Flirting with default Gingrich vs. Clinton: GOP leader threatens showdown if balanced-budget plan is thwarted

October 01, 1995

HAPPY FISCAL NEW YEAR! To the surprise of no one, Republicans and Democrats have put aside budgetary brinkmanship by passing a continuing resolution allowing government agencies to enjoy business as usual for more six weeks, though at a reduced rate. Had they balked, all but essential federal functions would have shut down and federal employees would have looked in vain for their paychecks.

The current respite, however, is equivalent to a Strauss waltz as a prelude to Wagner's Goetterdaemmerung. Very serious business lies ahead, with Nov. 15 trumpeted as a drop-dead date. At that moment, as Treasury borrowing bumps against the current $4.9 trillion debt ceiling, Republicans vow they are willing to risk the first real default in U.S. history if President Clinton spurns their plan to balance the budget in seven years.

"Blackmail," grumps the president as his fiscal gurus tut-tut about GOP irresponsibility. "Don't assume that we will flinch, because we won't," replies Speaker Newt Gingrich in his best school-yard manner. The casual observer would assume that the much-vaunted mother of all Washington train wrecks is coming down the tracks, but don't count on it.

For one thing, neither the politicians nor the economists can agree on just what would be the effect of a genuine default. Some think interest rates would go up as the full faith and credit of the United States is sullied. But there is a contrarian view that the financial markets would take the showdown in stride, both because they would be impressed with the GOP campaign to drive down deficits and because they know the Treasury has a few tricks up its sleeve.

Another reason not to panic is that both Mr. Clinton and Mr. Gingrich have a personal interest in demonstrating that they can govern. Mr. Clinton knows the Republicans will remain supreme on Capitol Hill even if he is re-elected. Mr. Gingrich obviously loves the present situation -- one that bequeaths him powers that would vanish with a Republican president in the White House. Therefore, the prospect of a last-minute compromise cannot be ruled out. The two men reportedly get reasonable once the cameras are out of the room.

Nevertheless, there is no reason to be complacent about the prospect of a default. The only thing worse, in our view, would be a retreat from the goal of a balanced budget. The Republicans want it in seven years, the Democrats on a slower glide path in ten years. The key is to make either target credible in contrast to the fiscal profligacy of recent years. Investors should be left with no reason to fear either default or unsustainable deficit spending.

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