WASHINGTON - As they recently passed out awards to pro-business members of Congress, including four from the Minnesota delegation, executives of the U.S. Chamber of Commerce also discussed an uncomfortable subject with each recipient: the need to increase the country's debt ceiling.
In a twist, one of America's most influential business lobbies -- and one of President Obama's most vocal opponents -- finds itself allied with the White House.
"The politics of this situation are so much different than the reality," warned Marty Regalia, the Chamber's chief economist. "Not raising the debt ceiling is not a possibility. We spend more than we take in. [Not raising the limit] would be tantamount to writing a bad check."
When that check bounces, it starts a chain reaction that hurts businesses across Minnesota and around the country, Regalia explained. "It's not just interest to debt holders," he said of the payments that won't be made. "It's bullets and Kevlar vests for soldiers. Interest rates rise. Debt holders divest. It's a domino effect."
Economic growth slows. Securities prices based on the value of Treasury bills fall. The dollar's purchasing power shrinks. Imports become more expensive. Oil prices rise. Individuals and institutions with U.S. government securities in their investment portfolios lose vast amounts of wealth.
"That's what's at stake," said Sen. Al Franken, D-Minn., who favors raising the debt ceiling without preconditions but who says a bill must pass, even if it isn't all he wants. "Anyone who says we can just pay interest on the debt and cut other things [without default] is indulging in magical thinking."
Sen. Amy Klobuchar, like Franken a Minnesota Democrat, wants to attach future debt reduction legislation to the debt ceiling vote, but she acknowledges the need to pass an increase. "Obviously we don't want to play Russian roulette with our economy by taking a risk on this," she said.
Yet as Congress returns from a two-week recess and begins to debate the debt ceiling, many members of the House and Senate and a significant proportion of the public question whether the U.S. should again raise the debt ceiling, as it has done 10 times since 2001.
Minnesota freshman Republican Rep. Chip Cravaack says there are certain scenarios in which he will oppose an increase to the debt limit.
"I will not support any proposal to raise the debt ceiling that does not provide significant, immediate savings combined with mechanisms to rein in future spending," Cravaack said.
The four Minnesota representatives who received Chamber Spirit of Enterprise Awards -- Republicans John Kline, Erik Paulsen and Michele Bachmann, as well as Democrat Collin Peterson -- were not available for comment about a potential default.
Bachmann has insisted on prior occasions that the debt ceiling should not be raised.
Former Minnesota Gov. Tim Pawlenty, like Bachmann contemplating a run for president, has said the debt ceiling doesn't have to rise to avoid default if the country devotes its existing revenue stream to paying interest on the nearly $10 trillion in government debt held by individuals and institutions.
A new CBS poll shows that 63 percent of Americans oppose any increase in the debt limit.
Franken believes Standard & Poor's recent threat to downgrade U.S. credit was at least partly an attempt to make Americans understand the dangers in letting a government default.
"Folks who don't want to raise the debt limit at all don't understand," said J.D. Foster, a fiscal policy expert at the Heritage Foundation, a conservative think tank.
The confusion stems from what the government now owes and what new debts it might take on. Virtually everyone recognizes the need to reduce borrowing to finance government. But economists point out that raising the debt ceiling involves covering legal financial obligations the U.S. already has incurred.
By year's end, the Congressional Budget Office predicts that the United States will be more than $10 trillion in debt to institutions and individuals outside the government. Roughly 53 percent of those institutions and individuals are in the United States. The other 47 percent are foreign. Among foreign countries, China, Japan and England hold the most U.S. debt.
The country has continually raised the debt limit over the past decade because the idea of default has heretofore been "unthinkable," said University of Minnesota economics professor V.V. Chari, an adviser to the Federal Reserve Bank of Minneapolis.
Last week, on Bloomberg TV, former Treasury Secretary Paul O'Neill, a Republican, called members of Congress who now threaten to block a debt limit increase "terrorists" who put the government's credit rating at risk.
Financial default is all but inevitable without an increase in the debt limit, Chari said. "Default by the U.S. government would be catastrophic for the world economy."
Default triggers regulatory consequences. For instance, Securities and Exchange Commission rules generally require that mutual funds sell all securities issued by institutions in default. Some states force pension and insurance funds to sell assets in default. Dumping trillions of dollars in U.S. securities into the market at once could destabilize the world economy, Regalia said. "When you dump, who do you dump to?" he asked.
When Russia defaulted on its debt in 1998 and Argentina defaulted on its debt in the early 2000s, "there was a flight to U.S. Treasury bills," added Chari. "If the U.S. defaults, what is the safe haven? If it's dollars, there could be a run on the banks."
Several of Minnesota's biggest companies -- Target, UnitedHealth and Cargill -- declined to comment on how a government default would affect their businesses.
As for those who continue to insist that Congress doesn't have to raise the debt ceiling, Chari said: "When you play a game of chicken, you really want the other guy to think you're nuts."
Even the Heritage Foundation's Foster struggles to offer a scenario in which an outright refusal to raise the debt ceiling does not result in some kind of government default. Foster laid out a plan to use the current revenue stream to pay the interest on government debts, contractors with legally enforceable contracts and troops in the field.
This is the basis for plans touted by Pawlenty and other conservatives. Foster says it would calm the financial markets. But Foster admitted that such a move also would leave Social Security and Medicare short of funds needed to pay senior citizens. And there would still be what he called "technical defaults" on all other government obligations totaling between $120 billion and $130 billion per month.
Foster believes a majority of members of Congress will eventually vote to increase the debt ceiling in some fashion "because they have to."
His prediction: "People will move from the 'Hell no' caucus to the 'Oh Hell' caucus."
