There’s a famous scene in the classic American movie, Rebel Without a Cause, in which two teenage boys race stolen cars towards the edge of a cliff. It’s a test of courage: The first to lose his nerve and jump out of his car is “chicken”, a coward. The hero waits as long as he dares, then jumps. His competitor tries to do the same but his jacket catches in the car’s door handle and he is dragged over the cliff and smashed to death on the rocks below.
That metaphor is making the rounds a lot these days as President Obama and his opponents in the Republican Congress play an incredibly dangerous game of chicken with the US economy. Traditionally, US debt has been all but universally rated AAA—virtually certain to be paid back as promised. There’s one catch: Whenever the total amount of US debt hits a certain limit, the law requires the President to seek Congress’ approval to borrow more. Normally, the approval is routine. But the Republican Congress has chosen this moment to turn the debt ceiling vote into a political bloodsport.
Congressional Republicans say they will approve a higher debt ceiling only if the budget deficit is narrowed substantially. Here’s the sticking point: Republicans demand the deficit be cut only by lowering spending, not by raising taxes. The President and his fellow Democrats argue that in a divided government (Democrats control the White House and the Senate, Republicans the House of Representatives), the parties need to compromise. So the Dems insist that any plan to reduce the deficit should include both spending cuts (a sacrifice for Dems) and higher taxes (a tough vote for Republicans).
That impasse could be the thing that drives the US economy over a cliff. If Congress fails to lift the debt ceiling by 2 August, warns US treasury secretary Tim Geithner, the US will be unable to pay roughly 40% of its bills. The results would be, in the words of the usually circumspect Federal Reserve chairman Ben Bernanke, “a financial calamity”. Interest rates would soar. Stocks and the dollar would crash. The US government would have to suspend all but a few essential services—such as interest payments, military pay, and pensioners’ checks—and millions of workers would lose their jobs. The US economy, still staggering from the 2008 crisis, would be flung back into recession.
Also read | Eric Schurenberg’s earlier columns
Until recently that outcome seemed ridiculously far-fetched. Yet as the 2 August deadline approaches, it grows frighteningly more likely.
Leaders of both parties agree that default would be a disaster. House Republican Speaker John Boehner refused even to contemplate the consequences. ”Nobody wants to go there,” he told reporters, “because nobody knows what’s going to happen.” His Democratic counterpart in the US Senate, Harry Reid, says, “It wouldn’t just be irresponsible. We would be out of our minds.”
It isn’t the leaders who are the problem, however. Most of the House’s newest Republican members pledged during their election campaigns not to raise taxes once they reached office, and they refuse to budge from that position. Boehner and the Republican leader in the Senate, Mitch McConnell, have both proposed compromises with the President; both were shouted down by the young members of their party.
Indeed, many freshman Republicans seem to relish the idea of cutting off the US government’s ability to borrow, as a form of shock treatment for Washington profligacy. “It’s time for some tough love,” declares Congresswoman Michele Bachmann, the heiress apparent to Sarah Palin as leader of the party’s most disaffected. In this viewpoint, the risk of economic disaster is an acceptable price to pay for forcing Washington to live within its means. Fittingly, perhaps, Bachmann’s home state of Minnesota spent two weeks in July mired in government shutdown not unlike the one that might face the entire US after 2 August. The cause: an impasse over taxes and spending between the state’s Democratic governor and Republican legislature.
Where do things go from here?
Greg Valliere, chief political strategist of Potomac Research, a Washington think tank, still thinks there’s a 35% chance that leaders can cobble together a compromise that reduces the deficit enough to win sufficient Republican support. But he thinks there’s a roughly equal (and growing) chance that neither side will yield.
If that happens, on 2 August, the Obama administration will have to choose which of its bills to pay and which to default on. The first priority would undoubtedly be to pay interest on existing debt and salaries for the military. But Valliere believes it is all but inevitable that US treasuries will lose their AAA-rating. Even if the treasury makes all its interest and principal payments, the gross failure of governance by the US Congress has simply cast too much doubt on America’s creditworthiness.
In the US, the Republican rebels clearly hope that forecasts of economic Armageddon are exaggerated and that voters will see, in the wake of 2 August, that much government spending is unnecessary. Esquire Magazine writer Tom Junod quotes an anonymous Republican official: “Once 3 August comes along and people see that bodies aren’t piling up in the streets, the jig is up for the Democrats.”
It’s far more likely, however, that the economic pain will be real and voters may blame the Republicans. That increasingly worries the party’s leadership. In justifying his compromise proposal, McConnell said: “If we go into default (Obama) will say that Republicans are making the economy worse and try to convince the public (of the fact), maybe with some merit. All of a sudden we have co-ownership of a bad economy. That is very bad positioning going into an election.” In a New York Times editorial on Thursday, Al Hoffman, Jr., the former campaign manager for Republican President George W. Bush, likewise urged Republicans to compromise for the sake of the country. “It’s not too late for both sides to strike a grand bargain. By so doing, (Republicans) will prove the better statesmen.” Other seasoned Republicans, veterans of older budget battles, expressed dismay that Republican freshman would turn down the deal offered by Obama, which meets the Republicans more than halfway. (The deal that he and Boehner almost agreed to would trim the deficit by three dollars of spending cuts for every dollar of tax hikes.) “If I were there,” Mickey Edwards, a Republican leader during the 1980s and 1990s told the New York Times, “I would say, ‘My God. Declare victory’.”
For now, the Republican party rebels refuse to listen. Their confidence that default would be salutary for the economy seems driven more by ideology than economics and by a fear that agreeing to any compromise will expose them to a challenge by conservatives when they stand for re-election. But in a democracy, governing means compromising. By refusing to govern, the Republican right has turned a rhetorical game into a reckless dare. Unlike the teenagers in the movie, these rebels may believe they have a cause. But they don’t seem to have a clue what’s at stake.
Illustration by Shyamal Banerjee/Mint
Eric Schurenberg is financial editor at large, AARP The Magazine, and former editor of Money.
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