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Dangers of the Looming Debt Limit Deadline

I am expecting later today that President Barack Obama will announce that he has found Amelia Earhart; tomorrow, it will be D.B. Cooper, followed by Judge Roy Bean. He is on a roll, after all.

The stunning news about Osama bin Laden will help Obama in the short term and the long term. In the short term, a stronger president will have more clout and leverage with his adversaries in the endgame negotiations over the debt ceiling (perhaps he ought to dispatch a Predator drone to circle Speaker John Boehner’s house for the next few weeks). In the long run, he will no longer have to sit by while Republicans criticize him for timidity, indecisiveness, leading from behind, or mirroring President Jimmy Carter in his foreign policy leadership.

But the triumph over bin Laden will not solve the problems of a looming debt ceiling deadline or set of deadlines, difficult negotiations over debt and deficits, not to mention the fundamentals of health care, a sluggish domestic and global economy, Libya, Afghanistan, Pakistan (now even more complicated) or soaring oil prices.

I will get to the debt limit dynamic later. But first I want to offer a few words on some heroes. They include Rep. Bobby Scott (D), one of the best lawmakers in the House, who had the courage to praise a Virginia redistricting plan that weakened the minority participation in his own district to create an additional minority-influenced district in the state. It is exceedingly rare for a House Member to accept willingly a redistricting plan that doesn’t enhance his or her own advantage.

The next batch of heroes includes four Senators: Susan Collins (R-Maine), Joe Lieberman (I-Conn.), Charles Schumer (D-N.Y.) and Lamar Alexander (R-Tenn.). All stepped up to the plate to craft and support an excellent plan to streamline and rationalize the nomination and confirmation process for executive nominees, including taking the dramatic step of reducing significantly the number of Senate-confirmable positions. (It should be noted that New Mexico Democratic Sen. Tom Udall, among others, helped make this reform effort a part of the January Reid/McConnell leadership understanding that headed off a confrontation on the Senate rules over the filibuster.)

I worked on this issue with Collins and Lieberman in 2007 and 2008, and we came close to crafting a sensible reform —but the pressure from committee leaders on both sides to keep their hostage numbers high put the kibosh on the whole reform effort.  This time, it worked, but with a strong, sensible, well-crafted package of reforms. I hope that this model of bipartisan cooperation and Senate discipline (as Alexander said, the Senate still has 1,000 hostages) will not falter because of the unreasonable opposition of a small group of conservatives.

Now let’s turn to something less heroic. The House and Senate currently seem to me to be gripped with a case of mass, temporary (I hope) insanity. First is the nonchalant or aggressively indifferent attitude way too many Members of Congress are taking toward a potential breach in the debt limit for the first time ever.

The idea that we will still have money coming in and can pay our creditors — it will just be government unpaid — is simply ridiculous. First, there is no legal, much less palatable, way to put the Chinese and other bondholders at the front of the line ahead of our other obligations, such as paying our troops or our Social Security recipients or our Medicare beneficiaries or our contractors. Shame on former Minnesota Gov. Tim Pawlenty (R), among others, for perpetrating this fallacy, now echoed by a slew of lawmakers.

Second, even if we can pay some creditors post-default, and even if all will eventually be made whole, there is undoubtedly a heavy price to pay over a long time in the event of a default, and quite possibly in the event of a resolution of the issue that includes a long and dysfunctionally farcical process to get there. Every holder of Treasury paper will quite rationally demand a significant risk premium to hold our dollars under these circumstances — which means higher interest rates, larger federal payments to service the debt and more deficits. If that doesn’t meet the definition of insanity — holding the full faith in the credit of the United States hostage in the name of fiscal discipline so that interest costs can go up — I don’t know what does.

I fear that, despite the fact that leaders like Ohio’s Boehner (R) know better, we may not be able to avoid at least one bout of technical default. I fear almost as much that we will go through a long and painful process of multiple endgame negotiations that may in the end avoid a technical default, but will convince our creditors that you just can’t trust America to deal with its issues.

Then comes my third big fear — we will reach a bipartisan accord on the debt ceiling, by including absolutely foolish and destructive ideas like a spending cap at a ridiculously low and unsustainable level (that will also channel much social policy into tax credits and deductions to avoid the spending cap limits) and a constitutional amendment to balance the budget. This terrible idea is being amplified by West Virginia Sen. Joe Manchin (D), among others. Some lawmakers who know how awful the amendment would be for the country say that it would be no big deal if it passed in Congress, because it would never get through the states. Wrong — I can easily envision a massive mobilization led by conservative activists around the country that could sweep state legislatures. God help us.

Norman Ornstein is a resident scholar at the American Enterprise Institute.

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