The tax-cut war is over for now. “Don’t Ask, Don’t Tell” repeal has been signed into law. The New START treaty has been ratified. But another big battle between Democrats and Republican is looming. The subject is something most Americans have likely never heard of—the debt ceiling. And, unlike the lame-duck battles that somehow found their way to happy conclusions, this one could very easily end in disaster.
The debt ceiling does exactly what it sounds like it does: It caps the total amount of money the government is allowed to owe. Because the government keeps running deficits, it keeps bumping up against it, and Congress then has to increase the limit to keep the government going. Right now, the national debt stands only $400 billion short of the $14.3 trillion ceiling, which means that some time in the next few months Congress will need to vote to raise it.
It’s a safe bet that most politicians would be extremely reluctant to cast such a vote. Deficit reduction was a major component of the Republicans’ battle cry this past electoral season, and Democrats are no more likely to embrace a measure that explicitly allows for more debt. But it’s a necessary evil: Failure to raise the ceiling could lead to full-fledged U.S. default—that is, the inability to make scheduled interest payments on existing Treasury bonds and other government debts.
Recent history provides a sense of just how scary this would be. “The reason the markets calmed down [during the financial crisis] is that we took [the banks’] toxic assets and handed the financial institutions Treasurys,” says Kevin Hassett, a scholar at the American Enterprise Institute. “If we’re in a default situation, the Treasurys themselves are the toxic assets, and it’s not clear what we can hand anybody to calm them down.” Banks and countries like China would view American debt as a severe liability, and markets would be thrown into chaos. Admittedly, this scenario is unlikely, since the Treasury Department can ward off default for months by taking extreme steps, such as raiding Social Security or civil-service pensions. But even if we don’t default, a protracted failure to raise the debt ceiling risks other dire economic consequences by making it look like the United States is ungovernable and a bad place to invest.
So the debt ceiling must be raised. This, however, will require cooperation from the Republicans, who will control the House and have a larger presence in the Senate come January 3. They fully recognize that they have the economic equivalent of the nuclear launch codes at their disposal—control over a weapon whose deployment is highly unlikely, but is nonetheless terrifying—and they plan to exploit this asset to maximum effect. Soon-to-be-Representative Kristi Noem and other newly elected Republicans attacked their opponents in the midterms for past votes to raise the ceiling. Representative Pete Sessions has suggested using the debt ceiling vote as a way to force partial repeal of health care reform. Senator Tom Coburn suggests $350 billion in spending cuts would be a fair trade for raising the debt ceiling. These Republicans are playing with fire, and they don’t care that they might burn down the American economy. When The Daily Caller asked Coburn if these tactics might drive the country dangerously close to defaulting, he replied, “Sure, and that’s the whole point.”
Even supposedly reasonable Republicans are using impending economic catastrophe to win concessions from the White House. Representative Paul Ryan, who has been lauded in Republican circles for his comprehensive and serious budget-reform proposals, recently illustrated the tactic: “The debt ceiling, obviously, is going to have to be increased if we’re not going to default, so the question is, what do we get in exchange for that?” he said in an interview. Senator Bob Corker is trying to assemble a group of senators who won’t vote for a debt-ceiling increase unless it comes with tax and spending reform.
This all adds up to an insane game of chicken. To win such a contest, one must credibly demonstrate a lunacy greater than that of one’s opponent. With more than 80 undisciplined freshmen in the House and an ascendant, bomb-throwing Tea Party wing, Republicans can deliver crazy. President Obama, on the other hand, may well be too reasonable to win at chicken.
Fifteen years ago, a remarkably similar fight over the debt ceiling took place. Newt Gingrich’s Republicans tried to force Bill Clinton to accept spending cuts as a precondition for raising the ceiling. Clinton vetoed their proposal in November 1995, making the Treasury Department scramble to prevent default. By late March 1996, however, the issue was settled. Clinton got his debt-ceiling increase; Republicans received only trivial, face-saving concessions.
In the months between the two bills, Clinton had let the Republicans shut down the government twice rather than sign spending bills containing policies he staunchly opposed. His refusal to back down (and a series of increasingly panicked warnings from Treasury Secretary Robert Rubin) meant that, in late January, most Republicans abandoned Dick Armey, then House Majority Leader, when he continued to demand that Clinton make drastic spending cuts. The president was apparently crazy enough to shut down the government—who was to say he wouldn’t let it default, too? Republicans were not willing to risk receiving the blame for that, as well, and so they capitulated.
The problem, of course, is that trying to out-crazy today’s Republicans is a dangerous proposition. Obama might have prevented things from reaching this point by insisting on an increase of the debt ceiling as part of the tax deal, or, even better, insisting on its elimination altogether. But he didn’t—and now all we can do is wait for the game to begin.
Alexander C. Hart is a reporter-researcher for The New Republic.