America Held Hostage

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The New York Times

America Held Hostage

Six months ago President Obama faced a hostage situation. Republicans threatened to block an extension of middle-class tax cuts unless Mr. Obama gave in and extended tax cuts for the rich too. And the president essentially folded, giving the G.O.P. everything it wanted.

Now, predictably, the hostage-takers are back: blackmail worked well last December, so why not try it again? This time House Republicans say they will refuse to raise the debt ceiling — a step that could inflict major economic damage — unless Mr. Obama agrees to large spending cuts, even as they rule out any tax increase whatsoever. And the question becomes what, if anything, will get the president to say no.

The debt ceiling itself is a strange feature of U.S. law: since Congress must vote to authorize spending and choose tax rates, why have a second vote on whether to allow the borrowing that these spending and taxation policies imply? In practice, however, legislators have historically been willing to raise the debt ceiling as necessary, so this quirk in our system hasn’t mattered very much — until now.

What has changed? The answer is the radicalization of the Republican Party. Normally, a party controlling neither the White House nor the Senate would acknowledge that it isn’t in a position to impose its agenda on the nation. But the modern G.O.P. doesn’t believe in following normal rules.

So what will happen if the ceiling isn’t raised? It has become fashionable on the right to assert that it would be no big deal. On Saturday the editorial page of The Wall Street Journal ridiculed those worried about the consequences of hitting the ceiling as the “Armageddon lobby.”

It’s hard to know whether the “what, us worry?” types believe what they’re saying, or whether they’re just staking out a bargaining position. But in any case, they’re almost surely wrong: seriously bad consequences will follow if the debt ceiling isn’t raised.

For if we hit the debt ceiling, the government will be forced to stop paying roughly a third of its bills, because that’s the share of spending currently financed by borrowing. So will it stop sending out Social Security checks? Will it stop paying doctors and hospitals that treat Medicare patients? Will it stop paying the contractors supplying fuel and munitions to our military? Or will it stop paying interest on the debt?

Don’t say “none of the above.” As I’ve written before, the federal government is basically an insurance company with an army, so I’ve just described all the major components of federal spending. At least one, and probably several, of these components will face payment stoppages if federal borrowing is cut off.

And what would such payment stops do to the economy? Nothing good. Consumer spending would probably crash, as nervous seniors started wondering how to pay for rent and food. Businesses that depend on government purchases would slash payrolls and cancel investments.

Furthermore, markets might well panic, especially if interest payments are missed. And the consequences of undermining faith in U.S. debt might be especially severe because that debt plays a crucial role in many financial transactions.

So hitting the debt ceiling would be a very bad thing. Unfortunately, it may be unavoidable.

Why? Because this is a hostage situation. If the president and his allies operate on the principle that failure to raise the debt ceiling is an unthinkable outcome, to be avoided at all cost, then they have ceded all power to those willing to bring that outcome about. In effect, they will have ripped up the Constitution and given control over America’s government to a party that only controls one house of Congress, but claims to be willing to bring down the economy unless it gets what it wants.

Now, there are good reasons to believe that the G.O.P. isn’t nearly as willing to burn the house down as it claims. Business interests have made it clear that they’re horrified at the prospect of hitting the debt ceiling. Even the virulently anti-Obama U.S. Chamber of Commerce has urged Congress to raise the ceiling “as expeditiously as possible.” And a confrontation over spending would only highlight the fact that Republicans won big last year largely by promising to protect Medicare, then promptly voted to dismantle the program.

But the president can’t call the extortionists’ bluff unless he’s willing to confront them, and accept the associated risks.

According to Harry Reid, the Senate majority leader, Mr. Obama has told Democrats not to draw any “line in the sand” in debt negotiations. Well, count me among those who find this strategy completely baffling. At some point — and sooner rather than later — the president has to draw a line. Otherwise, he might as well move out of the White House, and hand the keys over to the Tea Party.

Paul Krugman

Paul Krugman is professor of Economics and International Affairs at Princeton University and a regular columnist for The New York Times. Krugman was the 2008 recipient of the Nobel Prize in Economics. He is the author of numerous books, including The Conscience of A Liberal, The Return of Depression Economics, and his most recent, End This Depression Now!.

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