The Congress Who Cried Wolf - Financial Transparency Coalition

If Congress fails to raise the debt ceiling before August 2^nd, there will be an economic Armageddon.

The walls are closing in | Flickr/practicalowl*

In the overwhelming majority of cases, I’m opposed to this sort of sensationalist statement. American politics has become far too wrapped up in overstating the consequences of a particular moment, occurrence, or action. Even economists, who as a general rule are a pretty levelheaded bunch, have exhibited a strong tendency to sound sensational over the last few years.

The reason for this, partly, is that the Great Recession has brought with it a series of critical economic moments that really have required swift and significant action from the federal government to avert disaster. The rescue of Bear Sterns, the auto industry bailout, the emergency lending package to Citibank: these were all instances of significant government action, which were sold to the American public on the premise that if they did not occur, Armageddon would ensue. There’s little doubt that this is true. Yet when these disasters are coupled with consistent sensationalism of even trivial events, the important stuff tends to get drowned out by all the shouting.

Like the boy who cried wolf.

But now the boy is crying “Debt ceiling! Debt ceiling!” and the voters, who have heard it before, aren’t listening. In fact, by a wide 45 to 32 percent margin (with the remaining undecided), voters of any party oppose raising the debt ceiling. They’ve heard Treasury Secretary Tim Geithner’s warnings. But warning-weary Americans have heard it before, so now they’re not listening.

But the debt ceiling isn’t a joke. It isn’t a ruse. The consequences of failing to raise it haven’t been sensationalized or exaggerated.

On August 2^nd the Federal government will exhaust its borrowing authority. The debt ceiling doesn’t keep the government from making new commitments—the commitments have been made. It keeps the government from honoring those commitments. On August 3^rd, the government is expected to mail $23 billion in Social Security payments—money it won’t have. Then there are the bills for Medicaid, defense contractors, active military personnel, other federal employees, defense contractors, interest payments, and maturing bonds. Within weeks the government would be hundreds of billions of dollars behind.

As the government gets further behind, it will lose its position to sell bonds at low interest rates and will have to promise higher rates to attract new buyers (think about it like a person’s credit-worthiness; dependable borrowers get lower rates). This is where things will really get bad. Not only will higher interest rates mean higher government debt, but they will reverberate throughout the economy—affecting credit card and mortgage rates. As Jason Powell, former undersecretary of the Treasury and a scholar at the Bipartisan Policy Center, puts it: “Every kind of consumer debt and business debt is priced off of Treasuries. That’s not going to help the economy; it’s going to hurt the economy. It’s going to hurt the housing market.”

From there the stock market would crash, the value of the dollar would plummet, gasoline prices would soar, so would inflation, we would lose hundreds of thousands of jobs, and the world would nose-dive into another deep recession, one that might make the Great Recession look a warm-up.

Perhaps we are weary of dire warnings. Perhaps we’ve heard “wolf” so many times we just don’t believe in it anymore. But that history does not make this situation any less disastrous. This wolf is real and he is hungry, but he is also astoundingly easy to stop. If we let this crisis unfold it would be the first economic catastrophe in history that was foreseeable and easily avertable. I can’t imagine Congress wants to carry the burden of so much suffering on its shoulders.

It’s not a joke. It’s deadly serious. Raise the debt ceiling. Now.