Sunday, October 13, 2013

Four Days (Maybe) and Counting, Plus, What if We Do Breach the Debt Ceiling

So, in the latest news, Democrats may or may not reject a plan to extend current spending levels until March and instead press for a shorter deadline in hopes of getting more funding.  I think this is nuts.  Republicans see a one-way ratchet on spending -- it can only go down.  They now see agreeing to the spending levels in their proposed budget as capitulation on their part.  I am inclined to agree that this shows that Democrats should not start out by conceding Republican spending levels -- let the debate be whose levels, not what ransom you must pay to get Republican levels.  But it is a bit late now.  The longer you lock in Republican spending levels, the longer you can postpone the next budget crisis.  Meanwhile Paul Ryan has once again resurrected plans for using the budget battle to kill Obamacare and therefore does not want to continue funding to next year because the subsidies will kick in by then.  Sigh!

With a significant likelihood that will be pass the supposed deadline for a debt ceiling breach, I would like to speculate on what would happen.  First, there is, indeed, evidence that the shutdown has postponed the day of reckoning, quite probably to the end of the month.  I should register here my agreement with Kevin Drum. If shutdown has postponed the day of reckoning or the Treasury can prioritize payments, then statements to the contrary will seem like fear mongering and convince Republicans to be more willing to take crazy risks.

But, what would happen?  Well, so far markets seem worried about a short-term breach, but confident that it will not last beyond a few days.  I am inclined to think that will be survivable.  Republicans are arguing that so long as the government pays its bondholders, there is no actual default, and it does not matter who else gets stiffed.  At least according to this article, it would probably be possible to assure that bond holders got paid and did not disrupt the financial system -- but only at the cost of stopping payment on everything else. If this does happen, count on Republicans, who urged prioritizing bondholders and not worrying about anyone else, to scream bloody murder and accuse Obama of making things needlessly painful.  But here is the thing. Republicans will not be the only ones screaming bloody murder.  So will everyone who misses a Social Security payment or other check from Uncle Sam.  And there is no doubt to my mind that this will lead to an increase in the debt ceiling, fast.  Maybe if the breach is short enough, the damage will be limited.

So far as I can tell, "moderate" Republicans have chosen to use the debt ceiling rather than shutdown as their hostage of choice because it scares the hell out of insiders, but polls well with the general public.  Shutting down government polls badly and was unpopular last time the Republicans tried it, so the leadership wants to avoid it.  But raising the debt ceiling is unpopular.  And voters generally express support of the idea that increases in the debt ceiling should be matched by cuts in spending.  Voters are not polled on whether refusal to raise the debt ceiling is worth it if that means their Social Security checks start bouncing.  I am guessing that the answer would be no.

Furthermore, if refusal to raise the debt ceiling leads to bouncing Social Security checks, then Republicans will no longer have the support of public opinion if they try it again.  Obama will only have to point out what happened last time, and public opinion will turn against the idea in a big hurry.  In other words, breaching the debt ceiling is a credible threat only as long as it remains a threat.  Once it actually happens, it will be too unpopular ever to try again.

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