POLITICS JULY 7, 2011
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With Obama set to meet with congressional leaders from both parties on Thursday in the hopes of working out a deal to raise the debt ceiling, it’s a good time to step back from the details of the controversy and assess the bigger picture. My conclusion: We can’t get through the presidential election without addressing the fundamental issues facing the country and dividing the parties—the size of government, the level of taxation, and the future of Medicare and Medicaid. But with Republicans committed to their anti-tax orthodoxy and Democrats unwilling to surrender to it, the possibility of a compromise in the next 27 days seems as remote as the consequences of a failure to raise the ceiling seem dire. In place of both these options there’s a third possibility—an interim agreement, which has many longer-term downsides but may be the best we can do right now. Here’s the analysis that leads to me this conclusion.
The current negotiations can yield three possible outcomes. First, the parties might defy the odds and reach a grand bargain that includes revenues, Medicare, and Medicaid, as well as domestic and defense discretionary spending. According to some reports, before the Biden talks broke down, negotiators had identified possible spending cuts totaling at least $1.9 trillion (excluding interest savings). But as long as Republicans refuse to consider any revenue increases, the grand bargain won’t happen.
Nor should it. Yes, we’re spending too much. But we’re also taxing too little—or, if you prefer, spending too much through the tax code. Writing in the most recent issue of the conservative-leaning journal National Affairs, Donald Marron (a former CEA member and CBO director under George W. Bush) says that “America needs to fix its broken tax system and find additional revenue to help reduce our persistent budget deficits. The best way to achieve both aims is to take a hatchet to the thicket of spending-like tax preference.” He’s absolutely right. Obama and the congressional Democrats should not accept any deal lending credibility to the view that we can stabilize our long-term finances without additional revenues.
A second possible outcome is that the contending parties can’t converge on an interim solution and that we reach August 2nd without an agreement. What then? One possibility might be called “son of TARP”: the markets crash, panic spreads, and those who previously doubted the significance of a default see the error of their ways. Some economists believe that even a very short default would have long-lasting consequences for the perceived credit-worthiness of the United States, and therefore for interest rates. Putting their projection to the test of events strikes me as a reckless risk that no one should choose to run.
Each party has now advanced its favored scenario for avoiding default in the absence of an agreement. Led by Senator Pat Toomey, some Republicans believe that the Secretary of the Treasury could avert default by moving U.S. debt to the head of the line as the first claimant on government revenues. Secretary Geithner denies that he has such authority and insists that the failure to meet our full range of obligations would be perceived as, and have the same effect as, a default on our debt.
An analysis released yesterday by the Bipartisan Policy Center dramatizes this point. The day after the August 2 deadline, the government will have about $12 billion in receipts versus $32 billion in commitments, including a $23 billion Social Security payment. Even if the government reneged on all obligations other than Social Security, it couldn’t send out the checks in full and on time. And that’s just Day 1. By the end of the month, the government would have failed to meet $134 billion in legal obligations.
For their part, some Democrats have urged President Obama to invoke Section 4 of the 14th Amendment, which states that “the validity of the public debt of the United States … shall not be questioned.” Doing so would plunge the government into uncharted constitutional waters and all-out partisan warfare. On the one hand, Article I, Section 8 of the Constitution clearly vests the power to “borrow Money on the credit of the United States” in the legislative branch, casting doubt on the president’s ability to issue debt in the absence of congressional authorization. On the other hand, the power to borrow money entails the obligation to repay it, and it is up to Congress to meet that obligation—a legal obligation reinforced by the 14th Amendment. While the amendment’s language is rooted in the specific circumstances of the Civil War, the Supreme Court has been inclined to read it more broadly. In Perry v. the United States, one of the Gold Standard cases decided in 1935, the Court declared that:
The Constitution gives to the Congress the power to borrow money on the credit of the United States, an unqualified power, a power vital to the Government, upon which in an extremity its very life may depend. The binding quality of the promise of the United States is of the essence of the credit which is so pledged. Having this power to authorize the issue of definite obligations for the payment of money borrowed, the Congress has not been vested with authority to alter or destroy those obligations.
