We’re Gonna Need a Bigger Belt

Sometime next year, probably before summer, total federal government debt will reach its Congressionally-set limit. In theory, that could cause the government to be unable to pay its bills, and to default, or come near to default, on its debt. At that point, at lot of folks in Congress, as well as policy braniacs all over Washington, will push to do what Congress usually does when the legal debt limit appears in sight: Vote to raise the debt limit, yet again. It’s a lot like the belt-loosening ritual familiar to just about anyone who’s ever continued to gain a lot of weight over a long period of time. Eventually, you just give up and admit to yourself that the looser notch is the new normal, and you’ll never tighten it quite as much again.

The problem this time around is that a number of freshmen Republicans ran on anti-spending, anti-debt campaigns, and they’re not sure they can support yet another hike in the debt ceiling. And if not enough Congress critters go for raising the limit, then there just might be a government shutdown. Just like vampires need blood to survive, Washington needs debt to keep working, or so the theory goes.

Paul Krugman, for example, warned just yesterday that thanks to GOP stubbornness, numerous public services could be at risk. “It’s hard to see how this situation is resolved without a major crisis of some kind,” he wrote. Isn’t it plain to see that ever-rising debt is as American as apple pie, that good government and more debt go together like peanut butter and jelly, that it is our manifest destiny to continue taking out loans on the taxpayer’s tab until government borrowing has utterly transcended cliche?

Clearly, Krugman is laying the groundwork to blame debt-skeptics when the the issue starts to make bigger headlines next year. But it’s worth looking at what’s really going on. First, there’s little indication that most Republicans will simply refuse to raise the limit, period, no dealing. That may be the case for some freshmen, but it's doubtful that a flat refusal will end up being the primary Republican position. Presumptive House Majority Leader John Boehner is already indicating that he’ll work to ensure that it’s raised. And even the eternal foes of expanding government revenue at Grover Norquist’s Americans for Tax Reform have agreed that “no one, regardless of who is in the majority, wants to see the US default on its debt.” Instead, Republicans will probably attempt to pitch Obama and the Democratic party a sort of bargain in which Democrats agree to significant spending cuts and Republicans go along with an increase in the debt ceiling. If Democrats won’t agree to those terms, and government operations go through a rough patch, will it really be entirely the GOP’s fault for refusing to raise the ceiling?

So you can probably count on some serious debt-related drama as the debate grows. But it’s also worth noting that, as The Manhattan Institute’s Josh Barro wrote earlier this month, it’s not clear that a drawn out battle over the debt limit actually would lead to a default or a government shutdown.

The consensus view seems to be that a debt limit impasse will lead to an acute crisis: at least a government shutdown, possibly a failure to make interest payments on government bonds, and an ensuing spike in bond yields and fall in stock prices. The urgency of the crisis would make it self-limiting, one side would quickly cave, and Congress would approve a debt limit increase.

I think another scenario is at least as plausible: failure to raise the debt limit could lead to a prolonged standoff, with the Obama Administration using financial strategies and accounting gimmicks to stay technically within the limit and continue operating the government. In doing so, the Administration would draw on plans created when the federal government hit the debt limit in 1995, and essentially copy tactics that are regularly used by illiquid state governments. Obama and the Congress could muddle through for months or, theoretically, years without a debt limit increase, and without an acute crisis in the bond markets.

Barro’s column lays out a host of strategies that might allow the Obama administration to proceed temporarily without either raising the debt limit or shutting down the government, and it’s worth reading in full. But the key points he makes are that previous governments have made provisions for the possibility of a debt-limit showdown, and previous battles over the debt ceiling didn’t actually trigger significant market panic. Instead, markets remained confident that the U.S. would eventually find a way to pay its bills, presumably by reaching an agreement to allow the borrowing to continue somehow or another.

This is one of the consequences of allowing the government to take a lax attitude toward debt for years on end. In the near term, lifting the debt ceiling may be inevitable.

All of which is to say that you can probably expect Washington to go ahead and loosen its belt another notch once again. The important question is whether it will also agree to go on a diet as it does.

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  • Suki||

    That was one magic loogie!

