Is GOP Ready to Slash Defense, Shut Down Government Rather than Raise Taxes?

No trillion-dollar platinum coin. No 14th amendment. Time to get down to serious business. If Politico’s reporting from this morning is accurate, then “90%” of House GOP members are ready to allow across-the-board sequestration budget cuts to take effect rather than compromise with President Obama. And “more than half of their members are prepared to allow default unless Obama agrees to dramatic cuts he has repeatedly said he opposes.”

1. I don’t think more than half of House GOPers are willing to accept an actual debt default where Treasury bondholders don’t get paid. More likely what this means is that GOPers are willing to accept a situation where the government can’t pay everyone and is forced to prioritize debt payments. The WSJ today says this is “technically possible.”

2. So now we are talking about what Wall Street terms a “technical default,” where obligations outside of interest payments are delayed. Chris Krueger of Washington Research Group says there is a 20% chance the Congress fails to raise the debt ceiling before the “extraordinary measures” expire, which would result in a technical default on the U.S. debt … 20% may not sound high, but it is high when the odds are supposed to be zero. The 80% is based off of nothing more than blind faith.” And here is Citigroup: “So it is possible that we will get a technical default for a few days, but more likely that Congress will give in, vote the debt ceiling up temporarily, and let the automatic sequesters kick in.”

3. Is a technical default a bad thing? Treasury Secretary Timothy Geithner suggests it is. As he said back in 2011:

‘Prioritization’ also fails to account for how payments on principal would be made if investors were to lose confidence in U.S. creditworthines. … Under normal circumstances, investors who hold Treasuries purchase new Treasury securities when the debt matures, permitting the United States to pay the principal on this maturing debt. Yet in the scenario you advocate, in which the United State would be defaulting on a broad range of its other obligations, there is no guarantee that investors would continue to re-invest in new Treasury securities.

4. Team Boehner is clearly trying to avoid any sort of default, technical or otherwise. Indeed, the GOP background quotes in the Politico story seems part of that effort: “Boehner assumes he can ultimately talk members out of default, [and] Republicans who know him well believe he will never allow default, even if it puts his leadership position at risk.”

5. GOP leaders will try and convince their rank-and-file that the debt ceiling is the wrong fight to pick. Better this one:

[House GOP leaders] are searching for ways to delay that life-or-death choice or convince members that a government shutdown is sufficiently dramatic to make their stand. …The 2013 continuing appropriations resolution expires on March 27, cutting off funding for most federal agencies. It needs to be extended, and Republicans don’t want to do so unless a new continuing resolution reduces spending, too. This is where they could choose to shut down the government to dramatize their contention that for four years Obama has promised in words to cut spending but in action only piled up debt. Many Republicans believe this is precisely what they will do.

6. Politico calls the sequester, “The most likely outcome right now.” A compromise with the president would likely mean replacing half the spending cuts with tax hikes of some sort. Recall that the White House has already released a memo showing how capping upper-income deductions could realistically raise $450 billion to $650 billion over a decade. Doubt GOP goes for this.

7. And what if the sequester should happen? Well, spending would get cut. If the sequester happens and the previous Budget Control Act spending caps hold, spending as a share of GDP would drop to 21.2% by 2018 vs. 22.9% last year.

Let’s look at defense spending for a moment. It would get cut to historic lows, around 2.5% of GDP. Some context: Right before 9-11, the “peace divided” brought defense spending down to 3%. Moreover, defense spending accounted for, on average, a 7% share of GDP from 1948 to 2000.

  1. Shane McGuire

    You know how you have that relative who has just a little bit of crazy in him? If you hear a story from Aunt Sue about him, you’re not surprised, you just chalk it up to another bit of wackiness.

    The threat of being just crazy enough to do something is pretty important in some jobs. Speaker of the House may be one of them. Newt was just crazy enough to some pretty effective things (and some pretty crazy things!). Boehner lacks that. Democrats see Boehner and they think, “Here’s a guy who’s reasonable. Here’s someone who also thinks those Tea Partiers are a bit kooky.” And that’s why we’ll have to wait for the next fight, until the next fight finally rolls around, that is, when we find out it’s time to wait for the one after that.

