JONATHAN CHAIT JULY 5, 2011
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John Cornyn suggests it may already be too late for a debt ceiling deal, and floats a six- and eight-month extension. This seems deeply worrisome. An extension is going to expose everybody in Congress who votes for it and make them more reluctant to support the next debt ceiling vote. And it will locate the next debt ceiling vote during the peak of the GOP presidential primary, when candidates will start staking out anti-extension views and forcing the rest of the party to follow suit. Cornyn's idea may be necessary, but if it is necessary, we're in trouble.
Meanwhile, libertarian writer Megan McArdle reports that numerous right-wingers have a completely blithe attitude about default:
I am getting the same sinking feeling that Brooks is having--that there is a sizeable faction on the right, and worse, in the GOP caucus, that is willing to default rather than make any deal at all. In fact, I think it's worse than Brooks suggests. It would be bad enough if these people were simply against higher taxes, because then you might persuade them by pointing out that if we default, we're probably going to end up with higher taxes, right now, in order to close the current gap between spending and tax revenue.
But when I point this out, the response in my comments and email and twitter is "Fine, I'll accept higher taxes, as long as they come with radical changes in spending." The BATNA (best alternative to negotiated agreement) is default on either our debt, or entitlements like Social Security that people have planned their lives around; the Democrats properly view this as a disaster. But I'm hearing from people who seem to think that it's better than raising one thin new dime in taxes. This makes me very much afraid of where this is headed.
If you ignore the financial effects of debt default, then failing to lift the debt ceiling is a lot like immediately implementing a balanced budget amendment that rules out tax hikes. Now, I think that's a crazy idea. But many Republicans are in fact demanding a balanced budget amendment that rules out tax hikes. It's not just the lunatic fringe that believes this. Mitt Romney, paragon of sane Republicanism, has signed a pledge to support this.
Now, maybe Romney understands that it's crazy, and he's playing politics. The mere fact that he has to play this game, though, signals how strongly extreme right-wing economics has captured the conservative mind. The voices of sanity on the right exist, but for the most part, they're speaking quietly behind closed doors. It seems almost inevitable that any debt ceiling deal will expose any Republican supporter to a right-wing primary challenge. You have the countervailing power of the business lobby pushing for a deal, and that's nothing to sneeze at. But this may simply have grown into a problem that has no legislative solution, at least not until financial consequences have been felt.
16 comments
"But many Republicans are in fact demanding a balanced budget amendment that rules out tax hikes. It's not just the lunatic fringe that believes this. Mitt Romney, paragon of sane Republicanism, has signed a pledge to support this." Make that "former paragon of sane Republicanism." This just shows what a bunch of wild-eyed wackos the GOP has become. And instead of trying to talk sense into his fellow Republicans to avoid a possible fiscal disaster, Romney has chosen to join them in the asylum.
- DAVIDDREIER@EARTHLINK.NET-old
July 5, 2011 at 4:34pm
Actually, the pledge allows for tax increases, but only if they're agreed to by a super-majority. And we've seen how well that has worked in California. Total gridlock.
- DAVIDDREIER@EARTHLINK.NET-old
July 5, 2011 at 4:42pm
It does have a solution, maybe two: (1) Write Treasury checks and pay the bills to be honored by the Fed or (2) invoke the emergency provision that allows the Treasury to sell obligations directly to the Fed "notwithstanding any other law" and then have the Fed sell them or hold them as it sees fit to manage the money supply. Both of these do, however, require the cooperation of the Fed, and we know nothing at all about what the Chairman and the Board of Governors think about these matters.
- roidubouloi
July 5, 2011 at 4:44pm
Isn't this the result of 30 years of simplistic but appealing slogans that "Government is not the answer? Government is the problem!" and the general talking points not that the market could work more efficently, but hte government was akin to a theif and could only destroy and rob from productive people and give to parasites. So you get this absoulte stupidity.
- MikeB.
July 5, 2011 at 4:56pm
A "libertarian writer"? Is that equivalent to "she plays one on tv"?
- rayward
July 5, 2011 at 4:59pm
After months and months of hearing Boehner say that we needed an adult conversation about the deficit and I kept waiting for something pornographic. Someone should have said about the negotiations: "Don't go in there. It's a trap. The Republicans will hit you on the head with a baby rattle."
