Right on schedule, the United States hits its $14.292 trillion debt limit today. This does not create an immediate crisis, but we can now see a crisis on the horizon.
As we recently discussed, there are, in effect, two separate-but-related deadlines. The first is hitting the debt limit itself, and that milestone comes today. The second is more important. The Treasury Department has begun juggling the books, taking “extraordinary measures” to avoid a catastrophe. It can keep this up for 11 weeks, giving policymakers until early August to do what they already know they have to do.
In the meantime, the hostage strategy will continue to play out — Republicans are threatening to create a recession, on purpose, unless Democrats give them a whole lot of unspecified spending cuts. If Dems fail to comply with the demands, the GOP will refuse to act and on August 2, we’ll reach the next phase.
And then what happens? Paul Krugman explains that Americans can expect “seriously bad consequences.”
For if we hit the debt ceiling, the government will be forced to stop paying roughly a third of its bills, because that’s the share of spending currently financed by borrowing. So will it stop sending out Social Security checks? Will it stop paying doctors and hospitals that treat Medicare patients? Will it stop paying the contractors supplying fuel and munitions to our military? Or will it stop paying interest on the debt?
Don’t say “none of the above.” As I’ve written before, the federal government is basically an insurance company with an army, so I’ve just described all the major components of federal spending. At least one, and probably several, of these components will face payment stoppages if federal borrowing is cut off.
And what would such payment stops do to the economy? Nothing good. Consumer spending would probably crash, as nervous seniors started wondering how to pay for rent and food. Businesses that depend on government purchases would slash payrolls and cancel investments.
Furthermore, markets might well panic, especially if interest payments are missed. And the consequences of undermining faith in U.S. debt might be especially severe because that debt plays a crucial role in many financial transactions.
In case this isn’t obvious, it’s extraordinarily easy to avoid these consequences. All Republicans have to do is what policymakers from both parties have done for many decades — simply hold a vote and raise the debt ceiling. At that point, lawmakers can get back to fighting over the budget, entitlements, spending cuts, taxes, etc.
But that’s not happening, because radicalized Republicans have decided to start playing by new, wildly irresponsible rules, and Democrats aren’t drawing lines in the sand, demanding an end to GOP recklessness.
Time will tell just how long the extortionists will keep up the game, the extent to which this hurts the country, and how long Republicans can ignore Wall Street and American business leaders.
But the resolution won’t be soon — we hit the debt ceiling today, and the House is taking the week off.