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Beyond The Shutdown, There’s A Bigger Battle Brewing

Filed by KOSU News in Politics.
October 1, 2013

This week’s government shutdown could be just a warmup for an even bigger budget battle in a couple of weeks.

Congress has to raise the limit on the amount of money the federal government is allowed to borrow by Oct. 17. If the debt ceiling is not raised on time, President Obama warns that Washington won’t be able to keep paying its bills.

“It’d be far more dangerous than a government shutdown, as bad as a shutdown is,” Obama said Tuesday. “It would be an economic shutdown.”

No one is exactly sure what would happen if the government suddenly had to make do without a credit card. But experts agree that the fallout could be scary and far-reaching.

While government shutdowns are messy and disruptive, the country has lived through them before. The U.S. government, on the other hand, has never had to go cold turkey on borrowed money.

If Congress fails to raise the debt ceiling, the government has to get by with just the amount of cash that comes in every day.

Former Republican budget staffer Steve Bell has been trying to imagine what that would look like. “The Treasury has to wait all day for money to come in and see how much money they have and see how much they can pay,” he says. “It’s kind of a stunning thing because any business that ran that way would be bankrupt.”

Bell, who’s now with the Bipartisan Policy Center, says within a few days, some government bills would go unpaid. And while it might not be as visible as the shutdown, the effects of such a default would be far more serious.

“The consequences of a one-day or two-day failure to pay the debt will not lead to a shutdown,” he says. “But you don’t want to look at your 401(k) a week later.”

Two years ago, Congress merely flirted with not raising the debt ceiling. It cost the government its AAA bond rating, as consumer confidence and the stock market plunged.

Stocks have since rebounded, and the government is still able to borrow money at rock-bottom prices. But economist Nariman Behravesh of IHS Global Insight says lawmakers shouldn’t play chicken again.

“The effect could be big and it would be global,” Behravesh says, “because the ripple effects would just spread all over the world.”

The credit rating agency Standard & Poor’s says it expects lawmakers will raise the debt limit, but it’s not offering any prediction of what will happen if they don’t.

S&P analyst Marie Cavanaugh says other countries, such as Russia and Uruguay, that defaulted even briefly saw lower bond ratings and higher borrowing costs. A U.S. default would be unusual, though, in that it’s not triggered by underlying economic stress.

“This would really be, in our opinion, the first time that a sovereign had defaulted because of brinkmanship in various branches of government,” Cavanaugh says.

Obama underscores that this would be a “self-inflicted wound.” And as he noted Tuesday, failing to raise the debt limit wouldn’t actually save the government any money.

“If you buy a car and you’ve got a car note, you do not save money by not paying your car note,” he said. “You’re just a deadbeat.”

Even deadbeats usually find people willing to lend to them — but often at very high interest rates. Bell, who used to work on Wall Street, doesn’t want the U.S. government to take that chance.

“I don’t know anybody — hedge-fund managers, bond salesmen, bond traders — I don’t know anybody there who would tell you that they know the consequences of not paying, on time and in full, all of the bills the United States owes,” he says.

Bell worries that, looking back on this budget battle years from now, the question people will be asking is, “What were they thinking?” [Copyright 2013 NPR]

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