The majority went on to consider, and reject, a narrow reading of the Constitution that would have confined the reach of the 14th Amendment to Civil War-era debt. We can perceive no reason, they said “for not considering the expression ‘the validity of the public debt’ as embracing whatever concerns the integrity of the public obligations.”
It is also at least possible—some observers believe probable—that the Supreme Court would invoke the hoary doctrine of “political questions” to avoid adjudicating the pitched battle between the executive and legislative branches that an invocation of emergency presidential powers to issue debt without congressional authorization would doubtless create. So the President might be able to get away it. But whether this course would be prudent is another question altogether. If the ultimate objective is to reassure restive lenders at home and abroad that the United States stands foursquare behind its legal obligations, an inter-branch war that would paralyze the government for months (at least) is not the way to go.
This brings us to the third possibility: an interim outcome that codifies the spending reductions on which Democratic and Republican negotiators have already agreed. Because of the opacity of the negotiations, it’s hard to be sure what these items are. But if they amount to even $1 trillion, they could buy an additional six or seven months for the parties to reach a broader agreement.
In brief remarks on July 5, President Obama opposed such an idea. “There may be some in Congress,” he said, “who want to do just enough to make sure that American avoids defaulting on our debt in the short term but then want to kick the can down the road when it comes to solving the larger problem of our deficit. I don’t share that view.” Instead, he called on lawmakers to seize what he characterized as a “unique opportunity to do something big to tackle our deficit in a way that forces our government to live within its means.” But by repeating his call for a “balanced approach” that includes revenue increases, the president is resting his larger aspirations on the slender hope that the Republicans will change their minds. What if they won’t? As August 2nd draws closer, it would be surprising if either side were willing to roll the dice and declare an interim agreement unacceptable.
To be sure, as the metaphor “buying time” indicates, this transaction would not be cost-free. It would push the ultimate decision back into a presidential election year—not exactly the most promising time for reasonable compromises. In addition, the interim agreement would pluck all the low-hanging fruit, leaving the negotiators glaring at each other across the core issues—revenues and health care programs—that divide them. There’s no way around this, because almost no one believes that cuts in discretionary spending alone can generate the roughly $2 trillion we need to get past next year’s election. But it’s hard to avoid the conclusion that if an interim agreement is the best we can do in the next four weeks, each party would be well-advised to accept it and then spend the rest of the year trying to persuade the country that its preferred resolution of the broader issues is the one that merits the people’s support.
By contrast, it would be an unmitigated disaster if the president were to throw his weight behind a package of spending cuts alone that’s large enough to get us through 2012. Every Republican candidate would claim vindication for the party’s core contention that we can put our fiscal house in order without revenue increases, and the GOP would enter the next round of negotiations more intransigent than ever. This is Obama’s moment of truth. He’s right to insist on a balanced approach. Now we’ll find out whether he’s willing to fight for it.
William Galston is a senior fellow at the Brookings Institution and a contributing editor for The New Republic.
11 comments
No, he isn't, no thanks to the Galston's of the world who have thus far utterly failed to understand what the Republican party is about and have no explanation for who is going to bear the burden of reductions in social security, Medicare, and Medicaid that they urge upon us. The poor? Seniors who are not wealthy? Who?
- roidubouloi
July 7, 2011 at 12:27am
And what says Galston to Chait's point that we could balance the budget entirely with tax increases and still have the lowest tax rates in the industrialized world? Nothing. Forget raising the debt. Just write Treasury checks and continue to pay the bills.
