Tuesday, May 17, 2011

Default deniers: The new government skeptics

Default deniers: The new government skeptics
By: Carrie Budoff Brown
May 17, 2011 04:50 AM EDT
They are the newest breed of government skeptics, the swelling ranks of Republicans who don’t believe the Obama administration when it says a failure to raise the debt limit will prove catastrophic.

And they stand ready to make negotiations over raising the cap on debt as grueling as possible, leaving Treasury officials and Wall Street more nervous than ever that the country could suffer an unprecedented default, with consequences no one can predict.

The suspicion, which once flourished only on the conservative outskirts of economic circles, has seeped into the mainstream in recent weeks, gaining broader acceptance among establishment Republicans even as the administration issues increasingly dire warnings.

House Speaker John Boehner (R-Ohio) validated the default deniers Sunday, saying, “I understand the doubts.” Jim Nussle, a budget director under former President George W. Bush, argued last week that “no one’s going to default” if Congress misses the Aug. 2 deadline. And Alabama Sen. Jeff Sessions, the top Republican on the Senate Budget Committee, accused the White House of scare tactics similar to those used by the previous administration to win quick approval of the 2008 bank bailout after the markets crashed.

“Congress was stampeded,” Sessions said of the bailout vote. “They will have a harder time stampeding the Congress.”

The growing divide is fed by a combustible mix: deep distrust among conservatives of President Barack Obama and government in general and a hardening view among mainstream Republicans that the debt-limit vote offers the best shot in years to fundamentally reorder the country’s finances — and they can’t let it pass them by. The government hit the $14.29 trillion debt limit Monday, but Treasury took steps to keep the country afloat through August.

Within weeks of Treasury Secretary Timothy Geithner’s initial plea in January for a quick vote, Republicans were gravitating toward a counter-narrative, first pushed by a handful of conservative economists and ushered into the mainstream by Sen. Patrick Toomey (R-Pa.) on the editorial pages of The Wall Street Journal.

Now, the negotiating position of a growing number of Republicans appears to be this: If they need to hold out for a better deficit-cutting deal and blow the August deadline, so be it.

“The one acting like his hair is on fire is Mr. Geithner,” said Rep. David Schweikert (R-Ariz.). “It’s absolutely silly. We have plenty of cash flow to pay debt, which means I’m trying to figure out how credibly the administration can keep using that language.”

The doubters reject Geithner’s repeated claims — backed by Wall Street — that failing to raise the statutory cap would force the federal government into the first default in its history.

That’s hogwash, the doubters say, because the government takes in more than enough revenue to cover its obligations. They acknowledge the administration would need to make deep and painful spending cuts but argue that Geithner can avert default if he prioritizes which bills to pay.

It would be more like a partial government shutdown, Toomey said.

“That’s disruptive; that’s not optimal,” Toomey conceded in an interview. “But it’s not a financial crisis. It’s not a default on our debt. It’s not a catastrophe. It’s a disruption.”

Geithner’s response? It’s default by another name.

Even if Treasury pays its debt, other obligations such as salaries, tax refunds and contractor payments would go unmet, tattering the country’s creditworthiness, Geithner has argued.
In a letter Friday to Sen. Michael Bennet (D-Colo.), Geithner wrote that such an event that “would inflict catastrophic, far-reaching damage to our Nation’s economy, significantly reducing growth and increasing unemployment.” The value of 401(k) plans and pension funds would plummet, while the cost of buying a home or car and taking out student or business loans would rise, Geithner wrote.

“This abrupt contraction would likely push us into a double-dip recession,” the secretary warned.

A major financial institution emphasized the same concerns. Bank of America wrote in a research note Thursday that not raising the debt ceiling “would necessitate politically unpopular and potentially economically crippling budget cuts that would likely push the U.S. into recession and drag down the stock market.”

Geithner’s letter was the latest in a series of doomsday missives he has dashed off to Congress since Jan. 6, when he fired up skeptical conservatives with what Toomey later described as “alarmist” language.

By this point, conservative economists had already broached the idea that the country, drowning in debt, might welcome a default since it would force a massive reduction in federal spending.

John Tamny, an economic adviser and editor of RealClearMarkets and Forbes Opinions, wrote a column in May 2010 with the headline “Learn to Love a U.S. Default.” A month later, Bruce Bartlett, a senior policy analyst in the Reagan White House and a Fiscal Times columnist, compiled a list of conservative writings going back 30 years that argue the merits of default. He disputed this notion and predicted a dangerous alliance between this growing strain of conservative thinkers and an emboldened Congress if Republicans gained seats in the midterm elections.

“I believe we could be in for the biggest debt crisis we have seen since Alexander Hamilton was treasury secretary,” Bartlett wrote.

After the November election, Toomey began prepping for the debt-limit debate, meeting with Heritage Foundation economist J.D. Foster, a former Bush administration budget official who also doubted Geithner’s arguments.

“The administration was using misinformation to mislead and spook people into a mindset with regard to the debt limit that was simply false,” Foster said. “At the time, it was really shocking.”

Economic conservatives were worried Republican lawmakers might fold quickly and raise the debt limit without forcing spending cuts or deficit reduction.

Then Toomey offered what Sen. Jim DeMint (R-S.C.), a tea party leader, described as a “game-changer.” In a Jan. 19 Wall Street Journal op-ed, Toomey argued that a default was unacceptable, but it doesn’t need to happen since tax revenues would far outstrip debt obligations.

“To me, it was brand-new and it was refreshing,” said David Henderson, a research fellow with Stanford University’s Hoover Institution. “I [had] bought the conventional wisdom.”

Almost 100 House members and 22 senators have since signed onto Toomey’s Full Faith and Credit Act, which would require Treasury to first make interest payments on the debt. The bargaining positions of congressional Republican leaders have hardened. And the philosophy taking hold among conservatives is that if the country tips into a default, Geithner is to blame, not Republicans who held out for a better deal.

Republican leaders concede raising the debt limit is necessary but say that must be packaged with a deficit-reduction plan. Boehner and Senate Minority Leader Mitch McConnell (R-Ky.) haven’t commented directly on the proliferation of default doubters but issued nearly identical statements through their spokesmen Monday that failing to slice the debt would be more damaging to the economy than failing to raise the debt ceiling.

“If you are going to play chicken, it helps that you’re not blindfolded,” said Kevin Hassett, an economist at the free-market American Enterprise Institute who briefed House Republicans at a January retreat. “The White House presumed at the outset that that guys on the Hill would panic. They failed at causing a panic.”

Erika Lovley and Ben White contributed to this report.

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