The Republican Default Mode

Bruce Bartlett over at CG&G argues that if the Republicans make big gains in 2010 they will start exploring the possibility of refusing the raise the debt limit and defaulting on our debt in 2011 in order to force Austerity Hysteria (emphasis mine):

To be sure, the debt limit has always been raised in time to prevent a default, although Treasury sometimes had to push the limits of the law to move money around to pay the government’s bills. However, I believe the game has changed because Republicans have become extremely bold in using the filibuster to make it extraordinarily difficult to pass any major legislation without at least 60 votes in the Senate.

Furthermore, a growing number of conservatives have suggested that default on the debt wouldn’t be such a bad thing. It is often said that default would lead to an instantaneous balanced budget because no one would lend to the U.S. government ever again. Therefore, spending would have to be cut to the level of current revenues.

Writing in Forbes last month, the Cato Institute’s John Tamny was enthusiastic about the prospects of default. Said Tamny, “It’s time we learn to love the idea of a U.S. default . . . For Americans to worry about a debt default is like the parent of a heroin addict fearing that his dealers will cease feeding the addiction.” While acknowledging there might be some pain from default, he dismissed it as trivial compared to the enormous blessing of a massive reduction in federal spending.

Tamny is not an isolated crackpot; reputable conservative economists have been writing sympathetically about the idea of default for decades. These include Nobel Prize-winning economist James M. Buchanan, whose 1987 essay, “The Ethics of Debt Default,” defended the morality of default on the grounds that deficits weren’t financing public capital but current consumption, with the bills being passed on to future generations.

Other prominent conservatives who have been favorable, even enthusiastic, about debt default include Murray Rothbard, Dan Pilla, Jeffrey Rogers Hummel, and Christopher Whalen. In 1995, then House speaker Newt Gingrich publicly warned the Public Securities Association that he was prepared to default on the debt unless Bill Clinton acceded to Republican demands for budget cuts. “I don’t care what the price is,” Gingrich said.

Consequently, it is becoming increasingly common for the idea of default to be discussed as a realistic possibility even by responsible analysts. Last year, The Economist’s Greg Ip wrote an article in the Washington Post saying that financial markets were placing the risk of default at 6 percent over the next 10 years. “Default is unlikely,” he said. “But it is no longer unthinkable.”

My purpose today is not to make the case against default or explain all of its ramifications — that would require a separate column. Rather, my purpose is simply to alert readers to the consequences of increased Republican membership in the next Congress, a Democratic administration, the need for 60 votes in the Senate on major bills, and a debt limit that will run out early next year. I believe we could be in for the biggest debt crisis we have seen since Alexander Hamilton was Treasury secretary.

In other words, Republicans could simply hold the country hostage over the debt ceiling and get whatever they want.  Either Democrats make massive cuts in social spending and we end up in a depression in the medium-term, or the Republicans destroy our economy overnight and force even larger cuts as we end up in a depression in the short-term.  It's that short-term feature that comes in handiest for the Republicans as they'd get to blame Obama.

I don't think the Republicans would pull the trigger on default.  It would functionally annihilate our stock market and would almost certainly trigger another global economic crisis that would ensure everyone hated us for decades.  But they could certainly gain serious concessions from scared Dems.

Bartlett is frankly on to something given all the bold talk of massive spending cuts by election-year Republicans, who seem to have no problem with publicly declaring they will tear up the New Deal's social compact.