Every couple of years, with a regularity you can almost set your watch by, Congress flirts with the threat of not raising the federal debt ceiling and toying with a federal default. We played this game of brinkmanship in 2011, and again in 2013, and yet again in 2015.
Here we go again.
Every time in the past, when some congressional wrecking crew or another threatened to block the increase unless it got its way on something else, grownups stepped in and averted what would be almost certain economic disaster.
This time may be different. That’s what keeps Edward Kleinbard, a tax and budget expert at USC law school and a former chief of staff of the Congressional Joint Committee on Taxation, up at night. He wants us to share his insomnia, and he’s right to do so, considering how much is at stake.
The Trump administration, he told me this week, “is suffering from the ‘Three I’s,’ as I like to call them: inexperience, incompetence, and infighting.” Treasury Secretary Steve Mnuchin, he says, “understands the importance of raising the debt ceiling and wants a clean debt bill, but has very little experience working with Congress and managing leaders to get to the right place. This will be an extremely difficult exercise for him, because he’s not a hardened policy expert who’s been through these kinds of negotiations before.
“The incompetence is administration-wide. The infighting may be even more important.” While White House Budget Director Mick Mulvaney has walked back his public remarks that “it would be great to use the debt ceiling to obtain leverage on cutting spending to the poor, principally Medicaid,” Kleinbard said, “there’s every reason to believe that he continues internally to lobby for that. His sympathies are widely known.” As a GOP congressman from South Carolina in 2010, Mulvaney airily dismissed concerns about the consequences of a default on U.S. government debt: “I have heard people say that if we don’t do it it will be the end of the world,” he said then. “I have yet to meet someone who can articulate the negative consequences.”
“There’s no reason for the debt ceiling to exist as a concept,” Kleinbard observes. “The need to borrow follows inexorably from the spending and taxing path Congress puts us on.” In other words, if Congress wants to cut borrowing, the proper place to do that is through the budget process, not debt ceiling brinkmanship.
The current debt ceiling of about $19.85 trillion was set on March 15, at the expiration of a two-year suspension. While the federal debt currently exceeds that level, the government has stayed out of default through an elaborate process of fund-shifting. But Mnuchin has told Congress that the Treasury’s latitude will run out sometime in early October, and he wants a “clean” bill raising the ceiling — that is, one unadorned by politically motivated riders — by Sept. 29.
What’s most unnerving about the political and fiscal environment today is the resistance in Congress to a clean bill. Just Tuesday morning, Rep. Tom Cole (R-Okla.) told MSNBC that enacting such a measure would be “like having a credit card and saying, ‘I've reached my limit, I'm just going to change the limit higher without changing any of my spending habits.’” But a debt ceiling bill could be filibustered by Senate Democrats, setting up a major legislative fight.
Then there’s the cavalier expectation that the government would still have mechanisms to avoid a default in October. “There’s this absurd notion among those who want to use the debt ceiling as a club to slash spending,” Kleinbard says, “that crashing into the debt ceiling isn’t that big a deal because ‘prioritization’ will save the day.” The idea is that the government can pay its most pressing obligations first, such as interest and principal on Treasury securities, while letting its other bills slide.
There’s some question whether that system is even legal. In any case, “the markets understand perfectly that all these obligations are equivalent,” and would treat prioritization as an effective default.
“Then the sky really is falling,” Kleinbard warns. Interest rates will rise, suddenly eroding wealth in the U.S. and abroad. “Cash flow crises cascade through the markets and the role of the U.S. dollar as a reserve currency is called into question, because the act of prioritization is a cynical way to put lipstick on the pig of default. It’s really an act of domestic fiscal terrorism to trigger the debt ceiling. The markets will understand that the government has gone out of the business of honoring all its obligations as they come due as its first priority.
“The financial soundness of the country that Alexander Hamilton created as one of the bedrocks of success of the U.S. economy for 250 years will be thrown out of the window.” Putting the pieces back together could take years, if it’s doable at all.
These consequences haven’t changed; what has is the nihilism of some leaders in the White House and Congress. They’re moving toward experimenting with the livelihoods and fortunes of all Americans, driven by the “cynical view held by Mulvaney and others that this is all just a wonkish kerfuffle of no consequence,” Kleinbard says. “It’s exactly the opposite.”
Are there any adults left in Washington? We may not know until the first days of October.