Debt-Limit Deniers Say Geithner Tries to Stampede Republicans Into Vote

It’s debt-limit hysteria, says Pennsylvania Senator Pat Toomey. Scare tactics, says Senator Jim DeMint of South Carolina. To Representative Joe Walsh of Illinois, it’s fear-mongering.

A growing number of Republicans are scoffing at warnings that failing to raise the U.S. debt limit would trigger a financial catastrophe. Treasury Secretary Timothy Geithner’s cautions are merely aimed at stampeding Republicans into lifting the $14.3 trillion limit, said Toomey.

“They don’t want to make any concessions on spending,” he said. The administration is using the specter of a government default “as a cudgel to beat Republicans into submission and to prevent any real cuts” in the federal budget, he said.

As Congress returns to Washington from a two-week recess and edges closer to a showdown on the debt limit, more and more Republicans are contemplating what had been unthinkable: allowing the government to crash right into the cap. These lawmakers -- as well as former Minnesota Governor Tim Pawlenty, a potential Republican presidential candidate -- argue that there is an alternative to an unpopular vote to lift the limit or economic chaos.

Tax Revenue

The government can hit the limit and avoid a first-ever default because that can only occur if payments to bondholders are actually missed. And those obligations, the Republicans say, can be met with the tax revenue that will continue to pour into the Treasury, regardless of whether Congress raises the borrowing cap. All of the government’s other bills -- including those for defense contracting work, office supplies and highway maintenance, and to cover federal employees’ paychecks -- are secondary, they contend, and can be delayed or cut without panicking financial markets.

The theory amounts to a major gamble on the market’s reaction to a failure to act on the debt limit. And the Republican argument is likely to complicate President Barack Obama’s efforts to push a debt increase through Congress.

Geithner said today Congress will have until Aug. 2 to act, nearly a month longer than he had previously estimated. Stronger-than-expected tax revenue will allow the agency to postpone the deadline, he said in a letter to lawmakers. At issue is what happens if Congress doesn’t act by then.

‘Very Weird’

“This hypothetical is a very weird hypothetical,” said Donald Marron, a former economic adviser to President George W. Bush, because most debt crises in other countries have involved governments that can’t pay their bills, not ones that merely choose not to.

“There is not a lot of historical record in the U.S. or abroad” in a case where “we have the financial capabilities to pay all of our near-term obligations but are for some peculiar political reason choosing not to,” Marron said.

The administration, as well as many economists, says it would be calamitous for the U.S. to make that choice because the government would have to offer much higher interest rates to entice investors to continue buying its bonds. Those increases would cascade through the economy, according to Treasury officials, because interest rates on items as varied as mortgages and municipal debt are tied to the bonds.

The scenario would also require dramatic cuts in federal spending, which administration officials say would cause another shock to the economy.

‘Catastrophic’ Impact

“Default by the United States on its obligations would have a catastrophic economic impact that would be felt by every American,” Geithner wrote today. “Default would cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover.”

A problem for lawmakers, especially House Republican freshmen elected on promises to slash spending, is that polls show most voters opposing any increase in the debt limit. A McClatchy-Marist poll released last month found that 69 percent of registered voters are against lifting the cap, including 79 percent of Republicans.

The Tea Party Patriots, an advocacy group and part of the movement that fueled Republican gains in the 2010 elections, has announced that it opposes any debt-limit increase. “We stand with the vast majority of Americans in this fight for the future of our nation,” said Mark Meckler, the group’s national coordinator.

Toomey, a freshman senator and former bond trader, said there would be no reason for investors to panic if Congress deadlocks on the debt limit. With tax revenue projected this year to reach $2.2 trillion, the government will have more than enough to cover the $214 billion it is projected to owe in annual interest payments on the debt.

‘Very Disruptive’

Treasury could decide what other programs to finance out of the remaining revenue, and while Toomey acknowledged that required cuts would be “very disruptive,” he said that shouldn’t rattle financial markets.

“The markets do not equate all obligations of the federal government to all others,” Toomey said. “Furloughing a bunch of government workers is a failure to fulfill an obligation to those workers, but the market does not see that as equivalent to refusing to pay interest or principal on a bond.”

DeMint, in an opinion piece published yesterday in his home-state Greenville News, wrote that supporters of a debt- limit increase “are using scare tactics to keep up their big- borrowing and spending sprees.”

‘Simply Not True’

“The Chicken Little claims that a debt ceiling lapse would mean the nation’s creditors will not be paid are simply not true,” DeMint wrote.

Philip Swagel, a former adviser to Bush administration Treasury Secretary Henry Paulson, agreed that there is a difference between delaying payments to someone who “sells paper clips to the park service” and the “absolute catastrophe” of defaulting on bondholders.

“Those are different -- they’re both bad, but they’re different degrees of bad,” he said. Failing to raise the debt limit is “really the wrong way to run the government,” he said. He added, though, “I don’t think it literally means catastrophe in July.”

Toomey said he could support upping the debt limit if it is tied to significant spending cuts, a position taken by Republican leaders in Congress. While Democrats have said they are willing to consider additional cuts, they scoffed at suggestions the significance of hitting the debt cap has been overstated.

‘Deadbeat’ Signal

“This is a hare-brained scheme that would really damage the country’s economy,” said Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee. “When the United States stops paying its bills, whether it’s servicing the debt on the bonds or paying for ongoing operations of the U.S. government, that’s a credit problem” because “the signal that sends to the market is that United States is a deadbeat.”

Walsh, the Republican House member from Illinois, acknowledged the risk that the market’s response to Congress’s failure to act on the debt limit could be swift and harsh. “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.”

To contact the reporters on this story: Brian Faler in Washington at bfaler@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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