Is it that time again?
Syria will be foremost on Congress’ mind when it returns from vacation next week, but lurking on the horizon like an ever-present cloud bank will be the debt limit. Treasury officials say the limit, currently set at $16.7 trillion, will have to be raised by mid-October if the U.S. is to avoid a government bond default.
Under George W. Bush the limit was raised seven times by a total of $5.4 trillion, almost always without tendentious debate. In the first two years of the Obama administration it was raised three times, totaling $3.4 trillion, also without kicking and screaming. In 2011 the GOP took control of the House of Representatives, and that’s when the trouble began.
This once-routine vote has become a recurrent act of brinkmanship over the last several years. The fundamental issues haven’t changed, however. Here’s a rundown of how to think about the debt-limit issue, in five easy pieces.
1. There’s no real reason even to have a debt limit. The debt limit came into being in 1917 when the idea was to give the U.S. Treasury more latitude to issue debt, not less. Before that, Congress had to vote on every proposed bond issuance, which it considered a pain in the neck. So it chose instead to give the Treasury blanket authority to float bonds, though not unlimited authority.
The debt limit was never designed to keep Congress from enacting any spending bills or deficit-building tax breaks it wished. Obviously, it doesn’t do so today, since Congress routinely passes measures that it knows, by simple math, will require more borrowing. The debt limit became a fiscal pitfall only after 2010 when talk of holding it hostage for political ends became common.
Let’s not forget that raising the debt limit does nothing to increase spending; it merely authorizes borrowing for debts already incurred by Congress. If the lawmakers don’t want to increase spending, they already have a way to do so — by not enacting spending bills.
2. The consequences of reaching the limit are dire. It’s fashionable in some quarters to pooh-pooh the aftermath of a debt-limit breach, as if all the talk of consequences is just political posturing. That’s an unwise approach. It’s possible that the consequences wouldn’t be quite as severe as some Treasury officials suggest, but no sane person could advocate trying to find out just for the jollies.
Here are the dimensions of the fire the U.S. would be playing with if a default occurred, according to the Treasury: Ruining the U.S. government’s unblemished history of always paying its debts would instantly raise its borrowing costs, placing a heavier burden on its budget and slashing the value of government securities held by individuals, pension funds and other countries. Government issuance of Social Security checks, Medicare reimbursements to doctors and hospitals, paychecks to military families and vendors would be halted or cut.
The “full faith and credit” of the United States, the preservation of which has helped make the dollar the world’s premier reserve currency at great profit to America and Americans, would be impaired, possibly forever. This could cause “irreparable harm to the American economy,” Treasury Secretary Jacob J. Lew warned House Speaker John Boehner last week. Does anyone out there really want to test how much of this would come true?
Even the steps needed to defer a breach can be costly. When the nation hit the debt limit for three months in 2003, the government staved off default through the early redemption of bonds owned by a civil service retirement fund. That cost the fund and its beneficiaries more than $1 billon in lost interest, the Government Accountability Office determined.
3. Social insurance programs are still on the bargaining table, and that’s wrong. President Obama has maintained unequivocally that he will not negotiate with Congress over the debt limit. But there’s negotiating, and there’s negotiating.
This time around, the debt limit is inextricably tied to a couple of other fiscal imperatives: Congress must pass some sort of funding mechanism to keep the government running past Sept. 30 to avoid provoking a government shutdown similar to those in 1995 and 1996.
Additionally, the White House is eager to unwind the sequester — that’s the device that got everyone through a debt-limit crisis in 2011, but will force more than $100 billion in economy-sapping budget cuts in 2014. Both these goals require the assent of Congress.
In recent budget talks between the White House and congressional Republicans, changes to both Social Security and Medicare have been proposed.
One lingering idea is to alter the formula for cost-of-living increases for Social Security beneficiaries by tying them to the so-called chained CPI, a new inflation index that rises more slowly than the conventional Consumer Price Index used today. There’s no evidence that the chained CPI lives up to its adherents’ claims that it’s more “accurate” than the CPI. The chained CPI’s virtue for budget cutters is that it’s cheaper than the CPI — a benefit cut, imposed by stealth.
The budget negotiators also discussed a “complete restructuring of Medicare,” according to the Washington Post. It’s not clear why anything of the sort is necessary. Medicare is the most efficient provider of healthcare we have, and its rate of cost growth has been coming down sharply in recent years.
Obama still hankers after a “grand bargain” encompassing the debt limit, the budget and other fiscal matters, so the chance that there will be disguised negotiations over the debt limit still lurks in the wings. Social Security and Medicare aren’t out of the woods yet.
4. Recent debt-limit deals involved trickery; will this one too? Because Democrats and Republicans are so far apart on fiscal policy, the only way to stave off a debt-limit breach since 2011 has been through sleight of hand.
The original magic trick was the sequester. Enacted to resolve the 2011 debt-limit standoff, this arrangement called for draconian, across-the-board budget cuts starting this year unless Congress worked out more refined measures in the interim. Congress failed, and the result has been the systematic impoverishment of a host of government programs, with the damage largely visited on moderate-income and low-income Americans.
The second debt-limit fight was resolved in January by the “Williamsburg Accord,” named after the Virginia retreat where the GOP cooked it up. The accord raised the debt limit for three months in return for an agreement by Senate Democrats to enact a budget with totally illusory fiscal controls. But it kept the sequester in place.
Even the best magician knows that the audience gets wise when you repeat the same trick. This upcoming debt limit may well require yet a new form of legerdemain. Last week, former Treasury official Mark Patterson, a veteran of earlier debt-limit fights, suggested a resolution based on a few supposed “reforms,” “prohibitions” and mandates that all communicate “change, rectitude and toughness.” That’s what Washington has come to — all smoke, all mirrors, all the time. But no real achievement.
5. Even if the debt limit is raised, U.S. fiscal policy is a mess. The lesson of the post-World War II economy is that the surest way to cut the government’s debt burden is through economic growth. In 1947, gross federal debt swelled by war expenditures reached a record 121.7% of gross domestic product. Ten years later, the ratio had been cut in half and by 1974 in half again, to 33.6%. In that time frame, the size of the U.S. economy had nearly tripled.
Yet fiscal policy both in Congress and the White House continues to be aimed at measures that will suppress growth.
The federal deficit is shrinking so fast — from 7% of GDP last year to a projected 3.7% next year — that the risk of a new recession has been heightened, not lowered. Yet despite evidence that relentless austerity budgeting in Europe prolonged the recession there, scolds like the Peter G. Peterson Foundation want more, calling for another $2.2 trillion in U.S. budget cuts over the next 10 years. That’s on top of about $2.2 trillion in cuts made in the budget and sequester provisions in the 2011 debt-limit deal.
The U.S. economy is growing again, but it’s not yet strong enough to stand on its own two feet. That’s where the risk of another debt-limit standoff lies.
Nothing good can come of the posturing we’re about to witness over the next month or six weeks, especially since politicians can easily posture themselves over a cliff. If they do that this time, they might take us all with them.