    Good morning reason.

  • Obama||

    Stop worrying guys. This isn't anything we can't spend our way out of.

  • Tim||

    The Debt isn't Bruce from Jaws, it's that man eating plant from Little Shop of Horrors.

  • Audrey II||

    Feed me, Seymour!

  • SFC B||

    "If Democrats won’t agree to those terms, and government operations go through a rough patch, will it really be entirely the GOP’s fault for refusing to raise the ceiling?"

    It will be the fault of the GOP and their evil overlords The Libertarians. Haven't you been paying a lick of attention?

  • MNG||

    So Libertarians are like Sith Lords, quietly pulling the strings of the GOP empire?

    Do you guys have bad-ass double light sabers?

  • ||

    Yes. Yes we do.

  • Jeffersonian||

    Red ones, cuz we're on the Dark Side. Mwahahaha!

  • ||

    Not all of them are red. Warty's is purple, the same color as his big huge raging boner. Nutrasweet's is clear because he is as pale as edward. And Epi's is rainbow because he is gay. And John's is blood red because he uses the blood of puppies to color his light saber.

  • Xeones||

    Mine glows with an eldritch color that has no name in any human language.

  • MARDUK, NAMER OF COLORS||

    In other words, "hot pink."

  • ||

    NOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO!!!!!!!!!!!!!!!!!!!!

  • ||

    I prefer my Nuke Saber.

    (May the Curve of Binding Energy be With You.)

  • MNG||

    Anyone who saw the hysterics on MSNBC on election night (especially from O'Donnell) can only hope that some move towards blocking the raising of the debt ceiling is made. The political fireworks alone would stimulate the economy...

  • ||

    Right, MNG, Christine O'Donnell was the most hysterical person on MSNBC on election night. Can you bring yourself to criticizing someone on your side ever?

  • Fluffy||

    I think he means Nora O'Donnell dude.

  • MNG||

    Er, this guy dude
    http://en.wikipedia.org/wiki/Lawrence_O'Donnell

  • MNG||

    http://en.wikipedia.org/wiki/Lawrence_O'Donnell

  • ||

    At least it wasn't Norm O'Donnell. That guy was really crazy.

  • ||

    He was good in Dirty Work.

  • Old Mexican||

    Re: Tulpa,

    Right, MNG, Christine O'Donnell

    That would be Lawrence O'Donnell, the most honest man in the whole spectrum of American journalist, as he confessed to all to hear and in front of Glen Greenwald that he, Lawrence, is a dyed-in-the-wool Socialist.

    [Memo to L.O. - we kinda got that a long time ago, dude!]

  • ||

    Which is why he lives an ascetic life of quiet contemplation, without any material possessions, as he donates all the money he makes for merely yammmering to the poor...
    practically St. Francis...

  • Tim||

    Probably a Dem fantasy that Repubs will cause a backlash type shutdown replicating Gingrich's Bridge Too Far of 1995.

  • robc||

    Why would the hitting the debt limit cause default? Servicing the debt only costs a small fraction of the debt, so that is easily done with current revenue.

    Of course, might not be able to do much else, but default doesnt seem to be a possibility at all.

  • ||

    The problem is, you need to add new debt if you're running a deficit. Spending would have to be reduced to match revenues, which is apparently a horror no government should ever have to face.

  • Mo||

    I think it's because of the amount of mandatory spending. So either Republicans would have to vote to stop sending out SS checks, reduce Medicare or stop paying federal employees immediately (which may be illegal) or we'd have to take more debt.

  • robc||

    None of which are mandatory.

  • Mo||

    SS and Medicare is considered mandatory spending because they are not dependent on appropriation bills.

  • ||

    The present Congress isn't bound by any previous Congress, so no legislative action by Congress can be illegal.

  • Mo||

    Ceasing to pay federal employees for work done is may be unconstitutional under the 14th amendment. They would have to lay people off or cease payment for Medicare or SS, which is a PR nightmare.

  • ||

    Unless their contracts were signed before 1865, the 14th amendment doesn't apply.

  • robc||

    I think he meant the 13th.

    And yeah, we got to pay them one last paycheck before furloughing them.

