In previous columns, I expressed optimism about the debt ceiling debate, assuming, with most others, that a default would not occur. However, as I write this, a number of people now think a default is not only possible but maybe even likely. Hypothetical questions about what would happen are turning into strategic plans about what to do.
Business leaders from every level, big and small, local and international, have been unanimous in urging Congress and the President to make a deal. The Bipartisan Policy Center has done a comprehensive review of the economic consequences if they do not, and it makes for very grim reading. It lays out all the options that would be available to policy makers and none of them is attractive. (Full disclosure: I am a senior fellow at BPC, but did not participate in this study).
Equity funds have started to bet against the dollar, taking positions that will produce a return for them if the default occurs. Their money managers say it is distateful for them to do it, but they have a fiduciary responsibility to their investors. The Republican leader in the Senate, Mitch McConnell, R-Ky., has tried to break the deadlock in a creative way because he says that default is simply not an option.
And yet, in the blogosphere and on some talk shows, there are plenty of voices that say that it is an option, maybe even a desireable one. McConnell is being blasted as too timid. Those who do so either refuse to believe the counsel of people with real life experience in these matters or think that "macho" matters more. "Better to crash the economy to show how tough we are than to make any kind of compromise!"
They say that putting a ceiling on the debt will produce a dramatic change in the direction of government, and they are right, but they don't realize which direction it will take. Instead of shrinking the debt as a problem, a default would increase it. Government debt is measured as a percentage of the whole economy. If the economy shrinks while the debt stays the same, the debt percentage increases and becomes a greater burden. Rising interest rates, which will come if the U.S. credit rating is downgraded, make the problem even worse.
Also, a default would weaken the principles of the Constitution, not reinforce them. The Constitution's structure is built on the concept of "separation of power," with control of the money placed firmly in the congressional, not executive, branch. Failure to raise the debt ceiling would mean that there will not be enough money to pay all the bills, and the official who would have the power to determine how available funds would be disbursed would be the Secretary of the Treasury. Congress would see a continuation of the process by which congressional power has seeped into executive hands.
If the stakes weren't so high, this would be amusing political theater. President Obama has moved so far towards positions that conservative think tanks have been pushing for years that the pages of The New York Times are filled with angry denunciations of him from his former supporters on the left. However, bloggers and talk show hosts on the right still denounce his every move. One non-ideological observer asked me, "Why can't you Republicans take 'yes' for an answer?"
Unemployment is stubbornly high and the economy remains dangerously weak; the so-called recovery is very anemic. It cannot absorb the shock that would come from the first default on our national debt since Alexander Hamilton created it in 1790.
Robert Bennett, former U.S. Senator from Utah, is a part-time teacher, researcher and lecturer at the University of Utah's Hinckley Institute of Politics.