The US hit the debt ceiling Monday. As things stand right now, we can stretch dollars until about August -- and then we go into default. I don't think people have a good understanding of what raising the debt ceiling means. It doesn't mean we're borrowing money to spend more money, it means that we're borrowing money to cover money we've already spent. It means meeting our obligations. If we don't raise the debt ceiling, we will default on payments. Social Security checks may stop going out, paychecks to soldiers may stop being cut, grants to states will evaporate, and bond holders will find themselves in possession of nearly worthless pieces of paper.
Meanwhile, Republicans are playing on people's misconception of the debt limit. They've got everyone freaked out about spending and are counting on people equating the debt ceiling with new spending. It's a suicidal game of chicken, because one player is on rails -- it can't swerve. The GOP is playing chicken with an oncoming train.
Speaker of the House Boehner is demanding "trillions" in cuts or he says he'll let the crack-up happen. This is typical for the Orange One, whose political strategy playbook seems to consist only of a single page marked "Hostage Negotiations," with his party as the hostage takers. But, in this case, Boehner offers a Hobson's choice -- as economist Mark Thoma puts it, "Republicans are threatening to blow up the economy if they don't get budget cuts big enough to blow up the economy."
Thoma assumes that Boehner won't get his "trillions" or anything close to it. He chooses a lower number -- $600 billion over two years -- and works from there. He admits the number is a little arbitrary, but the purpose is to demonstrate the effects of spending cuts on economic recovery. Consider the $600 billion the way you would an inch on a yardstick, since all units of measure are basically arbitrary anyway.
Presently, GDP is just under $14.7 trillion, so a $300 billion change represents a 2% change in GDP. According to Okun's law, a 2% change in output corresponds to a 1% change in the unemployment rate. The labor force is presently just over 153 million, so a 1% change corresponds to around 1.5 million workers. Thus, employment would fall by 1.5 million workers in each of the two years, for a total decline of 3 million workers.
So, a $600 billion reduction in government spending over two years would raise unemployment by 1% per year, or around 3 million workers in total. We are currently down around 11 million jobs since the start of the recession, and we are not creating jobs at anywhere near the pace that is needed to reach full employment in a reasonable time period (at current rates it would be over 5 years). To stack an additional 3 million lost jobs on top of the large unemployment problem we already have would be a disaster, and I do not expect changes of this magnitude to happen despite talk of "trillions." Even a much smaller cut, say $100 billion over the next year, would still wipe out 500,00 jobs over that time period -- 2 months of job creation at present rates -- and set the recovery back considerably.
And, as everyone who bothers to be honest about things will admit, the current Republican freak-out over spending is entirely political. The vast majority of bills that would be paid by raising the debt limit were run up by Republicans -- in many cases, the same ones pulling their hair out now -- and they were more than happy to do it. It was Dick Cheney, not Joe Biden, who said, "Reagan proved deficits don't matter" -- a Republican pointing to a Republican's record to justify more borrow-and-spend policies.
To put it bluntly, the Republican strategy is to shoot the hostages. Not all of them, just some of them. They plan to accept a smaller level of spending cuts and then they'll watch the economy tank. Privately, they'll clap as it goes down, because they believe Barack Obama's reelection chances will go down with it. Millions of jobs, years of recovery, a recession or worse, all because a Democrat must not be allowed to sit in the Oval Office.
If that strikes you as extremely cynical and self-serving, I have one question for you...
Have you met the Republican Party lately?