The Second Liberty Bond Act, which helped finance U.S. participation in World War I, established a cap on federal debt in 1917 at the now-quaint level of $8 billion. Today the limit is $14.3 trillion, and according to Treasury Secretary Timothy Geithner, the U.S. will need to exceed that around the end of March.
Geithner has warned that “failure to raise the limit would precipitate a default by the United States,” and would be “catastrophic.” True enough. But that doesn’t mean this isn’t a fight worth having.
Republicans are intent on extracting major concessions from the Obama administration in exchange for agreeing to lift the debt limit. They will play a game of debt-limit chicken with Geithner and President Barack Obama.
While administration officials would like the public to believe that political gamesmanship is unprecedented and irresponsible, the opposite is true. Debt-limit debates are commonplace and can be political theater at its finest. Since reaching $300 billion in 1962, the debt limit has been raised 66 times (versus being lowered just three times), according to data from the Office of Management and Budget. The action has rarely been boring.
The script isn’t complicated: The legislative branch is shocked, just shocked, that our profligate government has maxed out its credit cards. The president warns that the irresponsible opposition is recklessly pushing the nation toward default.
Obama is no stranger to this game, having played his part dutifully when President George W. Bush sought a debt ceiling increase in 2006. In a close and largely partisan vote, Obama and 43 of his Democratic colleagues in the U.S. Senate opposed the measure. It passed, 52 to 48.
While opposition to raising the debt ceiling is common, using the faceoff to extract real concessions is less so. To cite just a few examples:
In 1967, the House resisted President Lyndon Johnson’s bid to raise the ceiling from $336 billion, as the Republican minority won over enough Democrats to oppose the president. Representative Wilbur Mills, chairman of the House Ways and Means Committee, cracked down on party loyalty and won back enough Democrats to pass the measure with minimal concession to Republican demands.
In 1989, the Democratic Congress and Republican President George H.W. Bush agreed to lift the ceiling, to $3.12 trillion, with less than 24 hours to spare. Congressional Republicans failed in their bid to tie the move to a cut in the capital- gains tax.
In 1996, House Republican Leader Dick Armey proposed steps including the elimination of the Commerce Department in exchange for raising the debt ceiling. Not only does Commerce survive, but Democratic President Bill Clinton’s deft handling of the ensuing government shutdown turned large numbers of Americans against the Republican House majority.
Yet if history suggests Obama holds an advantage over Republicans, the tide of current events argues otherwise. It’s difficult to envision a scenario in which the party controlling less than half the levers of government has as much momentum as Republicans enjoy right now.
After all, they just won a landslide election because they promised to reduce the size and cost of government. If they offer to increase the debt ceiling only if Obama agrees to cut spending, then Obama’s intransigence could hurt him.
House Republicans, whom I addressed last week at their strategy meeting in Baltimore, hold all the cards. Obama’s bid for public opinion rests on defending current spending levels. Good luck with that one, Mr. President.
For those following at home, here is a rough sketch of how the game will likely play out.
The Federal Reserve, as fiscal agent for the U.S. Treasury, manages payments so long as the Treasury’s account has a positive balance. If the Treasury hits the debt ceiling, it can continue to make payments until its bank account at the Fed empties. Once the account hits zero, payment stops: no interest payments, no Social Security checks, no subsidies to National Public Radio.
Even if Geithner is correct and the debt-ceiling limit is hit at the end of March, he has a few games that he can play to delay a default by slowing the net withdrawal of funds. He can tinker with government pension finances, draw on funds that are available to stabilize foreign-exchange markets, or possibly even shuffle gold reserves around.
The April 15 tax-filing deadline, with its influx of money to Washington, also could help the Obama administration delay the inevitable.
End of June
Accounting for all such possible maneuvers, it could be that the witching hour for default won’t arrive until the end of June.
So to review: The U.S. may declare it has reached its borrowing limit at the end of March but not run out of money until the end of June. That gives Republicans three months -- plenty of time -- to appear to be standing up to Obama without actually forcing a default.
If Obama vetoes a bill raising the debt ceiling because he can’t countenance its required spending cuts, let him defend that position. The same goes for the Democratic Senate, if it won’t pass a bill from the House. It would be hard to pin the blame on Republicans as we inch toward financial disaster.
As June wears on, both sides will have to get serious in order to stave off default, and here is where House Speaker John Boehner holds all the cards.
He promised during the 2010 campaign that Republicans would cut spending by $100 billion. It’s surprisingly easy to accomplish that, and voters will blame Democrats if government can’t.
While Democrats may have an articulate president pressing all sorts of alarm bells, Republicans will enjoy something more potent: an actual mandate. Spending will get cut, and the debt ceiling will be lifted.
You can take that to the bank.
Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain in the 2008 presidential election. The opinions expressed are his own.)
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