- Nusholtz
July 5, 2011 at 5:16pm
First of all, the Debt-Ceiling debate should begin with "Just Pass A Clean Bill Already, like ALL Other Congresses Before You!" -- all this "the Debt is a Crisis!" is mere Chicken-Little whining. Secondly, if the Republicans do force the default, this could be our Hoover-FDR moment, the moment when the Republican Party is known for a bunch of dogma-driven hacks whose dogma has destroyed the economy. Again. Then, no matter HOW Fox News tries to spin it, America can vote for politicians that take their current job of running the country seriously.
- AllanL5
July 5, 2011 at 5:31pm
Do they realize how many people would be hurt, maybe even destroyed?
- Sophia
July 5, 2011 at 6:16pm
Time to short the Dollar?
- IggyPop
July 5, 2011 at 6:25pm
At this point I think Republicans would be relieved if Obama invokes the 14th amendment and increases the debt limit without them. It would relieve them of the tough choices they have to make in an increasingly radicalized party AND they would get to call Obama "King Barack" along with the various other titles that go with being a Marxist/Facsist/Cult leader that they use to describe the President.
- Archon
July 5, 2011 at 6:48pm
Megan McArdle is on TV?
- liberalref
July 5, 2011 at 9:15pm
The Republicans have blamed anemic growth on uncertainty and so they add more uncertainty. Brilliant.
- paskunac
July 5, 2011 at 11:50pm
I think the President should provoke a political and constitutional and borrow as needed under the 14th amendment principal . I would rather that than risk the results of default on the economy . The human costs would be too great . Roi , could you explain how your proposals would circumvent the debt ceiling problem ? Wouldn't these fed actions necessitate new accountable borrowing ? Would the Fed have to increase the money supply to accomodate the emergency purchases ?
- alanwilkov
July 6, 2011 at 12:30am
Alan, Under the alternative of continuing to write Treasury checks to pay expenditures appropriated by Congress, the Fed just gives credit for them in the ordinary course. The debt limit applies to specifically enumerated types of Treasury obligations and I do not find anything that applies to checks. There are those who argue that the provisions against the Fed acquiring Treasury obligations from the Treasury would prevent this. But the checks would not be acquired by the Fed from the Treasury. They would be acquired from third-parties who present them for payment. I do not see that the debt limit applies. Others have argued that the Fed cannot acquire/honor checks if the Treasury does not have the money in its Fed account. But there is no such restriction on the power of the Fed to acquire Treasury obligations. A third argument is that the debt limit should be interpreted to apply to checks. But, as it is a technical provision, I don't see any reason why this should be so. Why should a court extend the language of the statute to create a crisis where by applying the literal language it would avoid a crisis? So, if the Fed will honor the checks by giving reserve credit on its books to the banks that present the checks for payment, the Treasury can, as far as I can tell, keep writing checks as long as Congress has appropriated the money. In the second case, there is a provision that allows the Fed directly to acquire Treasuries at the rate of $3 billion "per period" ($3 billion per day ought to cover the deficit) in an emergent situation where necessary to stabilize the currency. On its face, this seems to apply, but the legislative history might show otherwise. Assuming it does apply, it says that the Fed can do this "notwithstanding any other law." The debt limit is any other law and hence would not be a restriction. Thus, to prevent an abrupt declines of the dollar, surely one of the all but certain outcomes of the Treasury running out of money, it would seem that the Fed can in effect lend directly to the Treasury by buying its securities. The Treasury then writes checks and the Fed pays them. Same outcome. The money supply does not have to change at all. In the first case, the Fed can sell securities or assets it holds to soak up the dollars. It has more than enough. In the second case, it can sell those or, as specifically authorized in the emergency provision, it can sell the securities it just acquired from the Treasury. In effect, the Fed, in an emergency, can market Treasury securities that the Treasury otherwise would not be allowed to issue. But, as I said, either solution requires Fed cooperation.
- roidubouloi
July 6, 2011 at 1:48am
roi, I'm not saying you're wrong on the law, but as you just said, both of your proposals require cooperation of the Fed. It seems to me that if Bernanke saw such cooperation as lying within the Fed's brief, he would already have said so publicly just to ease any nascent market jitters. OTOH maybe Ben wouldn't commit either way until the house was about to fall down for fear of being accused of interfering in party politics and bolstering Paul & Son's calls for abandoning the Fed entirely.
- AaronW
July 6, 2011 at 9:48am
I don't think we know, Aaron. But the Treasury also perhaps has the opportunity of contracting with the major banks to play the central bank role. Mechanically difficult and fraught. Much better if the central bank behaves like a central bank.
- roidubouloi
July 6, 2011 at 12:53pm