US brinksmanship with economy must not become routine

Oct. 14, 2013
One of many dangers in all-or-nothing politics is that brinksmanship with the national economy might start to feel routine. Repetition can have that effect.

One of many dangers in all-or-nothing politics is that brinksmanship with the national economy might start to feel routine. Repetition can have that effect.

Much of the US government went idle after Congress on Sept. 30 refused to authorize spending in a bill that, at the insistence of a faction of House Republicans, withheld funds for the Affordable Care Act.

The last time the government closed because of congressional stalemate was late 1995. In August 2011, Congress almost let the Treasury Department run out of cash in a dispute over the debt ceiling.

A repeat of that showdown looms. Treasury reached its debt limit of $16.7 trillion in May and has been relying on so-called extraordinary measures to keep borrowing. It expects to exhaust those sources by Oct. 17, when its cash balance will be $30 billion. The Congressional Budget Office projects the department's borrowing authority and cash will run out between Oct. 22 and the end of the month.

Then, for the first time in history, the US government would begin defaulting on obligations.

Because the dollar and Treasury securities are vital to international finance, the mere possibility of federal default causes harm. In the US, Treasury says:

  • The debt-ceiling impasse of 2011 cut estimates of consumer confidence by 22% and of business confidence by 3% between June and August.
  • The S&P 500 index of equity prices fell 17% during the debt-limit debate and didn't recover until 2012.
  • Between the second and third quarters of 2011, household wealth—a strong influence on consumer spending, which accounts for roughly 70% of gross domestic product—fell $2.4 trillion.
  • Worry about the standoff increased stock-price volatility and increased corporate and household borrowing costs.

All this damage occurred even though Congress dodged default with a precarious agreement. Now the cycle begins anew.

While $17 trillion of debt is repugnant, default would be worse. And while trepidation over default is costly, ambivalence about political absolutism would be ruinous.

The ambivalent tend not to vote.