The looming deadline for raising the federal government's borrowing limit dominated the front pages of the newspapers (whether on dead tree or ipad app) and the weekly political talk shows Sunday. Negotiations on a "grand bargain" for reductions in federal spending coupled with the elimination of some tax breaks for the rich and corporations appear to be kaput, in large measure because of the refusal by Republican lawmakers, in the majority in the House, to consider any "job killing tax increase," even if the "increase" is the elimination of a tax deduction rather than an actual hike in rates. And the GOP does not trust the Obama administration to agree to real, nominal cuts.
So here we are.
Pennsylvania Sen. Pat Toomey, a freshman Republican and former Wall Street trader, has emerged as a leader of the debt-ceiling hardliners in his party. He was among the first to suggest that failure to raise the debt ceiling would not cause a default on the nation's debt payments, as the administration has warned. Toomey acknowledges that not raising the ceiling would stop many other government programs in their tracks and be harmful to many people, but argues that the vote is perhaps the last best chance to get some real reductions in the size of government and some structural reforms - spending caps and/or a balanced budget amendment.
If the DC gridlock continues past Aug. 2, the nation should indeed have enough money to make its debt-service payments. But most economists agree that not raising the ceiling would be a horrible blow, with the resulting steep cutbacks to government spending slamming the economy back into recession. And it is also possible that markets would lose confidence in U.S. creditworthiness, leading to higher interest rates (borrowing costs) that would ripple through the economy.
OMB Director Jack Lew made that case on NBC's Meet the Press.
"If we don't raise the debt ceiling, we won't be able to pay our bills in August," Lew said. "And that has dire consequences. It will, for the first time, mean the United States cannot keep its obligations. It will cascade through the economy. It will mean that people, regular people, who are buying homes and cars will pay higher interest rates. It means that we will put a cloud over the United States that might not go away anytime soon."