OPINION
While I get more cynical about politics every year, I keep concluding that I'm not cynical enough. It's happened again.
Congress could long see two deadlines looming ahead: a partial government shutdown on Oct. 1 if no budget was passed, and a potentially cataclysmic collision with the national debt ceiling if that limit wasn't raised in time. I'll get to the economics shortly, but first let's compare the political degrees of difficulty. The budget deadline looked easy; the debt ceiling looked hard.
Passing what Washington calls a "clean CR" (continuing resolution) just kicks the proverbial can down the road—an activity at which Congress excels. It takes no imagination, no complex negotiations, no concessions to the other side, and CRs come in any size you like: a week, a month, a quarter. You just continue arguing over the budget and live to fight another day. Furthermore, in this case, a CR would have held federal spending at low postsequester levels—a win for Republicans. And it would have kept House Republicans out of the political box from which they are now desperately seeking to escape.
Instead of refusing a clean CR and forcing the partial government shutdown on Oct. 1, Republicans could have put all their chips on the table for an epic poker game over the national debt ceiling—where they had a stronger hand to play. Would President Obama really be willing to become the first U.S. president to preside over a federal default? Or would he cave instead? Remember, Republicans won such a battle in August 2011. And public opinion, which abhors the national debt, might even have put some wind at their backs—until the stock market crashed.
So, in my naïveté, I thought House Republicans would choose the path that was better for themselves: avoiding the shutdown and girding for battle over the debt ceiling. Wrong! My poor political forecast wasn't based on a naïve belief that members of Congress would pursue the public interest. Rather, it was based on what I thought was the first rule of congressional behavior: avoid blame. Where I went wrong is in failing to believe that a determined minority of zealots—probably no more than a quarter of the House Republican caucus—could bend Speaker John Boehner to their will so easily.
That is why I'm now much more worried about the debt ceiling. A glimmer of hope arose Thursday when Mr. Boehner announced that the GOP might accept a short-term debt-ceiling increase in return for budget negotiations—while keeping the shutdown in place. The White House reportedly rejected that opening offer, and as of press time it wasn't clear whether a deal could or would be struck.
Which brings me to the economics.
What damage have we endured already from the partial government shutdown? Several private firms estimate that each week of shutdown trims the GDP growth rate for the fourth quarter of 2013 by something around 0.15 to 0.2 of a percentage point—with virtually all of that made up in the first quarter of 2014. If you don't care about messing up the lives of about 800,000 government employees, plus tens of millions of Americans who depend on their services, that may not seem like much. But there is also a less tangible, though perhaps more durable, cost of making the United States of America look clownish in the eyes of the world.
Failing to raise the national debt limit on time would be vastly more costly. Start with the most obvious, tangible, and easily measurable cost: the near-term damage to our economy. The federal budget deficit is now running around $750 billion a year, roughly 4.5% of GDP. If the Treasury loses the ability to borrow more, the budget must be balanced immediately, meaning that federal spending must fall immediately by about $750 billion (at annual rates), or about 20%. Both the amount and the suddenness are stunning. Cutting federal spending that much would likely reduce GDP by more than 4.5%—in an economy that is barely managing 2% growth rates. That spells recession.
Most of the negative impact on GDP would cease once the impasse ended, though strong downward momentum is hard to arrest. Other costs, however, would last for years, if not decades. Once international investors come to see threats to default as a standard weapon of American political combat—something they may now be starting to believe—U.S. Treasury debt would cease being the world's safest asset. And that would have two serious implications.
First, the Treasury would have to pay somewhat higher interest rates on all future borrowing, perhaps for decades, maybe forever. By the way, that might happen even if we meet all our interest and principal payments and default—yes, that is the right word—on some other obligations.
Second, the global financial system would begin a frantic search for a new international currency. U.S. Treasurys have long served that purpose. But if international investors see Treasurys as potential political pawns, they will seek something safer. Since there is no obvious replacement, a world-wide financial panic along 2008 lines is possible.
And did I mention that Washington would look like a bunch of knaves and fools? It is hard for a nation that has taken leave of its senses to remain the undisputed leader of the Free World. Hopefully, Mr. Boehner's offer will take this doomsday scenario off the table. However, the level of partisan acrimony has ratcheted up several notches in the past month. Furthermore, the tea-party faction has intimidated Mr. Boehner before, and might do so again. And since the partial government shutdown hasn't ended civilization as we know it, some Republicans may now see the risk of a debt calamity as acceptable. A few are already talking that way.
Back to political cynicism. Where reason fails, polls might succeed. Our best hope of avoiding Armageddon now may be lopsided polling results showing that Republicans will be blamed for the debacle. But so far, while polls do show Republicans getting more blame than Democrats, the margins aren't overwhelming. They do, however, look to be moving in that direction. C'mon Gallup, CNN and The Wall Street Journal. The country is at your mercy.
Mr. Blinder, a professor of economics and public affairs at Princeton University and former vice chairman of the Federal Reserve, is the author of "After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead" (Penguin, 2013).
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