“In short, the economic consequences of such a large and precipitous drop in spending would be crushing, and almost certainly result in a severe drop in economic growth and employment at a time when we can least afford it.
“Moreover, such a move could lead to a panic in the international financial markets. Following the 2008 financial crisis, we have seen debt crises hit Ireland, Greece and Italy, with fears that this could spread further and cause a global economic downturn. The financial markets are on edge today, with U.S. Treasury bonds being the safe haven for most investment capital. Refusing to raise the debt ceiling would recklessly disrupt the sale and purchase of new Treasury bonds, and could potentially cause a run on outstanding Treasuries as well, as investors sought other investments. This could have catastrophic consequences for our economy as well as the economic stability of the rest of the world.”
But despite the sheer idiocy of a debt ceiling freeze, many leading Tea Party Republicans have continued to press for it. Republican leaders unfortunately appear to be caving in to this sentiment.
Yesterday, Speaker of the House John Boehner (R-Ohio) issued a statement that appeared to raise the possibility of a debt ceiling freeze unless President Barack Obama makes “meaningful” concessions. Boehner’s statement represents a significant reversal from last fall when he said that the debt ceiling vote “is going to be the first really big adult moment for the new Republican majority... [and] we’ll have to find a way to educate members and help people understand the serious problem that would exist if [the debt ceiling wasn’t increased].”
The Obama administration and virtually all objectiveanalysts have rightfully excoriated those pushing for a debt ceiling freeze. They’ve made many excellent points about why this course of action would be “insane” and “catastrophic.”
“Since many [of the newly elected Tea Party Republicans] have never served in elected office before and know virtually nothing about economics or finance, I don’t think they realize that they are playing with fire when they even hint at the possibility of a debt default. They are like children playing with matches.”
Perhaps needless to say, I agree wholeheartedly with these sentiments. I would add that it cannot be overstated just how irresponsible and stupid the idea of forcing an extended debt ceiling freeze is. Let me emphasize two points that I think haven’t gotten enough attention in this debate.
First, it is important to recognize that the budget deficit is artificially high because we’re in the middle of a severe recession. As a result, tax receipts are at a low point, and short-term “automatic” expenditures such as unemployment benefits are greatly heightened. Evaluations of our long-term budget picture based on the present situation are somewhat misleading.
Second, those who are pushing a debt ceiling freeze in the name of imposing “shock therapy” on our fiscal policymakers should know that this course of action would actually severely worsen our long-term budget situation by causing a permanent and severe spike in the interest rates we pay on our outstanding debt.
We were paying just over 2.5 percent for a 10-year Treasury note as of last November. That is an extremely low rate that reflects the confidence investors have in our ability to repay our debt. A politically driven debt ceiling freeze would shatter that investor confidence. It would disrupt the issuance of Treasury debt and call into question the soundness of our political process. This in turn would likely raise our costs of borrowing significantly to the tune of hundreds of billions or even trillions of dollars in increased interest payments every year.
David Min is associate director for financial markets policy at the Center for American Progress.