In a Senate hearing on Thursday, Federal Reserve Chairman Ben Bernanke expressed his concern that Republicans were using debt ceiling negotiations as an opportunity to bargain on deficit cutting. Although he believes the deficit problem needs to be fixed, Bernanke does not think that it is wise to play games with the debt ceiling. He doesn't want to see the market for Treasuries get spooked by Washington's bickering. Why aren't Republicans more worried about this problem? They may realize that it works to their advantage.
There are two sorts of problems that could result from Congress failing to raise the debt ceiling promptly. In each case, Republicans might be better off taking their time.
Problem #1: No Agreement Is Reached On Time
Although the U.S. will bump its head on the debt ceiling next week, the Treasury has said it can take extraordinary measures until early August to keep the government going. After that, however, more significant obligations will have to be cut to prevent default. Is this supposed to scare Republicans?
For starters, the Republicans know that the Obama administration does not want to go down in history as the one under which the U.S. first defaulted. As a result, it will do whatever is necessary to make debt payments. In other words, it will cut other government obligations until a new deal is reached.
Telling Republicans you'll have to cut government spending is sort of like telling Br'er Rabbit you're going to throw him into the briar patch. "No. Don't. Stop," Republicans would calmly respond in quiet monotone. The precise thing that deficit hawks want is for spending to be cut, so if that's the immediate result of negotiations stalling, then it isn't likely to upset them very much.
Problem #2: Market Worries and Debt Cost Rises
But if that happens, the market might freak out a little. You might begin to see debt costs rise as investors demand a higher risk premium for U.S. Treasuries. Should this worry Republicans?
Again, it's hard to see why it would. So what you're saying is that it's harder for the government to spend more money? Just like before, making it more difficult for government spending to increase is exactly what deficit hawks want. Indeed, the "starve the beast" philosophy will finally have won, in a sense. Republicans can then state that the U.S. can no longer afford to support its spending habits, because investors are demanding more for borrowing. As a result, spending must be cut.
Of course, each of these results has a Democratic response. On the first, it's important to remember that the Treasury ultimately decides what obligations to pay first. So the Obama administration could simply decide not to pay obligations more important to Republicans than to Democrats. On the second, why wouldn't higher taxes be just as effective as less spending to better satisfy the higher debt costs that the U.S. would face?
Presumably, these are risks that Republican deficit hawks are willing to take. Indeed, they will have rejoinders ready to counter these Democratic moves. On the first, they'll say that the Democrats are playing politics by cutting programs important to Republicans. On the second, they'll argue that Americans would prefer less spending to higher taxes. They may be right, as Americans certainly do hate their taxes; but then, they also love their entitlements. It will be interesting to see how this political battle plays out this summer.