Why Debt Ceiling Worries Are Way Overblown
The debt limit panic being led by Paul Krugman and budget experts Stan Collender and Edward D. Kleinbard is probably all for nothing. Absolutely every incentive is for Republicans in Congress to bite the bullet and increase it by the fall deadline (by the end of September, or perhaps mid-October), and absolutely every incentive is for the president to sign on the dotted line. Nor are there any obvious insurmountable obstacles to getting it done. This is basically a very easy task that would take monumental stupidity or ineptness or both to get wrong.
And the bad news? Have you seen this Congress and this president? If anyone could screw it up ... but, really, they probably won't.
Republicans have long demonized raising the debt limit -- especially during the long period into the mid-1990s when Democrats usually held congressional majorities. So debt limit increases are usually seen as tough votes. 1 And they look even tougher since the rise of the House Freedom Caucus, which views all must-pass legislation as leverage to extract concessions from everyone else.
Both are problems, but overall it's a lot easier to raise the debt limit during times of unified government than with divided government, when congressional majorities might just want to make trouble for the president (as House Republicans did when Barack Obama was president).
Republican voter hostility to raising the debt limit is extremely unlikely to harm the president or Republican politicians if they do it anyway. That's because the people who really care about such things are the intense Trump fans (and Republican loyalists) who are bound to make excuses for their heroes and blame anything bad on others, regardless of what happens.
A recession, on the other hand, while also not costing Trump with his core supporters, would further damage him with everybody else, especially the weak supporters and weak opponents who Republicans will need in 2018 and Trump will need in 2020. Indeed, while passing and signing a debt limit increase is exactly the kind of story that tends to disappear rapidly after the fact (and long before midterm elections, let alone Trump's presumed re-election bid two years later), a recession will remain in the news as long as it lasts. 2 And George W. Bush's mid-20s approval ratings late in his second term demonstrate that it's not the kind of story that Fox News and other Republican-aligned media can blot out.
But a deliberate decision to hit the debt limit would be even worse than that. After all, just as in the case with a government shutdown, sooner or later Trump and congressional Republicans would have to relent and pass a debt limit increase after all. 3 So allowing a government default would be nothing but downside for incumbent Republicans.
Moreover, Trump clearly understands that a strong economy is in his interest. In tweets and events, he has tried to lay claim to market rallies and jobs growth and refrained from taking steps -- immediately canceling NAFTA, canceling the Iran deal, and some of the ways he could sabotage the Obamacare exchanges -- that could lead to a downturn. That's not a guarantee, but it is suggestive of his style of governing in the early stages of his presidency.
So how does this work?
The easiest route for Republicans is to try to pass a "clean" increase. If all Republicans vote for it and Trump signs it -- the administration has signaled that's their preference -- that's the end of the story. Democrats wouldn't have the votes to stop it in the House even if they wanted to, and certainly would not filibuster it in the Senate.
The problem is that Freedom Caucus radicals are threatening to oppose a clean bill, mistakenly believing they have leverage to force policies they couldn't get passed otherwise.
If Freedom Caucus members withhold their votes, Republican leaders could ask Democrats for help in passing it. Democrats would likely demand something in return -- perhaps, as Brian Beutler suggests, getting rid of the (completely unnecessary) debt limit altogether. In that scenario, Republicans who joined Democrats would accept the price of being labeled "RINOs" and whatever Democrats received for their votes in order to avoid the chance of being blamed for unemployment spiking in their districts and other economic malaise. Of course, the more Democrats they need, the more Democrats can demand, which then makes it more costly for Republicans.
But the alternative -- giving in to whatever the Freedom Caucus demands -- is even less likely to work. Senate Democrats could decide to filibuster the bill, and they have more than enough votes to keep 52 Republicans (some of whom may not support whatever the radicals demand) from getting the 60 needed to defeat a filibuster and allow the bill to pass.
The bottom line is that the Freedom Caucus doesn't really have any leverage over the final shape of the bill. Instead, their only choice is whether to support a clean bill or to withhold their votes, and therefore give Democrats some bargaining power they would otherwise not have. Granted, that hasn't stopped Freedom Caucus members from doing this sort of thing before, whether because they misunderstand the process or because they truly prefer a more Democratic-friendly policy outcome they don't support over a more Republican-friendly policy they would have to vote for.
Despite that, the odds are heavily in favor of this getting worked out in time. Just not as certain as it should be.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To back up a bit: The debt limit is a statutory rule saying that the government can only borrow up to a stated amount. Since the federal government almost always runs at a deficit, the limit must occasionally be lifted to a new, higher level by passing a law to that effect. If not, the government can't borrow to pay its various obligations, and the U.S. would stand in default. Economists generally agree that the consequences would be immediate, severe and long-lasting, with a serious possibility of bringing on a recession, and the almost certainty of making it more expensive for the government to borrow money well out into the future.
Or longer, since much of the electoral damage may come from lagging economic indicators. Bill Clinton and Barack Obama both suffered in their first midterms from recessions which had technically ended long before -- and in fact, the recession which helped elect Bill Clinton ended before George H.W. Bush lost in 1992.
The only alternative would be to immediately balance the budget -- not with a long term plan, but with immediate benefit cuts and tax increases -- something that would inflict even more pain to an economy already reeling from default.
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Mike Nizza at email@example.com