In an ideal world, Congress would not raise the debt limit.
This would force – automatically and immediately – a balanced budget. More important, it would produce a meaningful reduction in the burden of government spending.
And contrary to hyperbole from defenders of the status quo, it doesn’t mean default since the federal government collects about ten times as much revenue as needed to pay interest on the debt.
But even though that seems like a fantasy outcome for people like me from the Cato Institute, I actually don’t think libertarians, fiscal conservatives, and other advocates of smaller government should make the debt limit a do-or-die battle.
To elaborate, my concern is that the White House will be able to whip up too much hysteria on the debt limit, particularly since the media will serve as an echo chamber and Bernanke will act as a lackey for the White House.
And if the Fed Chairman is able to rattle Wall Street and cause a big drop in the stock market, it’s quite likely that Republicans will buckle rather than run the risk of being blamed for causing a financial calamity.