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Default Could Blunt GOP Deficit Goals

Scott J. Ferrell/CQ Roll Call
Treasury Secretary Timothy Geithner warned Senators last week that a default on the debt could actually add to the deficit.

Its the only reason I ran, Johnson said. I didnt run because I wanted to be a U.S. Senator. I ran because our nation is in peril. We are bankrupting America and we have to solve that problem.

This band of lawmakers is wary of a compromise for fear that it would require a relinquishing of their principles, which has made the chances for a deal difficult at best.

Compromise for the sake of compromise is not good for our country, Sen. Marco Rubio (R-Fla.) said Wednesday.

The results of failing to raise the debt limit would be almost immediate. In August, the Treasury Department is scheduled to borrow $500 billion and pay off $500 billion in expiring debts.

We have to sell $500 billion of new debt in August to pay off old debt, Powell said. In the ordinary course of events, thats not a problem. But in the middle of all the chaos and bad press that the United States is unable to pay its obligations during that environment, investors are probably going to require higher rates.

The Treasury Department has said it has until Aug. 2, when its borrowing authority would run out. Congressional leaders and the White House have been working feverishly in recent weeks to try to reach an agreement on a deficit reduction package that would win enough votes in Congress to raise the debt limit.

But negotiators are at loggerheads over raising taxes and which spending cuts to enact as a way to bring down the deficit. Republicans oppose tax increases and want to focus on limiting spending. The GOP argues that raising taxes would hurt the economy. Democrats support including spending cuts in the plan but also want to raise revenue by closing what they consider tax loopholes.

Powell, who spoke to House Republicans on Friday, said that if no deal is reached by the time the Treasury needs to pay interest and principal on its outstanding debt, the government would struggle to pay for much else a spectacle that is completely unprecedented and could spook investors.

So we service the debt and then we dont service 50 percent of our remaining obligations, [such as education, social safety net and other programs] and that 50 percent is what the public sees, Powell said. This gigantic cut in government spending is going to be a major negative shock to the economy, and it could push the economy back into recession.

That economic shock also would likely add to the deficit with lower tax revenue coming in and higher costs to the government, such as increased unemployment insurance expenses due to higher unemployment resulting from a bad economy.

Treasury Secretary Timothy Geithner said much the same thing in a meeting Thursday with Senate Democrats, according to Senators in attendance.

Its uncertain how much borrowing rates would increase by because Treasury security rates are set in auctions by investors. The question is how much do rates go up and for how long? Powell said.

With negotiations in Congress floundering, Senate Majority Leader Harry Reid (D-Nev.) was in talks with McConnell last week over changes to the GOP leaders plan that could make it a more viable option in the Senate.

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