Tax Analysts Blog

Debt Limit Fights Are All the Same – Except for This One

Posted on Oct 16, 2013

The United States may or may not be on the verge of default, but financial markets seem unworried. Maybe savvy investors know something the rest of us don't. Maybe they know, for instance, that past arguments over raising the debt ceiling have always ended short of disaster. History counsels complacency.

Or does it? After all, history is not all about continuity -- it also involves a lot of change. And in fact, this debt limit debate is different than all the rest. Different because it's a lot more dangerous.

Traditionally, arguments over raising the debt limit have been a form of political theater, with lots of overheated rhetoric but no real chance of default. Of course, to the extent that the debt limit gives Congress any sort of leverage, in its fiscal battles with the executive, that leverage depends on the threat of default. But in the past, that threat has been largely implicit and always empty.

Even history's most dramatic debt limit debate was largely a charade. In 1953 Congress refused President Eisenhower's request for an increase. Newspaper editorials chided Congress for playing games with the nation's credit; then, as now, the president had elite opinion on his side. But except for the doomsayers in Treasury, few observers believed that default was a serious possibility. Raising the ceiling was a matter of prudence, not necessity.

That was certainly the view of Sen. Harry F. Byrd of Virginia, the leading congressional opponent of raising the debt limit. Byrd knew that Eisenhower wanted a debt limit hike, but he was certain that the president could survive without it.

Byrd’s confidence was quickly vindicated. Eisenhower responded to the debt limit defeat by slashing expenditures across the board, thereby giving Byrd exactly what he wanted in the first place. In addition, Treasury engaged in some of its famous fiscal gymnastics (now called “extraordinary measures” but then lacking a hyperbolic label).

When all was said and done, default didn’t happen. And no one was surprised, least of all Harry Byrd. “I think this action [the debt limit refusal] brought the administration to the realization that Congress is determined to have economy,” he crowed in the wake of the budget cuts. “It brought in the results, and there won’t be any special session of Congress to raise the debt limit.”

Byrd’s victory would seem to vindicate the debt limit brinkmanship of today’s GOP. But in fact, it points up the differences between then and now. In 1953 no one thought default was possible, not even the debt limit deniers. Today, even most Republicans acknowledge that default could really happen.

Sure, some skeptics have questioned whether default is the inevitable sequela of an unraised debt limit. Ostensibly, some sort of payments prioritization could avoid actual default on federal debt instruments. Instead, we could just fold up most of the federal government semi-permanently.

But in fact, the nation's fiscal shortfall can't be permanently finessed with any sort of measures, be they ordinary, extraordinary, or even superhuman. Default will happen -- the only question is when.

By and large, both parties agree on this reality, but they differ in their level of distress at the prospect. Democrats are suitably terrified, which serves their partisan agenda but also probably reflects their actual convictions. Many Republicans, on the other hand, seem less concerned. A sizable number of Republicans have publicly entertained the notion that default might not be a wholesale disaster. At least one has even suggested that it might be good for the country.

To be sure, this is still a minority point of view. In particular, it doesn't seem to extend to the GOP leadership on Capitol Hill. But the willingness to consider fiscal triage in the wake of a debt ceiling breach is not confined to a few radical voices. It's become a common GOP talking point.

And all this talk, even when confined to a minority of the minority, makes the risk of default much more serious today than it's ever been before. Past debt limit debates have been conducted with a wink and a nod; everyone understood that necessary increases would not be refused.

And Wall Street seems to think that the old rules still apply; that the Tea Party doesn’t mean what it says; that GOP tough talk about the debt ceiling is just a bluff.

I hope Wall Street is right. But if Tea Party lawmakers are bluffing, then they’re very good at it.

And for what it's worth, Harry Byrd would be horrified.

Read Comments (2)

edmund dantesOct 15, 2013

Just to be accurate, the House Republicans did pass a CR for funding the
government that contained only symbolic changes to Obamacare, a delay in the
individual mandate in parallel with the delay already granted to business and a
restoration of the coverage of Congress under Obamacare. These are of no
financial importance. Given that the Senate refused this compromise, coupled
with the President's adamant refusal to negotiate, it would be much more
appropriate to say that it is the Democrats who don't really care about

amt buffOct 17, 2013

"Default will happen -- the only question is when."

Given that assertion, what's the advantage of piling on additional debt year
after year? Is it that later default is more profitable, wiping out repayment
of even more money that we borrowed from overseas?

It seems to me that the earlier default occurs, the easier and faster the
economic recovery will be. What am I overlooking?

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