  • Mo||

    Oops, meant the 13th.

  • robc||

    Its not illegal to delay the paycheck though. The workers could sue, but they cant get the money until the money exists. They will eventually get paid for their work, so no 13th violation.

  • Ted S.||

    Use the National Guard to run the National Parks and Historic Sites, and lay off the rest of the federal workers.

  • Kristen||

    I would love for the gubmint to shut down right after a monster Nor'easter dumps 20-30" of champagne powder all over northern Vermont. No reason.

  • ||

    I think you mean "no raisin".

  • Vermont Gun Owner||

    That could be any day.

  • Kristen||

    I wish - I'm watching the weather obssessively after last year's tropical torrential rain disaster in January, and it looks like nothing of substance til next week. Also checking the Stowe and Smuggs webcams and all their machine efforts are going down the tubes. Isawteh guns going at Smuggs a couple days ago, and now it's all brown grass.

    But I'll see ya in January, regardless!

  • Jeffersonian||

    It isn't an either-or scenario. Why can't deficit hawks hold their votes back in exchange for, say, a $400 billion cut in annual spending? Sure, we'll raise the ceiling...just for $600B, not $1T.

  • ||

    The vote on raising the debt ceiling gives smart Tea Partiers who hold the balance of votes a great leverage point for adding riders cutting programs, etc.

    All we need are smart Tea Partiers who hold the balance of votes.

  • ||

    Eh, not really. The game of chicken is a loser.

  • Restoras||

    "The important question is whether it will also agree to go on a diet as it does."

    Isn't the problem here that the obese entity in question needs to admit it has a gluttony problem before it will agree to something so horribly, terrifyingly drastic as a diet?

  • China Bickle||

    So you can probably count on some serious debt-related drama as the debate grows.

    You talkin' to me? You talkin' to me? You talkin' to me? Then who the hell else are you talking... you talking to me? Well I'm the only one here. Who the fuck do you think you're talking to? Oh yeah? OK.

  • ||

    If Democrats won’t agree to those terms, and government operations go through a rough patch, will it really be entirely the GOP’s fault for refusing to raise the ceiling?

    Obviously, considering the GOP was at fault for everything bad that happened while they had 40 senators and a minority in the House.

  • Xeones||

    The important question is whether it will also agree to go on a diet as it does.

    Hey, one i know the answer to!: nope.

  • Seth||

    When I was wearing your dad's pants last night, I realized that if I wear pants that are, like, a little too small, it might encourage me to lose a little weight.

    Also, chicks can kinda see, like, you know, the borders and outline of my dick a little.

  • Paul Krugman||

    "our nation is in much worse shape, much closer to a political breakdown, than most people realize."

    See, I can be right!

  • Old Mexican||

    Paul Krugman, for example, warned just yesterday that thanks to GOP stubbornness, numerous public services could be at risk.

    Oh Paul, you tease!

  • Old Mexican||

    "I [Josh Barro] think another scenario is at least as plausible: failure to raise the debt limit could lead to a prolonged standoff, with the Obama Administration using financial strategies and accounting gimmicks to stay technically within the limit and continue operating the government.

    Pretty much the government will simply apply the same kind of schemes that would land any of us in jail.

    "It's not illegal when WE do it, because we SAY it is NOT illegal."

  • ||

    I would love for the gubmint to shut down right after a monster Nor'easter dumps 20-30" of champagne powder all over northern Vermont. No reason.

    "Champagne powder" in Vermont; that's a good one.

    Meanwhile, I'm looking out the window at fifteen or sixteen inches of fresh (light and fluffy) snow which has accumulated since Thursday night. (temp: zero, f Winter has arrived.)

    Unfortunately, the wind is going to start blowing, one of these days, and it's entirely possible drifting will be severe enough to close the road down the hill. I'll be snowbound! I'd better go to the store.

    As for the debt ceiling, why can't we just cut nonessential expenses (National Endowment for the Arts, anyone?) to cover important stuff like debt service?

  • ||

    As idiots and blowhards around me have stated, cutting things like that out of the budget doesn't even amount to a drop in the bucket. Entitlements and defense spending are the real debt increasers.