  2. mask

    The GOP are always saying that whatever is happening right now is the wrong fight to pick.

  3. Eugen Richter

    Senator Obama had it exactly right when he voted against raising the debt ceiling back in 2006:

    “The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”

  4. donald todd

    Isn’t this something.   I don’t know about the Republicans in the House or the Senate but I personally am ready to suffer under sequestration, even knowing that the Administration will decide who gets and who does not get funding should this occur.

    Undoubtedly the innocent will be blamed and the guilty will drive off with the spoils but if sequestration succeeds, and we are able to get off the perch as the world’s policemen, good.

  5. veni vidi vesci

    When you say “raise taxes”, do you mean “raise marginal income tax rates”?  If that’s what you mean, why do we allow the Democrats to speak as if raising rates will increase revenues to the Treasury, when there simply is no direct relationship between increasing rates and increasing revenues?  Under Reagan in the ’80s, Clinton in the ’90s, and W in the ’00s, marginal rates were lowered, and tax revenues increased.  I don’t understand why we cede this intellectual high ground.  The way to decrease the debt is to cut spending and lower marginal rates, yet we allow the Dems to say that increasing rates will lower the debt.  It just ain’t so.

  6. Patrick in Albuquerque

    With sequester, don’t we also get the equal cuts in non-defense discretionary?

  7. Nick Stuart

    Is the GOP ready to do anything? Who knows? The GOP leadership was last seen on the back of a milk carton. Completely MIA (or AWOL, in addition to being FUBAR).

    I can’t understand why the House doesn’t simply put together a plan and pass it, then say “The ball’s in the Senate and President’s Court.”

    Guaranteed Boehner will negotiate with himself until he give the president everything he wants, and then some.

  8. Pilli

    Let’s think about this a moment.

    If the debt ceiling were not raised and the U.S. did “default” on some of its obligations (in quotes because I don’t know what default means in this case as opposed to me defaulting on my home loan) the prediction is that bond buyers would not buy the next set of bonds.

    Sooooo…the government would not have a bunch of money to spend.

     Sooooo…spending gets cut!  Isn’t that what we have been advocating all along…less spending?

    This seems to be a definitive way to force spending cuts.  This is what happens to normal people when their credit gets cut off.  Why not the government?

  9. BrentB67

    I expected Boehner to put on the bo peep costume and stroll up to the White House for his 90 day humiliation, return to the House for a midnight closed door meeting followed by a vote on whatever Sen. Reid wants sometime between 1 and 2 am.

  10. Valiuth

    I say “Burn Baby! Burn!”. 

    But, Seriously. No deals any more. I want the house to just pass bills. Pass every permutation of a debt ceiling increase Republicans can think of that will pass the house and then let the Senate Democrats and the President choose whatever they like from the set. 

    Of course that would only be possible if Republicans could stick together a little, but darn their hides they can’t. 

  11. Fred Cole

    Why is the percentage of GDP the correct metric to use here?

    Defense spending has exploded in the last decade.

    If our bloated national defense, which spends about three times what China and Russia spend combined cannot sustain modest cuts, then something is terribly wrong.

  12. Mr. Brown
    Fred Cole:  Defense spending has exploded in the last decade.

    Bad pun, Mr. Cole… bad taste if it was intentional. I’ve known a few people who have exploded in the last decade, in the war you seem to have forgotten about which might explain that whole spending increase.

    Can we just go back to pre-war spending, since the wars are over? Should that be considered  a “cut?”

    I’m a veteran, and a defense contractor, but  I know the military is not cutting budgets where they need to be cut. Do we need to be 3 generations ahead of everyone else in fighter plane technology? Should we be just barely even with everyone on body armor technology? 

    As for Russia and China, it’s a lot cheaper to steal our ideas then make their own. We make science, and pay for research with that money. Less isn’t a matter of efficiency or “right sizing” from them. It’s evidence of theft.

