Institutional memories are short in Washington, and history often is revised even before it is written. So it is likely that the lessons of August, 2011, and of the last several debt-limit standoffs, have not been learned as they should. Therefore, it is worth taking the opportunity of the waning days of the Easter/Passover congressional break to review just why going to the brink over the nation’s debt limit is such a bad idea.
This should not be a partisan issue. The points below would apply regardless of who is in control of the White House, the Senate, or the House of Representatives. So for now – and in principle for future Congresses and administrations – decision-makers should consider the following:
A fight over the debt limit is prone to disaster. Members of Congress will always be inclined to grasp any opportunity to extract concessions from a president with different views. However, those members should consider the precedent they risk setting. No president wants to be the first to make concessions with a virtual gun to his or her head. Once that door is opened, other adversaries – not necessarily from the United States, and with demands not necessarily about the budget – will surely try to pass through as well. Members of Congress from the opposite party should consider how they would regard a similarly situated president from their own party should he or she buckle under partisan tension, and then gauge the consequences of brinkmanship. There is playing political hardball, and then there is playing political chicken. Decision-makers must know the difference.
The U.S. economy is weak, and its resilience is uncertain. For that matter, virtually every major economy around the world is shaky, primarily from the aftermath of the global financial crisis; and the world relies on the United States, the economic superpower, as its flywheel in unstable times. If the U.S. economy itself becomes destabilized, we could join the rest of the world in what easily could become a mutually reinforcing downward spiral.
Market reactions to a U.S. debt-limit crisis would be inherently unpredictable – but surely all bad. Admittedly, we don’t know precisely how investors or other nations would react to a debt-ceiling standoff between the White House and the Congress, because our experience is thin. But you cannot tell a happy story from the family of possibilities. We do know that one ratings house downgraded Treasury securities in the last episode, and that the others likely would follow, and possibly even go further. We also know that the ratings of financial institutions and other entities that must maintain rock-solid security would suffer if their key holdings – in U.S. government bills, notes and bonds – were to be downgraded. If you want to think of the impact of a widespread Treasury downgrade on the nation’s financial infrastructure, imagine the effect on the nation’s physical infrastructure of a bacterium that would make concrete crumble.
If the Congress wants to play hardball with the president over budget policy, it can threaten to shut down the government over the appropriations bills at the end of September. That only makes the United States look like a keystone-cops operation that cannot run its own affairs. Going to the wall over the debt limit, by contrast, paints Uncle Sam as a deadbeat who cannot or will not pay his bills. In that choice, let’s take the higher (I wouldn’t call it the “high”) road.
Minarik is senior vice president and director of research at the Committee for Economic Development.