Some supporters of the debt limit respond that there is virtue in forcing Congress to debate the national debt from time to time. This may have been true in the past, but the Budget Act of 1974 created a process that requires Congress to vote on aggregate levels of spending, revenue and deficits every year, thus making the debt limit redundant.
2. Opposition to raising the debt limit is a partisan issue.
Republicans are doing the squawking now because there is a Democrat in the White House. But back when there was a Republican president, Democrats did the squawking. On March 16, 2006, one Democratic senator in particular denounced George W. Bush’s request to raise the debt limit. “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure,” the senator thundered. “Increasing America’s debt weakens us domestically and internationally. ... Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.”
That senator was Barack Obama, and he, along with most Democrats, voted against a higher limit that day. It passed only because almost every Republican voted for it, including many who are now among the strongest opponents of a debt-limit increase.
3. Financial markets won't care much if interest payments are just a few days late — a "technical default."
Some Republicans believe that bondholders know they will get their money eventually and will understand that a brief default — just a few days — might be necessary to reduce future deficits. “If a bondholder misses a payment for a day or two or three or four,” Rep. Paul Ryan, R-Wis., told CNBC in May, “what is more important is that you’re putting the government in a materially better position to be able to pay their bonds later on.”
This is nothing but wishful thinking. The bond-rating agencies have repeatedly warned that any failure to pay interest or principal on a Treasury security exactly when due could cause the U.S. credit rating to be downgraded, which would push interest rates up as investors demand higher rates to compensate for the increased risk.
J.P. Morgan recently surveyed its clients and asked how much rates would rise if there was a delay in payments, even a very brief one. Domestic investors thought they would go up by 0.37 percentage points, but foreign buyers — who own close to half the debt — predicted an increase of more than half a percentage point. Any increase in this range would raise Treasury’s borrowing costs by tens of billions of dollars per year.
Some may think that a rise in rates would be temporary. But there was a case back in 1979 when a combination of a failure to increase the debt limit in time and a breakdown of Treasury’s machines for printing checks caused a two-week default. A 1989 academic study found that it raised interest rates by six-tenths of a percentage point for years afterward.
4. It's worth risking default on the debt to prevent a tax increase, given the weak economy.
While Republicans’ concerns about higher taxes are not unreasonable, most economists believe that any fiscal contraction at this time would be dangerous. They note that a large cut in spending back in 1937 brought on a sharp recession, which undermined the recovery the country was making after the Great Depression.
Republicans respond that tax increases are especially harmful to growth. However, they made the same argument in 1982, when Ronald Reagan requested the largest peacetime tax increase in American history, and again in 1993, when Bill Clinton also asked for a large tax boost for deficit reduction. In both cases, conservative economists’ predictions of economic disaster were completely wrong, and strong economic growth followed.
5. Obama must accept GOP budget demands because he needs Republican support to raise the debt limit.
Republicans believe they have the president over a barrel. But their hand may be weaker than they think. A number of legal scholars point to Section 4 of the 14th Amendment, which says, “The validity of the public debt of the United States ... shall not be questioned.”
Some scholars, including Michael Abramowicz of George Washington University Law School and Garrett Epps of the University of Baltimore Law School, think this passage may make the debt limit unconstitutional because by definition, the limit calls into question the validity of the public debt. Thus Treasury may be able to just ignore the debt limit.
Other scholars, such as Michael McConnell of Stanford Law School, say the 14th Amendment will force Obama to prioritize debt payments and unilaterally slash spending to pay bondholders. But this would involve the violation of laws requiring government spending.
Either way, a failure to raise the debt limit would force the president to break the law. The only question is which one.
Bruce Bartlett, a former adviser to President Ronald Reagan and a Treasury official in the George W. Bush administration, is the author of “The New American Economy: The Failure of Reaganomics and a New Way Forward.”
He is a columnist for the Fiscal Times.