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Default Could Blunt GOP Deficit Goals

Republicans have made reducing the deficit their cause célèbre, but a failure to boost the debt ceiling could make the GOP’s policy goals that much harder to accomplish.

Without a debt limit increase by the Treasury’s Aug. 2 deadline, budget experts say the country’s budget woes could actually get worse by raising borrowing costs.

“Paradoxically, not raising the debt limit could make the deficit worse,” said Jerome Powell, a former Treasury official in the George H.W. Bush administration and now a visiting scholar at the Bipartisan Policy Center.

Republicans, in particular, could suffer in two ways: They could lose their leverage to force spending cuts that might reduce the deficit, and they are likely to take the political hit for the higher interest rates that would follow an unwillingness or inability to raise the debt ceiling.

Senate Minority Leader Mitch McConnell (R-Ky.) acknowledged as much in a Wednesday radio interview on the “Laura Ingraham Show.”

“The reason default is no better an idea today than when Newt Gingrich tried it in 1995 is that it destroys your brand and would give the president an opportunity to blame Republicans for a bad economy,” McConnell said.

It appears that calculus was behind McConnell’s decision to unveil a Plan B that would essentially put the burden of raising the debt limit on President Barack Obama. Under the plan, Obama would get the authority to raise the debt limit in three installments, unless Congress passes a resolution of disapproval and can overcome a presidential veto with a supermajority. The proposal would also require Obama to propose spending cuts, but the debt ceiling increase would take place regardless of whether Congress enacts the cuts.

Part of McConnell’s — and Speaker John Boehner’s (R-Ohio) — problem is that some of his rank and file are dubious of the Treasury deadline. But those Members are also the ones who have seized on the issue of deficit reduction as a politically winning one. Several freshman Senate Republicans have argued that Democrats and the White House have resorted to scare tactics to win over public opinion.

“I am a little bit cynical about the scare mongering and putting America’s back up against this Aug. 2 deadline just to get an increase in the American credit card,” Sen. Ron Johnson (R-Wis.) said Thursday.

Johnson’s attitude is shared by several other freshmen, including House Republicans who won their seats in a wave election based on cutting Washington spending, which they believe is out of control and weighing down the economy.

“It’s the only reason I ran,” Johnson said. “I didn’t run because I wanted to be a U.S. Senator. I ran because our nation is in peril. We are bankrupting America and we have to solve that problem.”

This band of lawmakers is wary of a compromise for fear that it would require a relinquishing of their principles, which has made the chances for a deal difficult at best.

“Compromise for the sake of compromise is not good for our country,” Sen. Marco Rubio (R-Fla.) said Wednesday.

The results of failing to raise the debt limit would be almost immediate. In August, the Treasury Department is scheduled to borrow $500 billion and pay off $500 billion in expiring debts.

“We have to sell $500 billion of new debt in August to pay off old debt,” Powell said. “In the ordinary course of events, that’s not a problem. But in the middle of all the chaos and bad press that the United States is unable to pay its obligations during that environment, investors are probably going to require higher rates.”

The Treasury Department has said it has until Aug. 2, when its borrowing authority would run out. Congressional leaders and the White House have been working feverishly in recent weeks to try to reach an agreement on a deficit reduction package that would win enough votes in Congress to raise the debt limit.

But negotiators are at loggerheads over raising taxes and which spending cuts to enact as a way to bring down the deficit. Republicans oppose tax increases and want to focus on limiting spending. The GOP argues that raising taxes would hurt the economy. Democrats support including spending cuts in the plan but also want to raise revenue by closing what they consider tax loopholes.

Powell, who spoke to House Republicans on Friday, said that if no deal is reached by the time the Treasury needs to pay interest and principal on its outstanding debt, the government would struggle to pay for much else — a spectacle that is “completely unprecedented” and could spook investors.

“So we service the debt and then we don’t service 50 percent of our remaining obligations, [such as education, social safety net and other programs] and that 50 percent is what the public sees,” Powell said. “This gigantic cut in government spending is going to be a major negative shock to the economy, and it could push the economy back into recession.”

That economic shock also would likely add to the deficit with lower tax revenue coming in and higher costs to the government, such as increased unemployment insurance expenses due to higher unemployment resulting from a bad economy.

Treasury Secretary Timothy Geithner said much the same thing in a meeting Thursday with Senate Democrats, according to Senators in attendance.

It’s uncertain how much borrowing rates would increase by because Treasury security rates are set in auctions by investors. “The question is how much do rates go up and for how long?” Powell said.

With negotiations in Congress floundering, Senate Majority Leader Harry Reid (D-Nev.) was in talks with McConnell last week over changes to the GOP leader’s plan that could make it a more viable option in the Senate.

Democrats also believe Republicans would shoulder more blame after Aug. 2, and have been sending that signal in an effort to win their cooperation on a debt deal.

“We have been telegraphing to [the] GOP that they lose leverage after default because the president has the bully pulpit,” said a Senate Democratic leadership aide.

While Sen. Charles Schumer (D-N.Y.) Thursday gave McConnell credit for at least taking action to prevent a default, he also said that it was out of political considerations.

“Sen. McConnell put on the floor a proposal that at least would avoid default with all its awful consequences,” Schumer said. “He did it for political reasons … because he knew that if we defaulted it would fall on the backs of the Republican Party.”

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