Most crises are brought to Washington from the real world. And—being real—they’re usually dealt with in a businesslike manner. The prospect of federal bankruptcy this summer, however, is overwhelmingly borne of political calculation. For this reason, no one should be sure it will be resolved intelligently.
Raising the debt ceiling by a couple of trillion dollars isn’t sexy; it isn’t something either party wishes to do alone. Still, it must be raised to finance the latest short-term and medium-term tax and spending policies of both Democrats and Republicans. The capital markets, business, and academic economists fortunately all agree: the US federal government is carrying a structural deficit but is several years away from crowding out private borrowing or becoming a high-risk, high-interest rate borrower itself.
The president and Congress leaders are huddled over multi-trillion-dollar, decade-long options they say they must make “adult decisions” about in the next couple of weeks. They’ll likely fail and that probably will be a good thing.
There is no honorable excuse to even try to settle the shape of federal taxes, defence, and social spending for the next ten years behind closed doors this July. Washington may have been irresponsible for a generation—but that doesn’t mean it’s insolvent, facing a takeover by the IMF, or about to pay double-digit interest rates on its bonds.
The “crisis” has been concocted out of trends—trends that neither justify business as usual nor nihilistic panic. The Congressional Budget Office set the stage in January with this statement:
“For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO's baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law.
Note the sentence: “Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law.” The federal deficit will decline substantially as the economy recovers and revenues grow—if Congress does not again extend income tax cuts, does not let stimulus spending lapse, and does not repeal the projected savings in the Affordable Health Care Act.
We are facing a financial crisis at the behest of a series of political considerations. Republicans want to be able to extend all the tax cuts and kill “Obamacare.” They’d like a bi-partisan deal this summer to make their tax cuts appear affordable in next year’s election. Furthermore, Republicans want a deal on entitlements now in order to blunt the Democrat campaign against the Ryan Plan to reform Medicare. Obama knows that a longer-term deal would significantly improve his reputation on the economy and weaken Republican claims that he is an extreme tax-and-spend president.
Effectively, both parties are trying to set the table for a winning election by settling extremely difficult and legitimate election issues in the debt-ceiling legislation.
This is ridiculously ambitious and Machiavellian at the same time. Something modest will soon look more adult.
Once the chest-beaters tire, Obama ought to select from the negotiations a trillion dollar down payment on spending cuts and fiscal targets those Democrats, swing state Republicans, and the economy can bear. He should leave taxes and social entitlements to the next election. Let the people decide which team has the most sensible long-term plan.
If the Republicans in the House of Representatives actually defeat legislation to raise the debt ceiling on the above basis, then Obama will have his chance to address an historic crisis—one with real villains.