JONATHAN CHAIT JULY 18, 2011
[Guest post by Kara Brandeisky]
Today, Moody’s rating agency came out and said what Hill observers have been privately muttering for weeks: Just get rid of the debt limit! Moody’s analyst Steven Hess wrote in a recent report that, since the debt ceiling causes “periodic uncertainty,” Moody’s “would reduce [its] assessment of event risk if the government changed its framework for managing government debt to lessen or eliminate that uncertainty.” As Dylan Matthews pointed out this morning, only Denmark has a similar limit. From a policy point of view, the debt ceiling seems unnecessary.
Jonathan Tobin of Commentary was less thrilled in his reply to Moody’s, entitled “There’s a Reason We Have a Debt Ceiling”:
It is also true that up until now forcing a vote on the debt ceiling has not impeded the growth of the government’s arrears since the Congress has always dutifully voted an increase to avoid trouble. The threat of default may be more theoretical than anything else, but even the hint that such a thing may be possible has brought the Democrats to the negotiating table and forced them to concede spending cuts that were heretofore unimaginable.
Right, and then what happened? Republicans still didn’t take the $4 trillion deal. Instead, they’re posed to pick the deal that inflicts maximum political pain on the Democrats with the fewest policy sacrifices for themselves. Ezra Klein predicted this morning that Republicans will eventually agree to a revised McConnell deal: The debt ceiling will be raised in three parts, with three “resolutions of disapproval,” $1.5 trillion in cuts, and no new revenues.
But what if, after all this, congressional leaders (Republicans and Democrats) can’t even scrounge up enough votes to get that deal through? We default, ratings agencies downgrade Treasury bonds to AA, interest rates skyrocket—and that, in turn, increases the deficit, since higher interest rates would force the government to pay more interest on its existing debt. In the words of Ben Bernanke, defaulting would be a “self-inflicted wound.”
Simply put, if conservatives are really concerned about the size of the debt, they shouldn’t be playing this game of chicken. Then again, even without a debt limit, given their track reord, I’m sure Republicans can find something else to hold for ransom.