    "Okay, so we can work on those things, but can't we defund NPR, dismantle the Department of Education, cut the National Endowment for the Arts as a start?" says I.

    But they just go on and on about how that amounts to "peanuts"

    Yes I'm talking about you Jim Philips you fucking moron!

  • Kristen||

    It's been known to happen every so often!

  • Ray||

    "Instead, Republicans will probably attempt to pitch Obama and the Democratic party a sort of bargain in which Democrats agree to significant spending cuts and Republicans go along with an increase in the debt ceiling."

    More like the Republicans will propose tiny spending cuts (some of which won't be spending cuts at all but rather decreases in the rate of spending increases). This will cause the Democrats to whine and make pouty faces, and Obama will threaten to veto the budget, so the Republicans will give in and pass the Democratic budget and raise the debt ceiling too.

    And then we get to invade Iran!

  • Restoras||

    Pretty much...

  • Matrix||

    Iran? Throw North Korea in there too! They're shelling the South.

  • Mike M.||

    Get a load of this: on his blog Krugman says that the solution to the problems of Ireland and the European periphery is to give them "debt relief", and then everything will be just wonderful. Can you believe this garbage?

  • Old Mexican||

    I can and do believe he wrote it. Now, do I believe his B.S.? No, I don't. The man is a crackpot, a crank; he's definitively no economist.

  • Unicorn||

    The man's a genius! I'm shtting a big pile of debt relief right now!!

  • Red Rocks Rockin||

    I guess he forgot they already tried this with Greece and it didn't do any good. Maybe he's getting senile in his old age.

  • Old Mexican||

    "And even the eternal foes of expanding government revenue at Grover Norquist's Americans for Tax Reform have agreed that 'no one, regardless of who is in the majority, wants to see the US default on its debt.'"

    "It's not a matter of economics, it's a matter of national pride, dawg-gone it!"

  • ||

    Krugman isn't even... liberal!!! ...its astounding that the left believes that THE most important thing in the world is bondholders, who, when they loan money to crack whores, believe that they should never, ever, lose any interest or take a loss.
    Of course, they're enablers (the FED) believe that CREDIT is the lifeblood of the economy ...instead of maybe production, work, and buying within your means. So maybe keeping the credit heroin flowing IS the most important thing the gubermint can do.

  • ||

    As idiots and blowhards around me have stated, cutting things like that out of the budget doesn't even amount to a drop in the bucket.

    As a wily old Chinaman of my acquaintance used to tell me, "The journey of a thousand miles begins with a single step."

  • Rich||

    Exactly. Drop by drop, the bucket is filled -- or emptied, in this case.

  • ||

    The "debt ceiling" is a puppet theatre and the debates around it are as stereotyped as a Punch and Judy show.

    The only difference is the name of the party pulling the strings each time.

  • Xeones||

    Oh, and lest i forget: SHUT THE FUCK UP, KRUG-MAN.

  • prolefeed||

    no one, regardless of who is in the majority, wants to see the US default on its debt.

    No in Congress, maybe. I'm all for the federal government's ability to borrow being more or less permanently destroyed by a default, so they have to live within their tax revenues since no investor will loan them money any more.

  • prolefeed||

    Meanwhile, I'm looking out the window at fifteen or sixteen inches of fresh (light and fluffy) snow which has accumulated since Thursday night. (temp: zero, f Winter has arrived.)

    I'm looking out at a sunny day in the mid to high 70s, with some palm trees framing my pool, which is still warm enough to swim in.

    But hey, enjoy the Mainland!

  • Trespassers W||

    Yeah, well at least I don't live in one of the Freak States.

    Now, if you don't mind, I'm going to turn my pot of resentment down to "simmer".

  • Bernie Madoff||

    The consensus view seems to be that a debt limit impasse will lead to an acute crisis: at least a government shutdown, possibly a failure to make interest payments on government bonds...

    That's not an accounting gimmick. It's a business model. You just have to find more "investors" so you can pay back the first guy with money you borrowed from the second guy. With interest.

  • ||

    How many on capitol hill think servicing the debt requires hookers?

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