What Happens If the GOP Refuses to Raise the Debt Ceiling?

As government spending continues to outpace government revenue by more than a trillion dollars a year, the federal debt ceiling, legal limit to US borrowing, is nearing its max. It stands at $14 trillion, and we're on pace to blow through the ceiling in the first half of 2011. That means giving government the right to have more debt could be the first major vote of anti-debt Tea Party representatives.

RNC Chair Michael Steele and key GOP electeds have planted their feet and refused to support a higher debt ceiling. What happens if Congress does not vote to raise the roof and allow the Treasury to legally borrow more money? To get a better idea, I chatted with former Reagan adviser and Fiscal Times columnist Bruce Bartlett. Here is an edited transcript:

The idea of a debt ceiling is weird. Why can't the Treasury borrow and spend as it needs to fulfill its obligations to investors and the law?

It's an incredibly stupid system. I think no other country has a debt ceiling. These countries understand correctly that the deficit, ie the incremental increase in debt, is a consequence of decisions about taxing and spending.

There's no need to have a debt ceiling and there's no evidence that the debt limit has limited spending. It serves no purpose except to give people free votes to look as if they're being fiscally responsible ["Hey look, I voted against raising the debt limit!"] while they act fiscally irresponsible ["Also, I'm voting to cut taxes by $4 trillion."].

What happens if we reach the debt ceiling?

We can't borrow any more money to pay for our obligations. You move to a pure cash flow budget. We can only pay with bills that come in -- payroll taxes, income withholding, that kind of thing. But that's not enough money.

Let's say the Treasury makes $100 of cash today but it has to pay $1000 of bills. You have to create a line. We don't want to piss off investors, so they come first. If bond holders come first, maybe Social Security recipients come second, but eventually you run out of money. Somebody has to go to the back of the line. Somebody expecting payment won't get paid when he's expecting a payment. It's a terrible thing. That's why the debt ceiling has always been raised.

Right. The debt ceiling always been raised. So why worry now?

I've talked to Wall Street types. They say, 'Well they've always raised the debt limit and they always will.' But they don't know how crazy the Tea Party people could be. I don't think John Boehner is crazy. He'll do what he has to do. He needs a couple dozen Republicans to walk the plank to vote with Democrats on this. But I honestly don't know that he has enough.

It is admittedly a wacky scenario. A new party elected to run government better immediately refusing Treasury the money it needs to run government, at all.

It is wacky! People dismiss the consequences of technical default, which is what we'll have if we touch the debt ceiling. But US bonds have been the gold standard, with zero risk of default. You introduce even the tiniest little bit of doubt into the minds of ultraconservative investors, and that's potentially disastrous. It hurts our ability to raise money without a risk premium.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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