Krugman and Klein on the ugly politics of the debt ceiling

Paul Krugman explains at his NYTs blog just what the fight over the debt ceiling means, in direct effects but more importantly in political terms, which mostly signal just how extremist the allegedly "conservative" faction in our governing system has become and how the most basic measures to ensure stability are nothing but partisan politics for the GOP:

The direct effects of hitting the ceiling would be bad enough — sharp cutbacks in spending, which would undermine essential services, not to mention derail the economy. It’s not clear to me whether there would be some wiggle room through the accumulation of arrears — say, not actually paying workers and contractors but promising to make it up when sanity returns. But it would be ugly indeed.

What might make it even worse would be indirect effects, of two kinds.

First, US government debt plays a special role in the financial system: T-bills are the universal safe asset, the ultimate collateral. That’s why, during moments of financial stress, the interest rate on T-bills has actually gone negative. Make that safe asset suddenly unsafe, and it might cause vast disruption.

Second — and I don’t think this is getting enough attention — failure to raise the debt limit could act as a terrible signal about the US political system.

When you look at the US fiscal position in terms of what we’re capable of as a nation, it’s not a big problem. Never mind those big numbers you hear about implicit liabilities; we have a big economy, too. So modest tax increases and reasonable efforts to limit health care costs could bring our long-run finances into line.

But all this depends on our having the political will and cohesion to do what’s necessary. What if it turns out that we’re a banana republic, with crazy extremists having so much blocking power that we can’t get our house in order?

And failing to raise the debt limit could be widely read as a signal that we are, in fact, a banana republic.

In that case, however, what should Obama do? My answer is that despite all that, he must not let himself be blackmailed.

Partly that’s because once he gives in the first time, the blackmail will never stop. Once the crazies know that they can get whatever they want by threatening to blow up the economy, they’ll just keep demanding more and more…

This is going to be very ugly. But I don’t think there’s any way to avoid taking it all the way to the edge, and possibly over it.

Ezra Klein has more on the GOP's cynical "We'll shoot the puppy!" approach to "bi-partisan" negotiations:

(I)t’s worth listening to (GOP Senate leader Mitch) McConnell's comments on the debt-ceiling vote. There will be no tax hikes, he said. But there will be sharp cuts in both agency and entitlement spending. And this is, in his view, a rare opportunity. “If there is a grand bargain of some kind with the president of the United States,” McConnell said, “none of it will be usable for either side in next year’s election — none of it.”

What’s interesting here is the way McConnell has redefined the term “grand bargain.” Typically, a grand bargain is a deal in which Republicans back tax increases and Democrats back spending cuts. But...McConnell is recasting it as a deal wherein Democrats back spending cuts and Republicans don’t destroy the economy. That’s . . . bold. But Democrats can’t say they weren’t warned.