Playing Chicken with the Economy
Robert Brent Toplin, University of North Carolina, Wilmington (retired), has published a dozen books on topics related to history, politics, and film. He lives in Charlottesville, Virginia.
Republicans say they will not raise the debt ceiling if Democrats do not accept their demands for huge spending cuts. Will they go all the way in this confrontation, even to the point of triggering the first default in the U.S. government’s history? Many political observers think Republicans won’t carry out the threat, because default would bring economic calamity. But Republicans have played the dangerous game of fiscal brinksmanship before. In some instances they actually went over the brink, and the consequences were severe.
Back in 1995 and 1996 Republicans in Congress threatened to close operations of the federal government in order to block federal spending. They were emboldened, much like today’s conservatives, by recent electoral victories. When President Bill Clinton refused to accept Republican demands for radical budget cuts, Newt Gingrich, Speaker of the House, forced a shutdown.
Hardball politics cost the nation dearly. During that shutdown, the U.S. government had to pay $400 million to furloughed federal employees who did not turn up for work. Washington froze veterans’ benefits, including health services. Foreign visitors stayed away, creating huge losses for Americans working in the tourist industries. GOP resistance melted when the public grew angry about the economic repercussions. Republicans eventually accepted a budget deal that was similar to the one they could have secured without a shutdown.
In 2008 ideologues in the Congress took another principled stand against government spending despite warnings that their resistance could jolt a deeply troubled economy. During the financial crisis, when several corporations nearly collapsed and a second Great Depression seemed possible, leaders in both parties backed the Troubled Assets Relief Program. Bush administration officials created TARP to inject billions of dollars in emergency aid for American businesses. President Bush, then Secretary of the Treasury Henry Paulson, Jr., and various GOP leaders pleaded with congressmen to back the rescue plan.
Many Republicans opposed TARP in any form. A GOP legislator identified the source of his colleagues’ opposition when he told Paulson, “I’ve been talking about deregulation and free markets my whole life. You’re asking me to change my view, and there is no way I can do that.”
Two-thirds of Republicans in the House opposed the original proposal to establish TARP. The bill went down to defeat, 228-205. Markets reacted swiftly to the news. In just one day the Dow-Jones Industrial Average dropped 778 points (almost 7%). After nervous Americans expressed alarm, some Republican legislators changed their vote. Eventually a revised TARP bill passed.
Republican politicians later denounced “bailouts,” but the $700 billion TARP program has proven a notable success. It staunched corporate bleeding and cost the government much less than the rescue of savings and loan institutions a few decades ago. In June, 2011 The Economist magazine concluded that the “the direct bill for America’s crisis-era rescues is likely to be remarkably small or to show a profit.”
Financial brinksmanship is now a Republican political tradition. Many GOP legislators are currently demanding trillions of dollars in spending cuts. They declare opposition to raising the debt ceiling if Democrats do not accept their demands.
Reducing the debt is a worthy goal, and taking a tough stand in budget negotiations is a familiar tactic in U.S. politics. But it is dangerous to focus on the debt ceiling when making a case for fiscal responsibility.
The current political talk about default is rattling business confidence in the U.S. and abroad. Markets have turned jittery. Fed Chairman Ben Bernanke warns that default could have “catastrophic” consequences. Treasury Secretary Timothy Geithner says default would “likely push the U.S. into a double-dip recession” and place millions of workers in the ranks of the unemployed. Officials at the major rating agencies seem to agree with them. They warn that the U.S. government may lose its high credit rating if a default occurs.
Conservative legislators do not act like they’re troubled by these concerns. Many of them, as well as their supporters in the national media, dismiss such warnings as hyperbole. Some Democrats, wary of polls revealing public concern about deficits, have joined the Republican resistance.
Congressional leaders will probably work out a compromise before the August 2 deadline arrives for raising the debt ceiling. Yet the historical record does not inspire complete confidence that a settlement will be reached in time. Ideologues in the GOP took the nation over the brink in the past, and they could do it again. Like the hardheaded partisans of 1995-96 and 2008, many legislators, especially freshmen in the House, appear ready to gamble recklessly in pursuit of their goals.
Even if Republicans agree to a compromise before the deadline, their game of chicken could have unfortunate consequences. An adviser to China’s central bank summarized the problem recently when he warned that American politicians are “playing with fire” when they take confrontations over the debt ceiling close to the brink.
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