,” and in a way, he’s right — but not in the way he intended. The debt ceiling is an entirely arbitrary cap Congress sets on the amount of money the federal government can borrow. There is no real reason for having a statutory debt ceiling, which didn’t exist until 1917. The amoung of debt the government takes on should be determined by budgetary needs, through the normal Congressional budgeting process, not some arbitrary redline that offers politicians a perennial issue on which to grandstand. But even with some empty grandstanding, Congress has routinely raised the debt ceiling for decades, increasing the limit 100 times since 1940. Ths limit was raised seven times under President Bush, with hardly any real opposition from Republicans. “[I]t has been a regular, even routine matter. In fact, for many years, it was just rolled right into the budget process, and they didn’t have a separate vote to raise the debt limit,” NPR noted. But this year, Republicans have seen a convenient opportunity to score political points and advance their partisan agenda, even it means risking the American and global economies. Republican leaders, including House Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R-KY) have made it clear they understand the consequences of not raising the debt limit and have said publicly that the limit must be raised.Yet these same leaders have threatened to vote against any increase in the debt limit if their demands aren’t met — and their demands are huge: “We should be talking about cuts of trillions, not just billions,” Boehner said. “This is a hostage situation…blackmail,” Krugan wrote. “In effect, they will have ripped up the Constitution and given control over America’s government to a party that only controls one house of Congress, but claims to be willing to bring down the economy unless it gets what it wants.” Indeed, for their demands to be effective, Republicans have to be willing to “shoot the hostage” and let the U.S. government hit the debt ceiling and default on its financial obligations.
DOWNPLAYING THE THREAT: Meanwhile, a growing number of Republican lawmakers, especially Tea Party freshmen, have tried to downplay the threat of hitting the debt limit or defaulting. “The case has not been made that this is an absolute necessity,” Rep. Bill Huizenga (R-MI) said last week. “The debt ceiling really doesn’t matter,” the conservative blog Red State wrote recently. But these claims ignore a danger that even former President Reagan, the great conservative icon, recognized. Arguing for raising the ceiling in 1983, Reagan said, “the risks, the costs, the disruptions, and the incalculable damage” of not doing so demanded the ceiling be increased. More reasonable conservatives today have come to the same conclusion. “Let me tell you what’s involved if we don’t lift the debt ceiling: financial collapse and calamity throughout the world,” Sen. Lindsey Graham (R-SC) told CNN. Even Boehner warned of “financial disaster, not only for our country but for the worldwide economy.” Rep. Frank Lucas (R-OK) said, “I won’t throw the country into the street” by not raising the debt limit. Conservative Washington Post columnist George Will said it could be “suicidal” for Republicans actually block an increase in the debt ceiling.
THE ‘PAY CHINA FIRST’ PLAN: Rep. Jim Jordan (R-OH), chairman of the important Republican Study Committee, suggested yesterday that hitting the debt limit could be a good thing. “Keeping the debt ceiling at its current level would force Congress to prioritize spending , but it would not force a default on our debt.” Jordon’s claim that U.S. would not default is based on the assumption that the government would be able to cover all of its expenses through tax revenue alone. Sen. Pat Toomey (R-PA) has made the same argument and even proposed a bill to implement this plan. But while they are technically correct, tax revenue contributes only around 60 percent of every dollar spent, so this plan would force the government to cut about 40 percent of its activities literally overnight to keep spending in line with revenues. Moreover, as CAP fellow Matt Yglesias points out, this approach doesn’t actually prevent a default from occurring. Deputy Treasury Secretary Neil Wolin said much the same thing, calling Toomey’s plan “unworkable.” Others have appropriately dubbed Toomey’s plan the “Pay China First” plan because it would prioritize payments to our debtors, including China, over paying for critical services Americans rely on. “This wouldn’t avert a potential global economic catastrophe, but it would make sure the United States wrote checks to foreign governments before anyone else,” the Washington Monthly’s Steve Benen wrote
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