How Republicans Are Holding a Gun to the U.S. Economy

Last Updated May 3, 2011 3:16 PM EDT

Who's up for a little "Russian roulette" with the U.S. economy? Rep. Joe Walsh, for one. The Illinois Republican is one of a number of GOP lawmakers who appear willing to gamble that congressional refusal to raise the federal debt ceiling wouldn't cause the nation's financial roof to cave in.

Indeed, these unbelievers contend that warnings by government officials and economists about the risks of failing to lift the $14.3 trillion borrowing limit, which we're expected to reach on May 16, amount to nothing more than scare tactics. Here's what Walsh had to say this week about how financial markets might react to the U.S. hitting the cap:
"Who knows? -- we don't really know," he said.
"Why take the gamble? Because unless we shake things up, we will not get this town, both parties, to get serious about this fiscal crisis," he said. "I don't know how else you're going to change the direction of things unless you really think outside the box."
Or reduce the box to splinters. One result of Congress failing to increase the debt limit is that global investors would get nervous about something that once seemed inconceivable -- the prospect of a U.S. default. And as the WaPo's Ezra Klein notes, the sight of Washington fiddling away as the deadline looms is more likely to panic the market than actually lifting the cap.

Another certainty: Unless you believe Rep. Paul Ryan's, R-Wis., pledge in his "Path to Prosperity" to close enough tax loopholes to offset a massive tax cut, the plan backed by "deficit hawks" like Walsh and other House Republicans to balance the government's budget would in fact swell the debt by $6 trillion in the next decade.

Playing with fire
Tim Geithner now says Congress has until Aug. 2 to raise the debt limit, or just over three weeks longer than he had previously estimated. The extension is a result of the feds collecting more in taxes than they had projected.

With lawmakers dithering, however, the Treasury Secretary is still moving to implement what he calls "extraordinary measures" to conserve government funds. Those include preparing to raid a government pension plan for money and temporarily halting issuance of securities that state and local governments use to balance their books. Geithner also this week described in no uncertain terms what would ensue if the U.S. ever did default on its debt. It wouldn't be pretty:
A broad range of government payments would have to be stopped, limited or delayed, including military salaries, Social Security and Medicare payments, interest on debt, unemployment benefits and tax refunds. A default on the nation's legal obligations would lead to sharply higher interest rates and borrowing costs, declining home values and reduced retirement savings for Americans. Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.
CEOs agree: Lift the debt limit
Fear-mongering? The Business Roundtable doesn't think so. The CEO association, a persistent Obama administration critic on issues ranging from corporate taxes to financial regulation, said this week that a debt limit increase "is simply unavoidable and necessary to protect the long-term health of our economy and ensure America's international credibility."

Characteristically, Warren Buffett is even blunter. Failing to boost the borrowing cap would be "asinine," he said on Saturday at Berkshire Hathaway's (BRK) annual shareholder meeting.

Will lawmakers get the message that playing with matches could set the economy ablaze? Not immediately. Expect the posturing to continue until right before that Aug. 2 borrowing deadline, as conservatives in Congress strike poses for the benefit of Tea Partiers and other spending hardliners.

But as I've written before, Republicans can't carry through on their threat to bar additional government borrowing without smiting their own constituents, notably big corporations and Wall Street banks. Once the theatrics are over, the calls of "we don't really know" on Capitol Hill are almost certain to become "we've got to do something."

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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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