Tuesday, December 04, 2012

Bruce Bartlett – The debt ceiling is the real fiscal cliff

The disillusioned Republican and dissident fiscal-conservative economist Bruce Bartlett is not sure that the consequences of the current standoff over the so-called "fiscal cliff" will be as disastrous as many people fear. Instead he zeroes in on a looming threat that may well turn out to be more dangerous, but which is not getting nearly as much attention right now. I recommend reading Bartlett's whole piece ("The Debt Limit Is the Real Fiscal Cliff"), but here are some highlights:
Washington is all abuzz over the impending tax increases and spending cuts referred to as the fiscal cliff, an absurdly inaccurate term that both Democrats and Republicans have unfortunately adopted in order to pursue their own agendas. In truth, it is a nonproblem unless every impending tax increase and spending cut takes effect permanently – something so unlikely as to be effectively impossible.

In my opinion, the fiscal cliff is akin to the so-called Y2K problem in late 1999, when many people worried that computers would freeze, elevators would stop running and planes would fall from the sky. Of course, nothing of the kind happened.
Could be. But one way or another, that's not the really crucial point.
So if the fiscal cliff is a faux problem, why do we hear that industry and financial markets are deeply fearful of it? The answer is that there is a very real fiscal problem that will occur almost simultaneously – expiration of the debt limit. Much of what passes for fiscal-cliff concern is actually anxiety about whether Republicans in Congress will force a default on the nation’s debt in pursuit of their radical agenda.
Whether or not that's what businesses and the financial markets are really most afraid of, it's a serious danger that they, and the rest of us, definitely should be afraid of.

Lest we forget, this whole threat of going over a "fiscal cliff" was engineered as part of the non-solution to the debt-ceiling debacle of 2011. In that year the Congressional Republicans—who had regained control of the House in the 2010 elections—took the historically unprecedented step of generating an artificial crisis over the usually routine matter of raising the debt ceiling, using it as a tool of political extortion, despite the fact that in the process they put the "full faith and credit" of the US government at risk, brought the federal government to the verge of defaulting on its debts, and triggered a first-ever downgrade of the US credit rating.  And there is every indication that the Republicans, who unfortunately still control the House, are sufficiently reckless and irresponsible to do it again.
No less an authority than the anti-tax activist Grover Norquist, who basically controls the Republican Party’s fiscal policy, has said repeatedly that the debt limit is where the real fight will be over the next several weeks. [....]
Well, the Republicans also have other leverage, continuing resolutions on spending and the debt ceiling increase. They can give him debt-ceiling increases once a month. They can have him on a rather short leash, on a small – you know, here’s your allowance, come back next month if you’ve behaved. [...] Monthly if he’s good, weekly if he’s not. [....]
Perhaps this amounts to no more than wild fantasizing or wishful thinking on Norquist's part, but we shouldn't take that for granted. Part of the problem is that many of the Congressional Republicans, and not only the most extreme Tea Party ideologues in the House, don't really feel they suffered much political damage from their debt-ceiling brinksmanship in 2011. Polls and other evidence indicated that many Americans were disgusted by the whole fiasco, but since many of them didn't follow or grasp the details very closely, they tended to put the blame on "Congress" or on "Washington" in general, not fully realizing that in this case as in many others (as the political analysts Thomas Mann & Norman Ornstein have been forced to conclude) the Republicans are the problem.

Furthermore, once the Republicans saw how effectively the debt ceiling could be used a tool for political extortion, they began to find it irresistible.  Bartlett once again gives us a telling quotation:
As Senator Mitch McConnell of Kentucky, the Senate minority leader, explained:
I think some of our members may have thought the default issue was a hostage you might take a chance at shooting. Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming.
So yes, the Republicans might well try this hostage-taking gambit again (and again). And sometimes, in such cases, the hostage doesn't survive.

=> Before proceeding, it is important to emphasize how crazy this game of chicken over raising the debt ceiling really is. Contrary to the vague impressions that some people may have, voting to raise the debt ceiling does not authorize new or increased expenditures by the federal government. It authorizes the federal government to cover payments for expenditures that have already been authorized by Congressional votes. The fact that increases in the debt ceiling have to be authorized separately from voting for those expenditures in the first place is a somewhat bizarre procedure that we can now see, in retrospect, was always a bomb waiting to blow up. In 2011, as several analysts have put it, the Republicans decided to weaponize this potential threat for the first time.
At the risk of stating the obvious, the debt limit is nuts. It serves no useful purpose to allow members of Congress to vote for vast cuts in taxation and increases in spending and then tell the Treasury it is not permitted to sell bonds to cover the deficits Congress created. To my knowledge, no other nation has such a screwy system.

Nevertheless, we have a debt limit that is denominated in dollar terms; it is breached when the debt subject to limit, which includes bonds the government itself holds in various trust funds, rises above that limit. Currently, it is $16.394 trillion. The Congressional Budget Office estimates that given current spending and revenue trends, that figure will be reached before the end of the year.

At that point, Treasury will have to take extraordinary and costly measures to avoid technically hitting the debt ceiling. But these measures provide only a month or so of breathing room. At some point, Treasury will lack the cash to pay the bills that are due and it will face nothing but unthinkable choices – don’t pay interest to bondholders and default on the debt, don’t pay Social Security benefits, don’t pay our soldiers in the field and so on.
Or perhaps that financial apocalypse will be avoided because the White House will capitulate first and, once again, try to buy off the Republicans with various ransom payments (which the Tea Party ultras in the House may nevertheless reject as inadequate). But if the Republicans are able to pull of this extortion racket several times in a row, what's to keep them from doing it again and again? And, in the process, the increasingly conspicuous dysfunctionality of the US political system will have economic consequences, too.

So Bartlett is right: We should be worried. This outcome isn't inevitable, but it certainly doesn't look implausible.

=> If the Republicans do decide to play this game again, it could also set off a constitutional mini-crisis.

A US  President is charged, of course, with obeying and enforcing laws and other valid acts of Congress. But the President (along with the rest of the Executive Branch) is also charged with ensuring that the debts and other financial obligations validly incurred by the United States are paid. As Bartlett and others have argued in the past, if these two obligations come into conflict, then there are plausible arguments to be made that Obama would be constitutionally authorized, even obligated, to tell the Congressional Republicans to drop dead and simply raise (or ignore) the debt ceiling on his own authority. According to these arguments, the basis for such actions would come from Section 4 of the 14th Amendment, which declares that “The validity of the public debt of the United States, authorized by law, ... shall not be questioned." Thus, if Congress refused to allow the federal government to pay its debts, it would be acting unconstitutionally, and in the end the Constitution trumps everything else.

The Obama administration has made it clear that it doesn't want to invoke this constitutional Nuclear Option, and it has good reasons to want to avoid it. But Bartlett argues that, if the Congressional Republicans decide to take the US economy to the brink again, President Obama should stop playing their game, even if doing that entails dangers of its own.
There are a host of practical problems any time the president is forced into uncharted constitutional territory, as Lincoln so often was. But when faced with an extortion demand from a political party that no longer feels bound by the historical norms of conduct, the president must be willing to do what has to be done.
Bartlett may be right. But I hope that such an extreme situation can somehow be avoided, and some other solution can be found (though I'm not optimistic). Stay tuned.

—Jeff Weintraub

[P.S. 12/7/2012: Some updates & elaboration here & here.]

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