In a bit of political stagecraft, House Republicans brought to a vote on Tuesday evening a measure that President Obama and the Democrats were demanding not so long ago: a clean increase in the national debt ceiling, unencumbered by any requirement that spending be cut.
Given that all Republicans and more than a few Democrats oppose any debt-limit increase that is not accompanied by some commitment to future fiscal restraint, the measure failed by a vote of 318-97. And for all the talk of economic crisis should Congress fail to raise the debt ceiling by August, the financial markets are likely to yawn at this vote — if only because Republican leaders have privately assured Wall Street executives that this is a show intended to make the point to Mr. Obama that an increase cannot pass absent his agreement to rein in domestic programs.
“Wall Street is in on the joke,” said R. Bruce Josten, executive vice president of the U.S. Chamber of Commerce.
But beyond this week, Wall Street has reason to be nervous as Congress nears the actual deadline on Aug. 2 to raise the $14.3 trillion borrowing ceiling, said people in both parties and in finance, some of whom asked not to be identified given the sensitivity of the issue.
Chickening out in games of chicken
Investors have grown accustomed to partisan games of chicken that always end with the needed increase in the government’s borrowing authority. But this showdown, many say, is riskier because of the strongly held antispending, antitax views of the many freshman House Republicans combined with the fragility of the economic recovery.
“The people who are more politically savvy realize this may not be the normal brinkmanship,” said Senator Mark Warner, Democrat of Virginia. Nor, he added, is this standoff like the fight a few months ago over the current year’s spending, which ended with a late-night deal shortly before the government would have shut down.
“The thing that people are missing is that in shutting down the government you can go to the 11th-and-a-half hour, and the consequences of not doing it, while significant, are not economy-threatening,” Mr. Warner said. “You can’t go to the 11th-and-a-half hour on the debt limit. You don’t know what’s going to spook the bond markets.”
The chief wild card is the House Republican majority, which was elected last November after a campaign defined more than in any year since 1992 by voters’ antipathy toward budget deficits. More than a third are newcomers who reinforced the ranks of Tea Party sympathizers already in Congress. More numerous than the insurgents elected in the conservative waves of 1980 and 1994, many freshman Republicans have no experience in public office and consider themselves citizen-legislators who entered government to shrink it regardless of the political costs.
“The faction in the Republican Party that takes a more moderate view is so much in the minority right now,” said Joseph E. Kasputys, founder of IHS Global Insight and an official in the Nixon and Ford administrations. “The people who have been sent to Washington most recently are bringing a strong message from the Republicans more to the right that really want something done about government spending.”
Disbelieving, not fearing, not caring
Many House Republicans have said publicly that they either do not believe the government will default or that they do not fear it. Many embrace a proposal of Senator Patrick J. Toomey, a first-year Republican from Pennsylvania, for the Treasury to pay bondholders with incoming tax revenues and delay other government payments pending a resolution. Treasury Secretary Timothy F. Geithner and many on Wall Street call the idea unworkable.
Also, many Republicans have made comments indicating that they do not understand or do not care that an increase in the debt limit is needed not only for new spending but also to cover Social Security checks, troops’ pay and myriad other agreed-to purposes, as well as for payments to creditors holding Treasury bonds.
A recent poll by the Pew Research Center found that more Americans are concerned that raising the debt limit would lead to new spending and debt than are concerned that not raising the limit would spur a government default and hurt the economy, 48 percent compared with 35 percent; among Republicans, the gap is 60 percent to 25 percent.
Another difference from recent decades, when the parties several times agreed to bipartisan budget-cutting deals to raise the debt limit, is the scale of spending cuts that Republicans are demanding as the price of support — up to $2 trillion in savings over a decade.
For Republicans and Democrats to agree this summer on such a far-reaching deficit-reduction plan is a hurdle that is all the higher given how far apart the parties are. Republicans oppose any new taxes while Democrats say a balanced package must include higher revenues.
Also, the time frame for action on a deal is shorter than the Treasury’s debt-limit deadline would suggest: The House’s unusual schedule of recesses this year means both chambers of Congress will be in session simultaneously for just four of the nine weeks before Aug. 2.
“I’m confident that unless we do something really significant about debt and deficit, it’s not going to be raised,” the Republican Senate leader, Senator Mitch McConnell of Kentucky, said on the NBC News program “Meet the Press” on Sunday.
Precarious recovery
Just as the political dynamic is more precarious than in years past, so too, say some analysts, is the economic recovery. The combination “definitely makes it more dangerous” to even flirt with default, said Rick Rieder, a managing director of BlackRock, the world’s largest investment management firm.
“The practical ramifications of it are dramatic, and I truly believe this,” Mr. Rieder said. At some point short of actual default, he said, “you’re going to run down the road where the rating agencies are going to have to react, the Fed is going to have to make a set of decisions, international investors are going to have to interpret what this means, and you could functionally have a self-fulfilling prophecy in terms of the risk while not actually having a default. That is such a dangerous path to go down.”
Even assuming a quick resolution, he added, the nation could face higher borrowing costs for the long term, increasing the national debt.
Not everyone agrees that the consequences of a showdown, or even a default, would necessarily cause substantial economic damage. But much of the business community appears concerned. Mr. Josten of the Chamber of Commerce, who has met privately with Republican newcomers on fiscal matters since January, asked, “Am I the only one who remembers the split screen on TARP?”
He is not. Increasingly, worriers from Washington to Wall Street recall the how House Republicans by a 2-to-1 margin first rejected the Troubled Asset Relief Program, better known as the bank bailout, on Sept. 29, 2008, though the financial system was near collapse and a Republican president, George W. Bush, was pleading for their support.
That afternoon, cable networks split screens to capture the stock markets going down simultaneously with the House vote; the Dow Jones industrial average fell more than 777 points, its largest single-day point drop. Four days later, following the Senate’s lead, the House approved a revised bailout and Mr. Bush signed it into law.
This article, "," first appeared in The New York Times.