The Roof, The Roof, The Roof Is On Fire

Jonathan Cohn at TNR:

The U.S. appears to be the only country in the developed world that forbids its government from accumulating debt without authorizing legislation. And that’s led to some scary moments, including one that the economist Henry Aaron shared with me recently.

During the early years of the Kennedy Administration, Congress passed an increase in the debt ceiling at the last minute. But when JFK went to sign the bill, according to Aaron, nobody could find the document. Treasury Secretary Douglas Dillon wanted to know what would happen if the government reached its debt ceiling and an administration lawyer, after some brief research, reported that “it seems, Mr. Secretary, that you are personally liable for interest on the debt.” Dillon, who was an investment banker, pressed the lawyer: How much would that be? “About $150 million a day,” the lawyer reportedly said, prompting Dillon to deadpan “I can’t last more than three days.”

It’s a funny story because it had a happy ending: Kennedy’s advisors eventually found the bill. And if they hadn’t, they would have gotten together with Congress and found some other way to raise the debt ceiling. That’s because, relatively speaking, they were grown-ups who took governing seriously.

Fifty years later, can we say the same thing? Sometime in the next few months, the U.S. will reach its debt limit and Congress will, once again, have a choice: Raise the limit or let the U.S. default on its obligations. For a while now, Tea Party Republicans like Senator Mike Lee, who unseated the insufficiently conservative Robert Bennett in Utah, have been threatening to vote against the debt ceiling increase unless they win substantial reductions in government spending. Idle threats about refusing to raise the debt ceiling are nothing new, but the Tea Party crowd seems quite serious about it–in part because they’ve promised their base they’re going to do it.

And now it looks like they have company. On Sunday’s “Meet the Press,” Republican Senator Lindsey Graham announced that he, too, was willing to engage in serious brinkmanship over the debt:

I will not vote for the debt ceiling increase until I see a plan in place that will deal with our long-term debt obligations, starting with Social Security, a real bipartisan effort to make sure that Social Security stays solvent, adjusting the age, looking at means tests for benefits. On the spending side, I’m not going to vote for debt ceiling increase unless we go back to 2008 spending levels, cutting discretionary spending.

As many others have noted, the demand of going back to 2008 spending levels is radical and, not coincidentally, highly unrealistic: According to the Center on Budget and Policy Priorities, it’d amount to a one-fifth cut in discretionary spending–forcing cuts that could damage the fragile recovery and starve programs like Pell Grants that most Americans value.

Daniel Foster at The Corner:

Unlikely as it may seem at the moment, I’m becoming more and more convinced that congressional Republicans can get a lot — in terms of spending cuts, entitlement reforms, and the like — in exchange for agreeing to raise the federal debt ceiling at some point in the next few months.

My argument is dead simple.

P1) The debt ceiling won’t be raised without a ‘yea’ vote from Sen. Lindsey Graham (R., S.C.)

P2) Senator Graham said on Meet the Press that

“I will not vote for the debt ceiling increase until I see a plan in place that will deal with our long-term debt obligations, starting with Social Security, a real bipartisan effort to make sure that Social Security stays solvent, adjusting the age, looking at means tests for benefits. On the spending side, I’m not going to vote for debt ceiling increase unless we go back to 2008 spending levels, cutting discretionary spending.”

P3) The debt ceiling must be raised.

C: Graham will get what he wants, or something approximating it. That is, there will be significant revenue-side concessions from Democrats in exchange for support from the likes of Graham and Senate Republicans in his ideological neighborhood.

Don’t buy it? Okay, so which premise is false? P1? Does anyone think 53 Democrats can overcome a filibuster, in a tea-infused Senate, on anything significant, without Lindsey Graham? P3? Does anyone think either party’s leadership will allow a federal debt default?

That leaves P2, which, admittedly, is the shakiest. It rests on us taking a politician at his word. But Graham has been — for good and ill — remarkably transparent about his strategic calculus when it comes to votes. Remember when he publicly, and baldly, abandoned the energy bill he helped write because Harry Reid was going to make his life in South Carolina exceedingly difficult by doing immigration reform first? Graham is a known bipartisan deal-maker, and one of the few Senate Republicans with an open line to the White House. So not only does Graham almost certainly want to make a deal, but he is in a better position than most to know what kind of deal is possible. Indeed, knowing Graham’s style, the hidden premise in his Meet the Press comments is that he has reason to believe Democrats in the White House and in the Senate are willing to negotiate.

