Despite its dismal approval rating, Congress deserves thanks for at least not driving the economy over the fiscal cliff. Let me state unequivocally that the New Year's Day deal was a lot better than the alternative, no doubt.
That said, a treacherous fiscal obstacle course still looms ahead of us. To get through it, compromise must cease being a dirty word.
Jumping off the full fiscal cliff would have amounted to a fiscal contraction of about 4.5% of gross domestic product. Horrible. But the next big budget impasse—over the federal debt ceiling—is even more dangerous. And that impasse is fast approaching.
The debt ceiling is one of the worst examples of American exceptionalism. Other countries routinely pass budgets that estimate total receipts and expenditures for the year to come—just as we do. Those budgets imply, by simple arithmetic, how much the government must borrow and, therefore, where the national debt should be by year-end.
Only in America is there another law that might, and sometimes does, contradict the budget law: a limit on how much the government may borrow. If the debt limit exceeds the number implied by the budget, all is well. If it doesn't, Congress has passed two conflicting laws. In such cases, the minority party always has a little political fun before letting the debt limit rise. If not, we have a Walt Whitman Congress. ("Do I contradict myself? Very well, then, I contradict myself. I am large, I contain multitudes.")
Did I say Congress always raises the limit? In August 2011, we almost crashed headlong into the debt ceiling because Republicans refused to raise it. That, you may recall, is when Standard & Poor's downgraded the government's credit rating. Now the GOP is threatening a repeat performance—or perhaps many.
In fact, the government has already breached the legal ceiling, and Treasury Secretary Tim Geithner is using a variety of gimmicks to avoid chaos. The widely respected Bipartisan Policy Center recently estimated that those gimmicks will take us only into the second half of February.
Since the federal government has never crashed into the debt ceiling before, nobody knows exactly what will happen if it does. But whatever does happen, it won't be pretty.
At current rates of spending and taxation, federal receipts cover less than 74% of federal outlays. So if the government hits the debt ceiling at full speed, total outlays—which includes everything from Social Security benefits to soldiers' pay to interest on the national debt—will have to be trimmed by more than 26% immediately. That amounts to more than 6% of GDP, far more than the fiscal cliff we just avoided.
How in the world could the government cut so much spending so quickly? No one really knows. That is why you hear about dark scenarios wherein the U.S. defaults on the national debt, stops paying tax refunds, delays Social Security checks, leaves soldiers unpaid, and so on. Bad things will surely happen, one of which will be a swift descent into recession. Another will almost certainly be a second ratings downgrade and higher borrowing costs for years, maybe decades, to come.
Who knows what else? Use your imagination. Suppose we pay the bills for Social Security, Medicare, Medicaid, defense, and interest on the national debt in full. Then all other federal spending would have to fall by about three-quarters. Think about that.
Or think about another financial crisis. Today's low Treasury borrowing rates imply essentially a zero probability that the U.S. government will default. Markets would be caught flat-footed if the threat of default suddenly materialized. Remember how financial markets froze in response to the Lehman Brothers surprise bankruptcy in 2008? If threatening default comes to be seen as a standard weapon of political combat in the world's greatest democracy, U.S. government debt will lose its exalted status as the world's safest asset. Treasury borrowing rates will soar while the dollar and the stock market sink. Very ugly.
In short, the consequences of hitting the debt ceiling are too awful to contemplate—worse even than going over the fiscal cliff. A sane Congress wouldn't even think about it.
So let's assume that Congress is sane and raises the debt limit in time. Is the country then home free? Not quite, for there's more trouble to come when the federal government's current continuing resolution expires.
The what? You may have noticed that the hyperpartisan Congress has been unable to pass a budget for several years. Instead, it keeps funding government operations temporarily with a series of continuing resolutions that, essentially, maintain spending at current levels for a time. The continuing resolution now in force expires on March 27. After that, unless Congress passes another, the country faces a government shutdown of the sort it experienced in 1995-96. (Remember when the Grand Canyon closed?)
What happens then? By dint of his authority to protect life and property, the president would declare some government services (like air traffic control) essential and others (like the national parks) inessential. The latter would be closed down while the former would continue. No one knows precisely how much of the federal government would shut down. But when this happened in 1995-96, relatively few federal workers were deemed essential.
Suppose military spending and entitlements absorb no cuts at all while appropriated funds for nondefense programs are reduced 60%. (That's a pure guess.) Then the resulting fiscal contraction would be about half as large as the just-avoided fiscal cliff, or about one-third of the hit from crashing into the debt ceiling. Plus, a government shutdown is far less likely to precipitate a financial crisis.
So, if Congress insists on a "surge" in its unending budget war, let us, at least, duke it out on the brink of a government shutdown rather than on the brink of hitting the debt limit. Some choice! Like Sen. Joe Manchin (D., W.Va.), I long for the day when the biggest threat to the American economy is no longer the American Congress.
Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve and author of the soon to be published "After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead" (Penguin).
More From The Wall Street Journal
216 comments