What’s Worse Than Tax Hikes and an Austerity Crisis?

“America cannot afford another debate with this Congress about whether or not they should pay the bills they’ve already racked up,” said President Barack Obama at a press conference on Monday.Uncle Sam Money New Feature 300x270

The President is, of course, talking about the debt ceiling. The United States hit its statutory debt limit of $16.4 trillion on December 31, and Washington’s fiscal wizards have used every incantation in the book to create about $200 billion in breathing room before Uncle Sam cracks his head on the ceiling.

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By most estimates, that extra funding will last until the end of February or early March, right about the same time Congress has to act on the sequester. You’ll remember that the spending half of the fiscal cliff was delayed for two months so policymakers could catch their breath after a long fight over tax policy. The outcome was a compromise that nobody was very happy with, but seems to have prevented total economic calamity.

Well, delayed at least. The fiscal cliff became a symbol for the sum of America’s financial problems, but many experts and observers believe that the worst is not behind us. One of the few things scarier than across-the-board tax hikes is jeopardizing the faith and credit of the United States’ debt. One of the few things scarier than crippling austerity measures and ill-conceived spending cuts is the failure to pay troops or social security benefits.

Those are the risks of Uncle Sam hitting his head against the debt ceiling, and the resulting concussion would be more devastating for the U.S. economy than the fiscal cliff. Worst-case scenario for the cliff, we at least made progress against the deficit — awkward, inefficient progress, but progress nonetheless. Even the best-case scenario with the debt ceiling would probably add to America’s growing debt problem.

elections republicans democrats“It would be a self-inflicted wound on the economy,” said the President in his Monday press conference. “It would slow down our growth, might tip us into recession. And ironically it would probably increase our deficit. So to even entertain the idea of this happening, of the United States of America not paying its bills, is irresponsible. It’s absurd. As the Speaker said two years ago, it would be, and I’m quoting Speaker Boehner now, ‘a financial disaster, not only for us, but for the worldwide economy.'”

Ostensibly, that means agreement between two parties that are bitterly divided over fiscal issues. But the fiscal cliff tax deal apparently left a bad taste in everyone’s mouths, and GOP leaders have been cited as saying that they are willing to hold a the debt ceiling hostage in order to win spending cut concessions from Democrats.

Senator John Cornyn (R-Texas) wrote in a Houston Chronicle op-ed: “The coming deadlines will be the next flashpoints in our ongoing fight to bring fiscal sanity to Washington. It may be necessary to partially shut down the government in order to secure the long-term fiscal well being of our country, rather than plod along the path of Greece, Italy and Spain. President Obama needs to take note of this reality and put forward a plan to avoid it immediately.”

Again, the plan that GOP members are seeking is substantial, comprehensive spending reform. For reference, here’s a look at America’s total public debt as a percent of GDP. Who could blame fiscal conservatives for wanting to slam the breaks of spending?

Debt as Percent of GDP

But the President, experts, and market participants seem to be in a consensus: The full faith and credit of the United States of America is not a bargaining chip.ecomomicdownfall_Full

“The last time republicans in Congress even flirted with this idea, our AAA credit rating was downgraded for the first time in our history. Our businesses created the fewest jobs of any month in nearly the past three years, and ironically, the whole fiasco actually added to the deficit,” said the President at the press conference.

Cut to Tuesday morning. Fitch, one of the big three international credit rating agencies, issued a press release stating that, “Fitch Ratings’ expectation is that Congress will raise the debt ceiling and that the risk of a U.S. sovereign default remains extremely low. Nonetheless, and in line with our previous guidance, failure to raise the debt ceiling in a timely manner will prompt a formal review of the U.S. sovereign ratings.”

It added, “In Fitch’s opinion, the debt ceiling is an ineffective and potentially dangerous mechanism for enforcing fiscal discipline. It does not prevent tax and spending decisions that will incur debt issuance in excess of the ceiling while the sanction of not raising the ceiling risks a sovereign default and renders such a threat incredible.”

Echoing Obama’s statement, “The last time Congress approved an increase in the debt ceiling in August 2011, the federal government came perilously close to being in a situation where, in the words of the Treasury Secretary, it would be unable ‘to meet our commitments securely.'”

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