Bruce Bartlett:

This morning, CEA chairman Austan Goolsbee warned Republicans against playing games with the nation’s credit rating by refusing to raise the debt limit and creating a technical default. I have been warning people about this problem for more than a year because I know there is a widespread belief among the nuttier right-wingers that a debt default is just what the country needs to force massive spending cuts into effect. Many stupidly believe that the budget would be balanced overnight because the government couldn’t spend any more than the available cash flow from taxes would permit.
Since I first started writing about this danger, some of these nutty right-wingers have been elected to Congress under the Tea Party banner. Since many have never served in elected office before and know virtually nothing about economics or finance, I don’t think they realize that they are playing with fire when they even hint at the possibility of a debt default. They are like children playing with matches.
What I haven’t figured out how to properly convey is that a default triggered by a failure to raise the debt ceiling is of a completely different nature than the sort of default that Ken Rogoff and Carmen Reinhart wrote about in their book. All of those cases were market-driven, where investors refused to buy or refinance a nation’s debt because of fiscal profligacy, irresponsible monetary policies etc. A U.S. default, by contrast, would be 100% self-inflicted based on loss of the Treasury’s legal authority to issue bonds, not because of a lack of market demand for those bonds. The historically low level of real and nominal interest rates on Treasury securities is proof that there is still strong demand for Treasury securities.
I have spent considerable time trying to figure out what exactly would happen in the event that, at some point, the Treasury literally had no cash to pay interest on the debt, redeem maturing securities, pay Social Security benefits and so on. Some people believe that the Treasury has an almost unlimited ability to fudge the problem indefinitely. But I know that there are analysts at the GAO who are very concerned about hitting a hard limit on the Treasury’s legal authority not long after the debt ceiling is breached. The law is very unclear and has never been tested in court.
As far as I am aware, no other country on Earth has the idiotic policy that the United States has of having a legal limit on the amount of bonds the central government can issue. They correctly recognize that the deficit and the debt are simply residuals resulting from the government’s tax and spending policies. It makes no sense to treat the debt as if it is an independent variable.

Tom Maguire:

That whistle you hear on down the tracks heralds an impending train wreck, as Tea Partiers brace for a vote on raising the debt limit sometime in the next few months.

Let’s get a sense of their attitude – some thoughts:

…raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.

Over the past 5 years, our federal debt has increased by $3.5 trillion to $8.6 trillion.That is “trillion” with a “T.” That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers…

And the cost of our debt is one of the fastest growing expenses in the Federal budget. This rising debt is a hidden domestic enemy, robbing our cities and States of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on.

Every dollar we pay in interest is a dollar that is not going to investment in America’s priorities.

Put him down as “Undecided”.  Ooops, my bad!  That was Barack Obama himself, speaking in 2006.  Put him down as “Present”.  And now, as “President”.  The shoe is on the other foot, sauce for the goose, and away we go.

Republicans will be having a lot of fun with that speech (as they did a year ago) but I hope they eventually suck it up and do the right thing.  Bruce Bartlett worries that they won’t.

Jonathan Bernstein:

First of all, it’s worth mentioning that way back in 2006, long, long, ago, we still didn’t have a 60 vote Senate: the debt ceiling increase passed by a 52-48 vote, with no cloture vote at all because the Democrats didn’t filibuster it.  As far as I can tell from a quick search of the reporting back then, the Democrats did threaten to attach amendments (and wound up forcing at least one recorded vote), but they didn’t use it as leverage (by filibustering or threatening to filibuster) to, say, force a withdrawal from Iraq.

Now, in fact, I don’t know that using the threat of default to win policy victories is irresponsible.  Even bluffing that you’re going to destroy the country if you don’t get what you want…I don’t know that I’d say that would necessarily be irresponsible.  Actually going through with it, though: yeah, that would be about as bad as it gets.  So I’d make a distinction not just between pure posturing and terrible behavior, but between pure posturing, responsible negotiations, and irresponsible negotiations.  And I’ll note that we probably can’t guess which one is going on until the end of the game.

John Cole:

I suppose it is too much to ask that the Democrats run a competent political operation and point out that the Republicans have no actual plan for governance, but intend to simply play chicken with the debt ceiling and hold investigations of the travel office and other crap like that.

If Lindsey Graham wants to go after social security, the Democrats should not do or say a thing until the Republican proposal is in bill form and the details are included. Let them be the party that wants to go after grandma’s income. Let’s see DeMint’s plan for the default of the United States.

Having watched Obama the last two years, I’m reasonably sure the brain trust in charge of the political operation will instead pretend the Republicans are serious and offer more than the Republicans as an opening bid, and then watch themselves get undercut but the douchebag Blue Dogs and flayed alive by the professional left. That’s just how they roll. Morans.

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