The Path of Least Resistance, and the Debt Limit Debate
-- Posted by Neil H. Buchanan
After the 2010 midterm elections, a Dorf on Law reader told me that the Republican leadership was talking about playing games with the debt limit. He suggested that I might want to write a post about the issue. My first thought was: "What could one possibly say about breaching the debt limit, other than: 'Don't do it. Everyone would lose'? That is not enough for a blog post." Six months later, we are now facing a very real political standoff involving threats to allow the U.S. to hit its debt limit. I have written three posts (here, here, and here) on the subject, and Professor Dorf has written another (here). One should never underestimate the power of a terrible idea.
Currently, the federal government is nearing the statutory limit on its debt. Within the next week or so, the Treasury Department will begin to take extraordinary measures to continue to pay all of the government's legal obligations in full. The current estimate is that such measures can forestall the inevitable default through August, at which point there really will be a moment of truth, absent action by Congress.
As this impending political disaster has developed, nothing has changed regarding the merits of the case. Nothing good could possibly come from allowing the government to hit the debt limit. It is not merely the people whose contracts with the government would be breached who would suffer. Everyone would lose. Big. If you have a retirement account (fully privatized, as the Republicans want you to have), it will plummet in value. Why? Because a default on any government obligation will reduce the value of all existing debt, as financial markets conclude that politicians really are stupid enough to blow up the economy to make an ideological point. The decline in values of existing financial instruments, in turn, is the same thing as saying that interest rates will rise, almost certainly to staggeringly high levels. That will choke the economy into a deep recession or even depression.
None of the proposals to "prioritize" the payment of certain types of debt (putting debt held by foreign lenders first in line, possibly followed by Social Security payments and some other arbitrary choices) will change this outcome. Once the government has defaulted on any legal obligation, everything changes for the worse.
In a speech earlier this week, Speaker of the House John Boehner (R-OH) told a New York business audience that the Republicans would demand trillions of dollars in spending cuts (and, of course, no tax increases) to buy their consent to a debt limit increase. According to a report in The New York Times, Boehner acknowledged that people are "uneasy" about the possibility of default, but he said it would be "more damaging to the nation" if Congress approved a debt limit increase without reducing future spending and "bringing down the federal debt."
Let us leave aside for a moment the ridiculous idea that we should be trying to run annual surpluses, which would be necessary in order to bring down the debt. Boehner's central claim is that the country will be worse off if we increase the debt limit without first agreeing to spending cuts than it would be if we allow the government to default. This is insane. As I argued in my first post on this topic, Boehner's claim boils down to saying that we should guarantee a crisis now in order to avoid a possible future crisis. Again, this is insane.
The sad fact, however, is that insanity from Boehner and the Republicans is no longer surprising. I still find it difficult to believe that all of them actually buy this nonsense, but they might actually have convinced themselves of it. In any case, we should no longer be surprised when Boehner says things that are just plain crazy. It's what he does.
What is scary and shocking, however, is that the insanity has crossed the aisle. The Democrats have always been willing to pander about deficits, to say the least, but they at least could be counted on not to say truly crazy things about deficits and debt. Sadly, The Washington Post reported last week, in "More Democrats Threaten to Vote Against Raising Borrowing Limit" (note the word "more"!!) that the deficit debate has now been completely overrun by the insanity that Boehner is peddling.
The Post quotes Democratic Senator Mark Udall as follows: "As catastophic as it would be to fail to raise our debt ceiling, it's even more irresponsible to not take this opportunity to own up to our unsustainable spending path." No, it is not. "This opportunity" is not unique. If an elected representative believes that any policy path is a bad idea, he or she has an opportunity every day to change it. The current situation is an opportunity to do what is needed to make solving any other problem possible, by raising (or, better yet, eliminating) the debt ceiling. (Note also that Udall talks about an "unsustainable spending path," not an unsustainable deficit path, furthering validating the Republicans' policy imperatives.)
Admittedly, Udall has been trying for months to lead the Democrats down the wrong path. He is on the record as favoring a constitutional balanced budget amendment. He never misses an opportunity to show how little he understands about economic reality. Still, it is hardly unusual to find Democrats who give the finger to their own party. (Joe Lieberman and Ben Nelson come immediately to mind. Remember Zell Miller?) The Post also reports, however, that a genuine progressive, Minnesota's Amy Klobuchar, is "undecided" about raising the debt limit.
As The Post points out, Klobuchar is running for re-election next year in a purple state. Her position is thus explained by her desire not to be out of step with voters' desires. One can hardly blame her. It is not her fault, after all, that Democrats have been pandering to anti-deficit hysteria at least since early in Bill Clinton's presidency. It is not her fault that voters believe the anti-spending, anti-deficit nonsense that they hear nonstop. Would it not be worse for her to lose, she must be thinking, possibly handing the Senate over to the opposing party?
All of which explains why we are here, now, arguing over whether to deliberately destroy the economy, and possibly our system of government. Sometimes, leaders have to make tough calls and lead. No Democrat is taking a responsible leadership role on fiscal policy, and none have done so for years. We are now reduced to arguing about whether we will accept ruinous spending cuts in order to avoid immediate disaster. The path of least resistance led us to this point.
