Okay. Republicans are against higher taxes. We get that. And really, I’m much more on their side than the other. But you can’t threaten to wreck the country if you don’t get your way.
At least the Democrats are willing to compromise on spending to make a deal. For the Republicans, again, it’s good to fight for the lowest taxes they can get, I’m with them; but they can’t expect a deal where the Dems do all the giving while the GOP gives nothing.
To try to get their way without compromise, the Republicans are holding hostage the vote to raise the national debt ceiling. That is, to allow the government to borrow more money to pay its bills – which it obviously must do so long as spending exceeds tax revenue – which of course it does, by a whopping amount. That the Treasury must continually ask Congress for permission to borrow (to pay for Congress’s spending) might seem a crazy system, especially when it allows legislators (like Barack Obama when he was a Senator) to register irresponsible grandstanding votes against it. And to perpetrate the sort of blackmail in which Republicans are now engaging.
They are indeed threatening to wreck the country if they don’t get their way. This isn’t hyperbole. We’re talking about government forced to default on its financial obligations. And the irony, for those who claim to be motivated by concern over future government deficits, is that a default would make that whole problem much much worse.
Here’s why. The U.S. government already owes $14+ trillion. That’s what we’ve borrowed to pay for past spending in excess of tax revenues. Government borrows by selling bonds, which are IOUs, paying interest. Those interest payments are a sizeable chunk of the federal budget, at around $200 billion annually, or 5%.
When a bond matures, the lender gets repaid, and normally the government re-borrows (“rolls over” the debt) by selling new bonds. For some decades past, all this borrowing has actually been a pretty cheap ride, because interest rates have been quite low by historical standards. (In fact, they fell close to zero in the financial crisis, actually reducing the government’s interest expense.) Interest rates are determined by market forces, and U.S. bond rates have been very low because the market has considered such bonds essentially riskless, with repayment virtually certain.
But that could change if, on August 2 or thereabouts, a default occurs. The immediate effects might seem minor, and presumably Washington would scramble fast to fix it. But American politics being shown up as so extremely dysfunctional that this could be allowed to happen at all would shatter financial market confidence. America’s literal credit rating would plummet. And the next time the Treasury needs to roll over some bonds, the interest rate will be higher. And the next, and the next, and the next. Again, today’s $200 billion interest cost reflects interest rates practically at zero. That $200 billion amount could explode. Thus, the government, already in a deep financial hole, will suddenly have dug itself much deeper. And as that realization sinks in, in the financial markets . . .
Of course there would be huge knock-on effects. Interest rates throughout the economy would go up. The dollar’s value would fall, and prices would rise. The dire housing/mortgage situation would worsen. Not good for an economy that was already struggling.
You might suppose the Republicans are merely adopting a very tough negotiating posture. But for many of them, it seems they really mean it when they say they’ll never accept any tax increases whatsoever. For them, it’s more like religion than politics. Thus, as columnist David Brooks says, they are bent on refusing a deal that’s really a huge no-brainer – giving an inch on taxes for a foot on spending. Democrats indeed seem ready to swallow gigantic spending cuts if the Republicans will give them a fig leaf concession on taxes. In fact, it wouldn’t even require an actual tax increase – merely removing some tax breaks for special interests that are really spending in disguise. But even this the Republican absolutists bizarrely refuse. If they’re playing chicken, it seems they’re determined to crash rather than swerve.
Of course, it’s not only Republicans who are at fault. Some Democrats seem to have a “bring it on” mentality too, thinking they can benefit politically by pinning the blame for catastrophe on the Republicans. That too is grossly irresponsible. Both sides have their political equivalent of suicide bombers.
This morning’s news intimates that Speaker Boehner, at least, may be willing to be rational about revenues. A hopeful sign?