  13. Fricosis Guy

    Funny how the ridiculously optimistic CBO growth estimates — which therefore exaggerate the GDP % defense spending decline — get rehabilitated when they suit our purposes.

    Beneath your usual standards, Mr. Pethokoukis.

    Fred Cole: Why is the percentage of GDP the correct metric to use here?

    Defense spending has exploded in the last decade.

    If our bloated national defense, which spends about three times what China and Russia spend combined cannot sustain modest cuts, then something is terribly wrong. · 0 minutes ago

  14. flownover

    Let’s go for it, it’s our only chance for the foreseeable future.

    Popularity contests are not for those kicked off the student council.

  15. Ross C

    I think the sequester is undoubtedly bad governance but cutting government spending is a good thing.  I don’t know when the other shoe drops on our debt.  Maybe not in my lifetime, but I think in the next 10 years.  We cannot grow our way out of the debt problem.  That is what Bush 43′s strategy was and it did not work, God bless him.

    I would say raise the debt ceiling but let the sequester happen.  Let’s get the ball rolling.

  16. Pelayo

    I would offer up the budget cuts that Paul Ryan detailed last year as part of any alternative to sequestration.  If the Dems don’t want to deal then let the chips fall where they may.  No deal is better than continuing to fund runaway entitlement spending.

  17. Paul DeRocco

    People seem blissfully unaware that money is pouring into the government each day. It’s just not pouring in as fast as it’s pouring out. So only a fraction of the outflow is being paid for by borrowing. If the borrowing has to stop, the outflow doesn’t stop, it is merely cut back by a substantial fraction.

    The point is that the American people have to be made to understand that not raising the debt limit will force cuts, but it is entirely up to the President to decide how to allocate those cuts. The narrative must be that if someone is hurt by a particular cut, then it’s Obama’s fault, because he could have cut something else instead. A handy list of unpopular programs that didn’t get cut will not be hard to assemble. If we can’t manage to unite behind that narrative, then we might as well abdicate, and move up to the north slope of Alaska to hide.

  18. Paul DeRocco
    Fred Cole: Why is the percentage of GDP the correct metric to use here?

    Defense spending has exploded in the last decade.

    If our bloated national defense, which spends about three times what China and Russia spendcombined cannot sustain modest cuts, then something is terribly wrong.

    Over the long term, percentage of GDP is definitely the correct metric to use. The bigger the GDP, the more we can afford, and the more value we have to protect.

    But going from 4.4% to 4.7%, in a period when there has been very little growth in per capita GDP, isn’t much of an explosion. More like gaining a little weight. It’s still waaay below our post-WWII average.

    Staying miles ahead of our competitors is the thing most likely to make them feel like it’s not worth trying to compete. China’s sudden willingness to expand its their military dramatically must be at least partly due to their calculating that now’s their chance to become competitive, while Obama is in office.

  19. RushBabe49

    Shut down the government!  Yeah!  Send home every federal employee making over $100,000 per year.  The grunts doing the real work don’t make nearly that much, and customer service (?) wouldn’t suffer one iota. And the R’s should be reminding the public that Social Security, Medicare, and Medicaid are NOT contractual requirements, but programs that can be changed any time at the whim of Congress.

  20. Fred Cole
    Paul DeRocco

    Over the long term, percentage of GDP is definitely the correct metric to use. The bigger the GDP, the more we can afford, and the more value we have to protect.

    But going from 4.4% to 4.7%, in a period when there has been very little growth in per capita GDP, isn’t much of an explosion. More like gaining a little weight. 

    No.  The correct metric is need.  And need is based on the world situation and our own.  If we had no enemies then we still wouldn’t need to spend on the military.

    We’re close to that now.  There’s no Soviet Union, there’s no Nazi Germany, there’s no Imperial Japan and we trade with China.

    We don’t need to spend nearly 5% of GDP to be able to drop bombs on guys in caves.  We don’t need a dozen carriers.  We don’t need a military presence.

    Instead we do things like defend countries that either have no threats or can defend themselves or both.

    Well, if you want it then you can damn well pay for it.  

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