McManus: Debt-limit delay in the real world

In 2008, as financial crisis threatened the U.S. banking system, President George W. Bush asked Congress to approve an emergency bailout. Leaders of both parties blessed the idea; both presidential candidates — Barack Obama and John McCain — endorsed it. But conservative Republicans and liberal Democrats rebelled, the House defeated the bill — and the stock market plummeted in real time during the roll call. It took the prospect of economic meltdown to get the House to reverse itself and approve Bush’s Troubled Asset Relief Program.

Why the history lesson? We appear to be heading for a rerun of that kind of fiscal policy melodrama.

President Obama and his Republican adversaries are locked in an impasse over the debt ceiling, the $14-trillion limit on how much the federal government can borrow. If Congress doesn’t raise the ceiling by Aug. 2, the government won’t be able to pay all of its bills.

Republicans say they’re willing to raise the ceiling but only if they get deep and immediate cuts in federal spending — and no tax increases. Obama and the Democrats say they’re willing to accept tough spending cuts, but they’re holding out for eliminating tax breaks for (as Obama likes to put it) “millionaires and billionaires.”

If this were a normal impasse over fiscal policy, here’s what would happen now: We’d suffer through several weeks of tiresome polemics from members on both sides. We’d watch anxiously as negotiations ended in walkouts. And then, as the deadline approached, Obama and House Speaker John A. Boehner of Ohio would sit down and cut a deal, just as they did in April when a short-term spending bill was needed to avoid a government shutdown.

That’s not likely to happen as easily this time. Instead, it’s looking increasingly likely that we’ll have to go through another sickening market dive before the two parties can cut a deal.

“If we could arrange for a life-threatening but not fatal brush with disaster, that would help,” said a Republican financial expert who has been trying — fruitlessly so far — to nudge members of Congress toward compromise. (He insisted that he couldn’t be quoted by name, lest he sound as if he were rooting for the market to dive.)

It shouldn’t take the gut-wrenching threat of a financial crisis to force elected officials to do their jobs. But it does.

The problem begins with polarization in both houses of Congress. More members on both sides represent the uncompromising wings of their parties; there are fewer dealmakers, especially in the House.

Boehner, a dealmaker at heart, faces an especially difficult challenge. The last time he asked his members to accept a fiscal compromise — on April’s short-term spending bill — 59 Republicans, or almost one-fourth of his caucus, refused to go along. Boehner needed the votes of dozens of Democrats to win.

This bill could be even harder for “tea party” Republicans to swallow. Some vote counters think as many as 90 Republicans in the House intend to vote no on an increase in the debt ceiling no matter what kind of deal is reached.

One problem is that there has been little pressure from the voting public for a deal, Republican aides say. If anything, conservative voters — the ones who gave the GOP its majority last November — want them to stick to their guns.

Traditionally conservative business organizations, including the U.S. Chamber of Commerce and Wall Street investment banks, have been pushing for a deal, but their efforts have shown little success. This isn’t Wall Street’s GOP anymore.

Indeed, leaders of the Tea Party Caucus in Congress have tried to build a case that refusing to raise the debt ceiling wouldn’t have catastrophic consequences. All that would happen, Sen. Patrick J. Toomey (R-Pa.) and Rep. Michele Bachmann (R-Minn.) have argued, is that the government would have to “prioritize” its expenditures. In their telling, the Treasury could avoid defaulting on U.S. debt by making interest payments first and deciding later which other government obligations to meet, from Social Security and Medicare payments to federal employee salaries and payments to suppliers.

A long list of economists say they’re wrong — and that even a brief interruption in the federal government’s ability to pay its bills would have serious consequences.

The Bipartisan Policy Center, a centrist Washington think tank, released a study last week analyzing the real-world consequences of a debt-limit freeze. The short answer: After paying the interest on the federal debt to stave off default, the Treasury would have to cut federal spending on everything else by about half. The government could cover Social Security, Medicare, Medicaid and military spending, but that’s about all. Almost every other federal expenditure, including unemployment insurance, college tuition aid — even FBI salaries and IRS refunds — would have to stop.

But many tea partisans simply don’t believe the doomsayers. At worst, Bachmann has said, that kind of government shutdown would just become an exercise in “tough love.”

And that’s where the financial markets come in. Republican members of the House won’t listen to pleas from Obama’s Treasury secretary, ivory tower economists or even Wall Street bankers, but they are likely to pay attention to the bond markets.

And the message they send won’t be subtle. By mid-July, “people are going to start getting nervous one investor at a time,” predicts Mark Zandi, chief economist for Moody’s Analytics and a former advisor to McCain. “And it’s going to start showing up in rising bond yields, a weakened equity market. Then, all of a sudden … the markets are going to start going south.”

If he’s right, we’re about to see a real-world, dollars-and-cents consequence of our broken political system.

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