On May 15, John Boehner, speaker of the US House of Representatives and the highest ranking Republican in government, gave a speech in which he promised a replay of last summer’s debt limit showdown.
Mr Boehner said: ”Yes, allowing America to default would be irresponsible. But it would be more irresponsible to raise the debt ceiling without taking dramatic steps to reduce spending and reform the budget process.
“We shouldn’t dread the debt limit. We should welcome it. It’s an action-forcing event in a town that has become infamous for inaction.”
Under US law, legislation creating debts and deficits is treated separately from the legislation that funds them. From time to time, Congress must raise the debt limit to permit the Treasury to borrow money to pay the expenses Congress has previously written into law. It’s not uncommon for members of Congress who voted for large tax cuts and/or large spending increases to later vote against raising the debt limit, claiming, nonsensically, that it would be fiscally irresponsible to do so.
When the debt limit is not raised, it threatens a debt default because the Treasury would lack the legal authority to borrow to raise cash to repay maturing securities or pay interest on them. Thus, unlike the debt problems of countries such as Greece, a US debt crisis resulting from failure to raise the debt limit would not be market-driven, but would result solely from partisan gamesmanship.
Political observers are curious about why Mr Boehner would throw down the debt limit gauntlet now, especially since last year’s showdown is often credited for disturbing investor confidence – something Republicans attach great importance to. It also led Standard & Poor’s to downgrade US Treasury debt, citing the fact that the debt limit had become a political bargaining chip between the two parties.
Senator Mitch McConnell, the Senate Republican leader, confirmed the purely political nature of the debt standoff. Shortly after a last-minute deal was reached, he said that some of his members actually favoured default on the debt – “a hostage you might take a chance at shooting”, as he put it. However, Mr McConnell went on to say: “What we did learn is it’s a hostage that’s worth ransoming.”
Some observers speculate that congressional Republicans are not so sure they will take back the White House next year. If they were confident of doing so, it would make more sense for them to wait, especially since the debt limit is not expected to expire until early 2013, according to a statement by Treasury secretary Timothy Geithner on May 15.
Others think that Mr Boehner, whose position is threatened by right-wing “tea party” members, is simply trying to demonstrate resolve on the budget for their benefit. But it runs the risk of alienating independent voters, who were widely displeased with last summer’s brinksmanship.
The reality is that there are many other “action-forcing events” on the horizon, especially the expiration of temporary tax cuts at the year’s end, as well as large automatic spending cuts previously enacted into law. Although there is a strong case to be made for allowing this fiscal tightening to take effect on schedule, there is widespread fear that it would be too much, too fast and risk pushing the US economy back into recession.