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Debt-ceiling deniers court economic disaster

You would think a bone-chillingly bad jobs report would persuade some American politicians that it is their patriotic duty to end the uncertainty about whether the U.S. government will be able to pay its bills next month.

News that the United States created a negligible 18,000 new jobs in June - or one-third fewer than Canada, whose economy is 10 times smaller - should be proof enough that the time has come to reassure U.S. bondholders, pensioners and soldiers alike that their cheques will arrive in August.

With the unemployment rate rising to 9.2 per cent last month, American consumer confidence is fragile enough without the threat of a potential debt default by the U.S. government to add to the gloom.

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Yet, there was Michele Bachmann, repeating on Friday her refusal to vote to increase the statutory limit on the amount the U.S. Treasury can borrow once it hits the current $14.3-trillion (U.S.) ceiling on Aug. 2.

For Ms. Bachmann and a strikingly large corps of like-minded Tea Partiers in Congress, there is no need to pass legislation to raise the limit, even though the government now borrows 44 cents of every dollar it spends.

"It's absolutely absurd to think the United States would have to default on its debt," Ms. Bachmann, the Minnesota congresswoman and Republican presidential candidate, told Fox News. "We have [tax]revenues consistently coming into the government."

Ms. Bachmann, and a crowd of debt-ceiling deniers that includes Sarah Palin and Pennsylvania Senator Pat Toomey, insist the U.S. government could just "prioritize" spending if it runs out of room to borrow.

Paying the interest on the federal debt would come first, after which Social Security pensions, Medicare payments and military salaries would follow. "After that, we would have to have some very tough love," Ms. Bachmann said. "We can't spend money on everything politicians want."

Politicians of Ms. Bachmann's ilk have persuaded a huge swath of the American population that raising the debt ceiling is a bad thing. Scores of otherwise sensible Republicans in Congress are now reluctant to agree to raise the borrowing limit out of fear of a grassroots revolt.

Yet, unless you prefer courting economic disaster, raising the debt limit should not be an option.

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"The Aug. 2 deadline is a real deadline," Jay Powell, a former Treasury Department undersecretary under George H.W. Bush, explained in an interview. "The federal government will run short of funds on Aug. 2 and on Aug. 3 be unable to pay its bills going forward."

An analysis by Mr. Powell, a visiting scholar at the Washington-based Bipartisan Policy Center, shows that the U.S. government is projected to take in $172-billion in revenues between Aug. 3 and Aug. 31, but face bills totalling $306-billion.

The shortfall of $134-billion would not only force the government to choose whom to pay among its millions of debt holders, pension recipients and employees. The sudden plunge in federal spending - equivalent to a staggering 10 per cent of U.S. gross domestic product in August - would by all accounts pull the rug out from under the economy.

"The bad job numbers underscore the need to avoid that kind of negative shock to the economy," Mr. Powell added.

Republican House of Representatives Speaker John Boehner, commenting on the pathetic June jobs report, appeared to agree: "While some think that we can go past Aug. 2, I frankly think it puts us in an awful lot of jeopardy and puts our economy in jeopardy, risking even more jobs."

But Mr. Boehner has painted himself into a corner. He has made raising the debt ceiling conditional on reaching a long-term deficit-reduction deal with the White House equivalent in size to any increase in the borrowing limit.

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But as congressional leaders prepared for a Sunday meeting with President Barack Obama, Mr. Boehner conceded that no such deal is in sight: "This is a Rubik's cube that we have not worked out yet."

Even if they do work it out, Mr. Boehner will have a tough time persuading scores of his fellow 239 GOP House members to vote for it.

About three dozen of them, along with 12 Republican senators, have taken a "Cut, Cap, Balance" pledge. Their support for a debt-ceiling hike is contingent on passage of an "immediate" spending cut, a statutory cap on future spending and a constitutional amendment requiring the federal government to balance its budget every year. All that by Aug. 2.

Then again, if Ms. Bachmann is right, why worry about the debt ceiling at all?

"What would happen [without an increase in the borrowing limit]is that we would see a reduction in government jobs, but we would see a rise in private-sector jobs," she told CNBC on Friday.

Ms. Bachmann is entitled to her opinion. But to be safe, it's probably better if we never have to test her theory.

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About the Author

Columnist Konrad Yakabuski writes on politics, policy and business for The Globe and Mail’s Comment section and Report on Business. More

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