After the 2010 midterm elections, a Dorf on Law reader told me that the Republican leadership was talking about playing games with the debt limit. He suggested that I might want to write a post about the issue. My first thought was: "What could one possibly say about breaching the debt limit, other than: 'Don't do it. Everyone would lose'? That is not enough for a blog post." Six months later, we are now facing a very real political standoff involving threats to allow the U.S. to hit its debt limit. I have written three posts (here, here, and here) on the subject, and Professor Dorf has written another (here). One should never underestimate the power of a terrible idea.
Currently, the federal government is nearing the statutory limit on its debt. Within the next week or so, the Treasury Department will begin to take extraordinary measures to continue to pay all of the government's legal obligations in full. The current estimate is that such measures can forestall the inevitable default through August, at which point there really will be a moment of truth, absent action by Congress.
As this impending political disaster has developed, nothing has changed regarding the merits of the case. Nothing good could possibly come from allowing the government to hit the debt limit. It is not merely the people whose contracts with the government would be breached who would suffer. Everyone would lose. Big. If you have a retirement account (fully privatized, as the Republicans want you to have), it will plummet in value. Why? Because a default on any government obligation will reduce the value of all existing debt, as financial markets conclude that politicians really are stupid enough to blow up the economy to make an ideological point. The decline in values of existing financial instruments, in turn, is the same thing as saying that interest rates will rise, almost certainly to staggeringly high levels. That will choke the economy into a deep recession or even depression.
None of the proposals to "prioritize" the payment of certain types of debt (putting debt held by foreign lenders first in line, possibly followed by Social Security payments and some other arbitrary choices) will change this outcome. Once the government has defaulted on any legal obligation, everything changes for the worse.
In a speech earlier this week, Speaker of the House John Boehner (R-OH) told a New York business audience that the Republicans would demand trillions of dollars in spending cuts (and, of course, no tax increases) to buy their consent to a debt limit increase. According to a report in The New York Times, Boehner acknowledged that people are "uneasy" about the possibility of default, but he said it would be "more damaging to the nation" if Congress approved a debt limit increase without reducing future spending and "bringing down the federal debt."
Let us leave aside for a moment the ridiculous idea that we should be trying to run annual surpluses, which would be necessary in order to bring down the debt. Boehner's central claim is that the country will be worse off if we increase the debt limit without first agreeing to spending cuts than it would be if we allow the government to default. This is insane. As I argued in my first post on this topic, Boehner's claim boils down to saying that we should guarantee a crisis now in order to avoid a possible future crisis. Again, this is insane.
The sad fact, however, is that insanity from Boehner and the Republicans is no longer surprising. I still find it difficult to believe that all of them actually buy this nonsense, but they might actually have convinced themselves of it. In any case, we should no longer be surprised when Boehner says things that are just plain crazy. It's what he does.
What is scary and shocking, however, is that the insanity has crossed the aisle. The Democrats have always been willing to pander about deficits, to say the least, but they at least could be counted on not to say truly crazy things about deficits and debt. Sadly, The Washington Post reported last week, in "More Democrats Threaten to Vote Against Raising Borrowing Limit" (note the word "more"!!) that the deficit debate has now been completely overrun by the insanity that Boehner is peddling.
The Post quotes Democratic Senator Mark Udall as follows: "As catastophic as it would be to fail to raise our debt ceiling, it's even more irresponsible to not take this opportunity to own up to our unsustainable spending path." No, it is not. "This opportunity" is not unique. If an elected representative believes that any policy path is a bad idea, he or she has an opportunity every day to change it. The current situation is an opportunity to do what is needed to make solving any other problem possible, by raising (or, better yet, eliminating) the debt ceiling. (Note also that Udall talks about an "unsustainable spending path," not an unsustainable deficit path, furthering validating the Republicans' policy imperatives.)
Admittedly, Udall has been trying for months to lead the Democrats down the wrong path. He is on the record as favoring a constitutional balanced budget amendment. He never misses an opportunity to show how little he understands about economic reality. Still, it is hardly unusual to find Democrats who give the finger to their own party. (Joe Lieberman and Ben Nelson come immediately to mind. Remember Zell Miller?) The Post also reports, however, that a genuine progressive, Minnesota's Amy Klobuchar, is "undecided" about raising the debt limit.
As The Post points out, Klobuchar is running for re-election next year in a purple state. Her position is thus explained by her desire not to be out of step with voters' desires. One can hardly blame her. It is not her fault, after all, that Democrats have been pandering to anti-deficit hysteria at least since early in Bill Clinton's presidency. It is not her fault that voters believe the anti-spending, anti-deficit nonsense that they hear nonstop. Would it not be worse for her to lose, she must be thinking, possibly handing the Senate over to the opposing party?
All of which explains why we are here, now, arguing over whether to deliberately destroy the economy, and possibly our system of government. Sometimes, leaders have to make tough calls and lead. No Democrat is taking a responsible leadership role on fiscal policy, and none have done so for years. We are now reduced to arguing about whether we will accept ruinous spending cuts in order to avoid immediate disaster. The path of least resistance led us to this point.