Let's be clear: Republicans have the upper hand in the coming fight over raising the federal debt limit. President Obama will push to raise the limit without giving Republicans the massive spending cuts they demand. But in the end he will cave.
Conventional wisdom today says the opposite is true: In forcing a showdown over the debt limit, Republicans risk repeating the political disaster of the 1995 government shutdown--except this time they will be blamed for consequences far worse than the temporary closure of federal agencies. In a letter to Congress this month, Treasury Secretary Timothy Geithner warned of Armageddon if Congress fails to raise the debt limit, which could be reached by March 31. Refusal to act would "precipitate a default by the United States," Geithner wrote, which would result in "a significant and long-lasting tax on all Americans," cause "home values [to] decline," "reduce retirement savings," produce "business failures on a significant scale" and result in the "loss of millions of American jobs." The damage to the economy would be "catastrophic" and "potentially much more harmful than the effects of the financial crisis of 2008 and 2009."
The devastating scenario Geithner describes is precisely why Obama will not let it happen. Back in 1995, President Clinton could allow a government shutdown with no long-term consequences and reap the political benefits as Americans blamed the GOP. But Obama cannot allow the United States to default. He will not permit an economic crisis worse than 2008-2009 and the "loss of millions of American jobs" on his watch. He will make a deal with GOP leaders to avoid a government default--so long as Republicans stand firm.
The national debt has grown by $3.4 trillion since Obama took office. According to the Congressional Budget Office, our public debt is now about 62 percent of our economy--the highest percentage since shortly after World War II--and could reach 87 percent of our economy in just 10 years. Now, after maxing out the nation's credit card, Democrats are asking Republicans--who just campaigned on a promise to reduce the national debt--to bail them out by raising the debt limit. If Republicans do so, Democrats must agree to significant cuts and spending controls in exchange.
What kinds of concessions will the GOP demand? Symbolic spending cuts won't cut it. Republican should require real reductions paired with iron-clad constraints on future spending. Sen. John Cornyn, a member of the Senate Republican leadership, has called for linking the debt-limit increase to a balanced budget amendment to the Constitution, so we can put a spending "straitjacket on the federal government." Sen. Tom Coburn (R-Okla.) has demanded a "minimum" of $350 billion in spending cuts. Sen. Lindsey Graham (R-S.C.) has insisted that Congress enact entitlement reform first. A good united GOP starting position should be: all of the above.
If President Obama does not go along, Republicans should let the deadline pass without raising the debt limit. The government would not immediately go into default. The Treasury Department has many tools it can use to continue paying U.S. obligations during an impasse--such as suspending sales of nonmarketable debt, trimming or delaying auctions of marketable securities and under-investing in certain government trust funds. Treasury has used these tools before. In 1985, Congress waited nearly three months after the debt limit was reached before it authorized a permanent increase.
In 1995, four and a half months passed, and in 2002, three months passed. If the Treasury Department informs Congress that it has exhausted the tools at its disposal, Congress can pass small, temporary, short-term debt limit increases--as it has in the past--to keep the government solvent while a deal is worked out. But even these extensions should be tied to spending concessions. Cornyn told me that the message to the administration needs to be: "If they want a one-month extension of the debt limit, the price will be X. If they want a one-year extension of the debt limit, the price will be Y."
A debt-limit standoff could go on for months, but the GOP should not give in. Obama will have a hard time making Republicans seem unreasonable, since he voted against raising the debt limit himself as a senator. And the president has the political winds against him--71 percent of Americans oppose raising the debt limit. They won't blame the GOP for holding out in the name of restoring fiscal discipline. If anything, Republicans could face a major backlash if they fail to do so.
The debt-limit fight is the Republicans' first major test since the November elections, and it is the best chance they will get to force major spending concessions from Obama. The only question is: Do they have the nerve?
Marc A. Thiessen is a visiting fellow at AEI.