- roidubouloi
July 7, 2011 at 12:28am
"if an interim agreement is the best we can do in the next four weeks, each party would be well-advised to accept it and then spend the rest of the year trying to persuade the country that its preferred resolution of the broader issues is the one that merits the people’s support." This seems to neglect the fact that the public already has certain preferences (maintain Medicare, SS, and most discretionary spending at current levels >>> lower taxes > lower spending) and that you seem to want to give the Republicans more time (how much is enough exactly? they've been trying for 30 years!) to try to persuade the public over to their side (lower taxes [for rich people, corporations] >> lower spending >>> lower taxes for everyone else = maintain current spending). If you are interested in government doing the will of the people, a basic dictate of a democratic society, you should completely reject the Republicans' claims to the bargaining table. Conveniently enough, the Democratic Party seems to be interested in that very democratic principle of trying to approximate the desires of the public instead of trying to hoodwink and then hold the country hostage in order to get the majority of the population to give into the extortionary desires of an already privileged minority.
- chaitless
July 7, 2011 at 7:18am
How about if someone, say a pension fund with major Treasury holdings, sues the government on the basis of Section 4 of the 14th Amendment to force the debt ceiling to be put aside. Holder can then concede to the plaintiff allowing Obama to then say he has no choice but to ignore the debt ceiling.
- sighthnd
July 7, 2011 at 9:39am
I assume Galston makes his arguments in good faith, that they are made in the context of a dysfunctional Republican Party, and that he is trying to be a realist in that context. But he can't seem to help himself when it comes to patronizing TNR readers. For example, notice how Galston makes the suggestion that social security payments would be at risk: "The day after the August 2 deadline, the government will have about $12 billion in receipts versus $32 billion in commitments, including a $23 billion Social Security payment. Even if the government reneged on all obligations other than Social Security, it couldn’t send out the checks in full and on time." Of course, social security taxes currently exceed social security benefits, so how could social security payments be at risk? And then notice how he supports his recommendation (agreeing to roughly $1 trillion in spending cuts in an interim agreement that buys another eight months or so) with a red herring: "By contrast, it would be an unmitigated disaster if the president were to throw his weight behind a package of spending cuts alone that’s large enough to get us through 2012. Every Republican candidate would claim vindication for the party’s core contention that we can put our fiscal house in order without revenue increases, and the GOP would enter the next round of negotiations more intransigent than ever." Who, exactly, is suggesting that the President "throw his weight behind a package of spending cuts alone that’s large enough to get us through 2012". And, of course, Galston undermines his own recommendation: by entering into the interim agreement, "the GOP would enter the next round of negotiations more intransigent than ever". Again, I believe Galston makes a valuable contribution to TNR. But sometimes I wonder if he actually agrees with himself.
- rayward
July 7, 2011 at 12:51pm
If the President "threw his weight behind cuts sufficient to get us through 2012", the economy would tank. The recovery is barely moving forward as it is. Besides it's not all about the Debt-Limit. After the Debt-Limit comes October Spending Bills. After that comes April/May 2012 "Shut Down the Government Again". The Republicans get several opportunities throughout the year to continue to hold America hostage to their lunatic economic theories. And all the movement they appear to have made so far has been FURTHER to the Right. You might as well "Kick the can down the road", there's LOTS more cans down there already.
- AllanL5
July 7, 2011 at 5:19pm
The trouble with roi's view of the world is that any nation that adopts it destroys itself. You get more and more tax eaters and fewer and fewer tax payers. Eventually you wind up in the situation of the PIIGs, Portugal, Italy, Ireland, Greece and Spain, broke and sitting on the sidewalk, hat in hand. Roi and the rest of the Obamites live in a fantasy world where there is such a thing as a free lunch. Why work, why save, why invest? Tax the rich and use the money to support the rest of us. Roi, aren't you at least a bit disturbed by the fact that the Communist Party of Cuba is about to privatize a large part of its economy? Doesn't the fact that social democrats in most of Western Europe have been voted out of office give you pause for reflection? Nah. Trying to explain basic economics to a leftist is like trying to explain to a Christian fundamentalist that the world isn't six thousand years old. Roi, envy and spite toward the so-called rich are a poor substitute for rationality. Even from a leftist point of view anti-capitalism is counterproductive. Without the rich where would leftists get the tax money they need to live without doing any honest work?
