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Let me see if I have this right: Senate Republican Leader Mitch McConnell (R-KY) has effectively embraced the debt limit plan first offered months ago by President Obama. Under the McConnell/Obama scenario, Congress would extend the government’s borrowing authority through next year without agreeing to a dime’s worth of spending reductions or tax increases.
As the deadline for action nears, the partisan rhetoric heats up, and the consequences of Congress’s failure to increase the debt limit become clearer, senators of both parties seem to be climbing aboard McConnell’s do-nothing-and-get-out-of-town bandwagon. But the tea party House Republicans are spitting mad. And Obama, who senses new political advantage on the deficit issue, is publicly cool. Somehow, the president, who spent his first two-and-half years in office studiously ignoring the deficit, has now become Fiscal Hawk-in-Chief.
McConnell’s proposal is devilishly complicated, with its multiple congressional votes, supermajority requirements and, perhaps, creation of another bipartisan deficit reduction panel (oh, the forests that give their lives for budget commissions).
Why would McConnell, who a week ago was demanding steep spending cuts as his price for extending the debt limit, now abandon the field without getting any reductions at all? Mostly, I think, because the tea party is scaring him half-to-death. As he candidly acknowledged yesterday, McConnell fears a default would destroy the GOP brand.
But the veteran lawmaker also seems to have recognized the severe economic consequences of the government defaulting on its obligations. In a new report, the Bipartisan Policy Center does a careful day-by-day cash flow analysis of what would happen if the government exceeds its borrowing authority on Aug. 2. And the results are frightening.
From Aug. 3-31, the government would have to reduce spending by $134 billion. That is to say, it would pull $134 billion out of the economy in just 29 days—more than 10 percent of monthly GDP.
The economic effects at a time of 9 percent unemployment would be catastrophic, even if the bond market did not demand higher interest rates on Treasury debt—which it very likely would.
The BPC looked at what would happen if the government tried to preserve its bond rating by paying the $29 billion in interest it will owe on Treasury securities in August, and prioritized the rest of its spending. You might call this the Bachmann model of governing.
Such a step would leave only about $143 billion to pay $277 billion in non-interest bills. Let’s say Obama paid Social Security, unemployment, and veteran’s benefits, met the military payroll, and kept the courts and the FBI running. Those programs alone would take up about $70 billion, leaving only $73 billion to run the rest of government.
With those remaining funds, Washington would have to make some exceedingly unpleasant choices: It could pay doctors, hospitals, nursing homes, and home health agencies what it owed for Medicare and Medicaid services, but that would cost $50 billion and leave just $23 billion to pay all other bills—everybody from defense contractors to senior day care center operators to disaster relief. And keep in mind that these are for goods and services the government has already bought.
Sure, McConnell sees some political advantage in forcing Obama and the Democrats to increase the debt limit unilaterally (I can see the attack ads now). But mostly, he seems very worried about the real world consequences of a fiscal train wreck in part of his own making. And it looks as if he’s looking for a way to stop the locomotive.
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