2. What happens if we don't raise the debt limit?
Economic catastrophe happens. Partial government shutdown, interest rate spikes, job losses, a possible double dip recession. Nobody knows, though, because the U.S. has never officially defaulted on its debt.
The U.S. government without a rising debt ceiling is like an average American without a credit card. If you can't borrow money, you can only spend what you earn. As Bruce Bartlett explained to me, "Let's
say the Treasury makes $100 of cash today but it has to pay $1000 of
bills. You have to create a line." If we pay off investors, we can't pay off contractors. If we pay Social Security checks, we can't pay federal employees. Michael Linden predicts the immediate cessation of 40 percent of federal
government activities, including Social Security and military operations.
But the impact could be even deeper than a few weeks of suspended payments, Bartlett continued. US bonds
have been a gold standard, with zero risk of default, for decades. If you introduce
the tiniest little bit of doubt into the minds of
investors, you could poison their impression of America's financial record.
3. Is it reasonable for Republicans to demand short-term spending cuts in exchange for raising the debt ceiling?
Some Republicans say they won't agree to raise the debt limit unless Democrats agree to cut spending. This will be a fascinating fight to follow. Most Democrats have no interest in spending cuts. Most Republicans have no interest in being held responsible for a government shutdown with a ripple effect that lasts decades. Drama!
Conservatives have their own promises to keep. The Tea Party rode into Washington pledging to cut spending, and they have every political incentive to fight a debt ceiling vote that enshrines the status quo. On the other hand, John Boehner knows how important it is for the debt ceiling to go up. So look for him to negotiate with Democrats for something that saves face for conservative deficit hawks, even if it isn't $100 billion in cuts in 2011.
4. If I want budget sanity without catastrophe, what should I wish for?
In an ideal world, the debt limit would not exist and we would pass a long-term fiscally responsible plan to reduce the deficit with slow and steady changes to tax and entitlement policy. In an almost ideal world, Washington would jack up the debt ceiling by trillions of dollars, clearing space for many years of borrowing, in exchange for something like the Bowles-Simpson deficit commission plan. In the real world, you should hope for a debt ceiling increase paired with some long-term promise to reduce domestic spending or reform the tax code.