THE BLOG

Debt-Ceiling Austerity

Oct 09, 2013 | Updated Dec 09, 2013

Has anyone thought that the current position of House Republicans on the debt-ceiling issue is really NOT a bluff? That it might be more than a short-term negotiating ploy?

Treasury Secretary Jack Lew warns that, unless the debt-ceiling is raised before October 17, financial chaos will occur in US and global financial markets. Absent an increase in the US government's borrowing authority, we will be unable to pay our debts and will, for the first time in history (not counting a brief technical default in 1979), default on our obligations. The media predict dire consequences: an enormous economic calamity on a par with the 2008 global financial collapse.

A default by the US government would immediately undermine our creditworthiness - no more Triple A ratings on government bonds, for example. Interest rates would rise almost immediately, thereby making borrowing costs much more expensive. After five years of near zero interest costs (actually negative if you count the modest inflation we've had), suddenly the cost of rolling over more than $16 trillion in public debt will begin to rise significantly. Increased interest costs would add pressure on federal spending and further crowd out additional spending. Government programs would shrink even further than under this year's sequester.

What if this outcome is precisely what some House Republicans want? If their underlying premise is that we already borrow too much to fund programs that we cannot afford (or should not even have), then what better approach is there than to increase immediately the cost of borrowing? The impact will be to halt any new programs and, most likely, force additional cuts to offset the higher interest payments.

Recall that when President Obama embraced the initial sequester rationale, no one actually believed it would take effect. Republicans would compromise rather than see cherished defense programs squeezed; Democrats would compromise rather than see cherished domestic programs squeezed. Nobody budged, and the sequester went into effect.

The current government shutdown is merely the opening act in what may be a long-term strategy of shrinking the US government through austerity. Financial markets will remain open, creditors will not be paid on time - although they will, in due course, be paid - and there will be widespread disruption that will, over time, be resolved. The assumption is that this time, as in the past, there will be a backroom solution, or responsible moderates will find a compromise. But what if the situation today is precisely like the run-up to the sequester? The consequences now will be much more severe - and that is precisely the point, the endgame.

Everyone is assuming that what we are seeing now is short-term posturing to secure some important short-term changes in Obamacare or tax policy. That might be the case, but the recent sequester experience suggests otherwise. The president's adamant refusal to negotiate over the debt-ceiling actually plays into these long-term plans. When the chaos actually begins, President Obama will be blamed for failing to lead, to negotiate, to twist arms, to do everything possible to avert calamity.

If this cynical reading is at least plausible, then the best thing for Obama to do is to abandon his pedestal and do what Lyndon Johnson or Ronald Reagan would do: engage with the Congress to do everything within his power to forge a majority coalition to avert the crisis. If he does not do this, he will share considerable blame for the outcome. If he does engage - and even if he fails in the end - he will at least have positioned himself as a leader who tried but did not succeed.

Charles Kolb is President of the French-American Foundation--United States in New York City. He served in the first Bush White House from 1990 - 1992 as Deputy Assistant to the President for Domestic Policy and at the Office of Management and Budget from 1983 - 1986. From 1997 until 2012 he was president of the Committee for Economic Development, a Washington, D.C.-based think tank. The views in this article are solely the author's.