Let’s suppose for a moment that all this talk about ideology—about the evils of big government, the flood of debt that threatens our moral and economic collapse, and of course the line that must be drawn in the sand against any new taxes of any kind on anybody—is simply a fig leaf, and that Republicans are pursuing their own partisan advantage without any scruples whatsoever. What would such a strategy look like?
As an unpaid advisor to Boehner and company, here is what I propose:
Using any arguments at hand, however implausible, delay an agreement on raising the debt ceiling. At some point, just before moment of reckoning, the markets will be spooked, and interest rates will begin to take off. Use this crisis to reach a compromise that raises the ceiling, but only for a couple of months or so, signaling to the markets that default risk remains on the table. With luck, interest rates will stay relatively high. Continue doing this, again and again, until next year’s elections.
The advantages practically scream out to be heard. Above all, the interest rate spike will doom the economy, more or less guaranteeing a second, even more painful dip. Obama will have to go before the American people with the economy in tatters and unemployment at a post-FDR high. He might as well stay in bed.
Second, the added interest expense guarantees that there will be no resources for the government to initiate any new programs under Obama’s watch or even implement the few he has started. The public sector at all levels will be tied in knots.
Third, higher interest rates mean more transfers to the bondholders, a core constituency of the Republicans. True, at the moment it may look like a risk premium that simply compensates the rich for the added risk of default, but in reality the Republicans have their hands on the dial and can keep averting default at the last moment so that there is a real ex post transfer.
To put it bluntly, a perils-of-Pauline debt ceiling strategy will force the Democrats to run on a ruined economy, bleed them of fiscal resources and cleverly funnel yet more money to the rich. What’s not to like?
There is a risk, however, that the Democrats will be able to make the argument that Republican intransigence and guile has tanked the economy and made them unworthy of election. My assessment is that this risk is minimal for four reasons:
1. Democrats would have to be capable of taking a strong partisan stand. Simply by continuing to play the (illusory) negotiating game, and by presenting the image of a clash of honestly-held principles, they would undermine their ability to go partisan. If Republicans were using the debt ceiling standoff as a ruse to depress the economy, what were the Democrats doing?
2. It would have to be clear that Republican actions had caused the renewed economic slump. It is never so simple, however, because there are always lots of other things going on at the same time that might have an effect on recession and unemployment. There will almost certainly be more bad news coming out of the Eurozone, for instance, as well as natural and man-made disasters, corporate scandals, etc. It could be this or it could be that.
3. Above all, the public would have to acquire a sufficiently sophisticated understanding of financial and economic matters to see the connection between debt ceiling brinksmanship, interest rates and economic pain. Since the evidence is clear that they don’t have this understanding now, they would have to learn in a hurry. This is unlikely, especially since there will be a steady flow of analyses coming out of academia, think tanks and the mass media to cast doubt on truly valid explanations. The climate debate shows that this is entirely doable.
4. There remains the worry that business interests may become alienated from the Republicans due to the losses they incur as a result of this kill-the-economy strategy. Without doubt, some will see it this way and support the Democrats. By this point, most of this segment of the business community is already leaning to blue, so the net effect is likely to be small. The rest of the corporate and financial upper tier will have the discipline to recognize that short-term suffering is the price that has to be paid to restore complete conservative dominance of American politics. Come 2013, a Republican president and congress will go ape-Keynesian, slashing taxes and increasing spending on various emergency and national security initiatives. The economy will come back, and meanwhile a serious, unimpeded assault will begin on what remains of the public sector. The profit opportunities will be spectacular.