Even though it would seem to be the thing that is right up my alley, I haven't written much about the debt ceiling. Mostly because this has little to do with economics and all to do with politics, even though the consequences will have much graver economic impact than political. (At least long-term.) And the politics involved on both sides has been appreciatively distasteful to me, even for politics.
I honestly don't know what is going to happen. My guess is that we will see:
1. A raise in taxes. This may not happen on Deal Day, but it may be an implicit bargain for later. Grover Norquist, the dean of anti-tax sentiment, has all but said that not continuing the Bush tax cuts does not count as a tax hike, giving all the reps and Senators that signed his pledge a loophole. Of course, raising taxes in a recession is generally considered a bad economic move, so this won't happen immediately. But I suspect it will, Tea Party howls to the contrary.
2. Given the tone of the vote last night, we still won't see any structural changes in entitlements. I always thought it was common knowledge that war spending and recession-level revenues and spending could easily be overcome--the amounts are temporary--but structural spending, such as Social Security, are (politically) permanent and the only way to reach fiscal sanity. If the Tea Party fails, expect absolutely nothing meaningful to get done--just like every other administration since FDR. Also, expect 60% marginal tax rates in the 2030's.*
3. Someone will (politically) die. It may be Speaker Boehner, it may be Tea Partiers, it may be Obama himself. Again, this isn't something that will happen next week, but at this point someone is going to be mortally wounded. They will limp along until the next crisis, in which someone will have to step aside and resign.
Most of what happens on Capitol Hill is artificial. Issues such as abortion or gun control don't just happen--specific individuals decide to make it an issue, and it becomes an issue. (Taxes and spending are slightly different, since there are deadlines to pass budgets.) But this seems to be an artificially created problem with consequences far outside of failing to pass a farm bill.
Anyway, for a clear account of exactly what will happen economically if an agreement is not reached on the magical date of August 2nd, Megan McArdle has a post over at the Atlantic that lays it out for you. Read it, or, if you prefer sleeping at night, don't.
*I am sympathetic to what the GOP is trying to do--it is crystal clear that entitlements must be reformed, or, instead of a lot of shadow boxing about whether we default, we will just straight-up default with no political choices to make in about two decades. So the Republicans have chosen the debt ceiling to "force" a crisis that will require that some sort of entitlement reform be made, or at the very least set the stage. In theory I have no problem with this, since politicians for at least sixty years have never once felt compelled to make meaningful changes, so someone has to do something to get people to act. How the GOP handled this, at least so far, has been clumsy and abysmal. If a halfway decent deal gets passed in the next few days, however, they will go from pariahs to heroes. So we shall see.