The New Nihilism in the Debate over the Debt Ceiling
For decades, fiscal conservatives have used congressional debates over raising the debt limit to vent their frustrations with big government. But no one seriously questioned the need to do so, not until a band of Tea Party uber-conservatives in 2011 resolved to use the debt limit as a bargaining chip in budget talks. They ignored the fact that raising the debt ceiling does not in any way determine future spending or taxes. It simply allows the Treasury to borrow the funds to finance spending that past Congresses and Presidents already have undertaken. Raising the debt limit, in short, is a ministerial act that grants the government the technical legal authority to maintain the full faith and credit of the United States. And since the Treasury securities that comprise that credit underpin much of the operations of the American economy, withholding that technical authority could have devastating economic effects.
To understand how and why, start with the basics. When Washington runs a deficit, the Treasury has to borrow from investors not only to fund the deficit, but also to cover the interest on the government’s existing debt and to refinance much of that debt, all on a continuing basis. A failure to raise the debt limit, as many Tea Party denizens in Congress propose, therefore could force the Treasury to default on those obligations. Sovereign debt defaults have many well-known and very unpleasant consequences. Interest rates spike, stock and bond markets fall sharply, the value of the currency declines dramatically, and the country quickly falls into a deep recession. Given those consequences, no government with sane leadership would ever default voluntarily. Rather, the only reason any country has ever found itself unable to pay the interest on its bonds or issue new government debt is that domestic and foreign investors won’t lend it the funds to do so.
If, beyond all reason, Congress effectively forces our own government to default on our national debt, the results would be particularly nasty. Trillions of dollars in U.S. Treasury securities are held by financial institutions here and abroad, so the default would quickly freeze capital markets around the world. In other words, private lending to businesses and households here and in many other nations would halt. The reserves held by many of the world’s central banks include more trillions of dollars in U.S. Treasuries, so a U.S. default also would quickly bring on a global financial crisis that could dwarf the chaos of late-2008. In fact, even if the debt-limit debate merely increases the concerns of investors that a U.S. debt default somehow might occur, their heightened apprehension could have serious effects on interest rates, the dollar, and the stock and bond markets.
Even before a technical debt default could set in, however, the government would be forced to drastically cut current federal spending. Federal borrowing today covers between 35 and 40 percent of all federal spending. If Congress prevents the Treasury from legally borrowing any more funds, the government will be forced at once to slash spending by 35 percent to 40 percent. Such truly unimaginable cuts — more than ten times those contemplated under the sequester provisions of the 2011 budget Act — would force the President to shut down many parts of the federal government, including some national security operations, and even cut income support programs for tens of millions of retired Americans. And since the President and the Treasury would determine the distribution of these cuts, failure to raise the debt ceiling would effectively shift the power of appropriations from Congress to the Executive.
Conservatives have serious and sincere differences with progressives over certain federal programs and functions. Whether Republican leaders recognize it or not, putting at risk the government’s legal authority to issue new bonds as a lever to press their policy preferences is a form of political nihilism. It easily dismisses the costs of wrecking the operations of government, because it places so little value on government itself. As such, the new political nihilism is as far from genuine conservatism, which seeks to preserve traditional political arrangements, as it is from a progressivism that uses government to reform those arrangements. Nevertheless, by vowing to block any increase in the debt limit until the administration accedes to their budget demands, congressional conservatives have embraced this new nihilism.
Nor, as some Tea Partiers would have it, should a failure to raise the debt limit be seen as a “preemptive default” intended to head off a real one. Global investors continue to lend the United States whatever funding we require — and judging by the low interest rates they accept, they are eager do so. We also are one of only two countries in the world (Denmark is the other) that places a legal limit on the debt its government can issue. So, now a handful of radical members would have the Congress refuse to raise that limit, knowing that the country will face another recession as government programs are slashed, followed by the chaos of a sovereign debt default. Republican leaders have no reasonable alternative but to join the President in rejecting such nihilism.