Forget the unbalanced nature of the debt limit deal, the rash cuts that will occur if policymakers don’t reach consensus on a more thoughtful approach. All of that pales in comparison to the worst legacy of this debate.
It’s this: raising the debt limit on time is no longer a foregone conclusion, and default is now a legitimate topic of public debate.
Leading Republican presidential candidates and many Tea Party lawmakers continue to poo-poo a first-time U.S. default, suggesting that warnings about the consequences amount to baseless fear mongering.
Perhaps worse, the nation’s “paper of record,” the New York Times, extended the debate today with a long story that gave further voice to this argument, noting “in recent days there has been growing attention on a few economists and financiers who have been arguing that it would be all right to miss the deadline – and even, a few of them say, default on payments to the nation’s bondholders.”
That’s a sea change, and it’s frightening on several levels.
For one thing, and as the same Times’ story notes, U.S. Treasury securities are widely considered the safest possible investment because Washington will pay on time. That’s why Treasuries carry the lowest possible interest rate; unlike other borrowers, Washington does not pay a “risk premium.”
A default would immediately change that view, maybe forever. Suddenly, U.S. Treasuries would carry risk, raising interest rates on them at least a little, perhaps a lot. Because other interest rates key off the Treasury rate, that would raise rates for every other borrower both here and abroad.
For the United States, however, the consequences would extend far beyond finances. U.S. global leadership, which our allies and enemies alike have long taken for granted, would come into question as well.
The world would wonder whether a nation that’s willing to ignore its bills would ignore its treaty obligations or military commitments. That, in turn, would shake our allies and embolden our adversaries.
Yes, in recent days, cooler heads prevailed. Grown-ups stepped forward. President Obama and congressional leaders of both parties crafted a deal to raise the debt limit before tomorrow’s deadline.
But, it came after weeks of very public commentary that weighed the pros and cons of a deal versus a default. What was once an unthinkable notion has now gained the stature of a legitimate option.
Beyond this deal, Washington will have to raise the debt limit again around late 2012 or early 2013. We should expect even more discussion next time about not only how, but whether, we should do so.
I’m with Harvard historian Niall Ferguson, who told the Times, “hey, wait a second, we should not be talking about the United States in the same breath as Argentina and Russia” – both of have defaulted on their debt.
Lawrence J. Haas is former Communications Director to Vice President Gore and, before that, to the White House Office of Management and Budget. He's now a public affairs consultant who writes widely about foreign and domestic affairs, including fiscal policy.
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