- bulbman1066
July 8, 2011 at 12:51am
bulbman, You are a fantasist. You cannot but speak without uttering falsehoods, including positions that you falsely attribute to me. And you are a complete ignoramus about economics. You know absolutely nothing. Not one little thing other than rightwing wacko cant that you repeat endlessly. We are not discussing socialism. I am not a socialist. I am a banking lawyer, merchant banker, and hedge fund owner. We are talking about market capitalism. Except that you are a nutjob absolutist who, along with the rest of your extremist so-called libertarian brethren, believes that unregulated market outcomes are the best that can ever be achieved notwithstanding endless evidence to the contrary and endless disasters thrust upon us by people who actually try to implement the psychotic fantasies that you think of as economics. Our system is broken because of the excesses of the private market and a clownish tax structure, courtesy of people like you, that places far too much income in the hands of the investor class and so starves demand and creates asset bubbles. Here is economic lesson number one for you, bulb: Businesses invest so that they can produce goods and services to sell to customers. If there is not enough demand because people who work for a living do not have sufficient income to spend, the temporary solution is for business to lend it to them, which it did. But that is unsustainable because business will not extend unlimited credit to consumers. When the meter runs out, you have a collapse of demand and a crash. In our case, that was exacerbated by the fact that the ruinous Bush tax cuts also put far too much income in the hands of investors. With inadequate demand, there are not enough real investment opportunities to absorb the investment funds. As they search for yield, they drive up asset values. This produces an asset bubble, this time in residential real estate, and inevitable crash as bubbles are like Ponzi schemes, as soon as they stop growing the collapse. In the face of these problems, what do the rightwing morons ask us to do? Why, more of the same of course. As for other economies, who lent Greece too much money? The sacred private market. How did Ireland get into trouble? Not by spending too much or borrowing too much, but by stupidly guaranteeing the debts of the feckless private market banks that, due to lack of adequate regulation, got themselves into trouble. Spain had a robust economy, except that it was also affected by the asset bubble and dragged down by the bust. I don't know enough about Italy or Portugal to have an opinion, but I know for a fact that you know nothing at all as you demonstrate simply by lumping all of these countries together. But we don't have to look to other countries. We have abundant evidence right here at home of the utter failure of libertarian so-called economics. Make no mistake, bulbman, it is the inadequately regulated private financial market, aided and abetted by moronic, libertarian rightwing tax policies, that is the cause of our distress. Nothing else. Communism didn't do it, social security didn't do it, Medicare didn't do it, emulating Cuba didn't do it. People who think just like you did it -- to the rest of us. And get this one other thing too. I am rich. Very rich. But I am not a parasite like you. Hence, I don't want to be rich in a society that depends on the suffering of masses of people the way you do. Envy and spite? You despise everything and everyone other than money itself, bulbman. Your god, your idol, your be-all and end-all. But you hate people, especially those who work for a living. All of the honest work in our society is done by people who work for a living. Not by investors. Aren't you at least a bit disturbed that unregulated markets and unfettered capitalist greed have plunged us into crisis? Nah. Why would you be, you are a parasite.
- roidubouloi
July 8, 2011 at 10:51am
Beautifully said, roidubouloi!
- rover27
July 8, 2011 at 4:25pm
Thanks, rover.
- roidubouloi
July 9, 2011 at 7:14pm
Bulbman, you do realize that Ireland was supposed to be a stunning conservative success story a few years back? Low taxes, low regulation, no abortion even. This is where it got them. Meanwhile, countries like Germany and Sweden are doing pretty well, despite their big public sectors. It's not about the size of government. It's about its competence.
- Dausuul
July 11, 2011 at 2:55pm