JONATHAN CHAIT JULY 29, 2011
Megan McArdle writes about Wall Street's confidence that a debt ceiling deal will be reached:
The core fact is that markets haven't sold off nearly as much as you'd expect if Wall Street were really freaking out. This is not because Washington pols have told their Wall Street paymasters about a secret deal that just hasn't reached the ears of those of us reporting from down here. Nor are they calm because they think that a failure to raise the debt ceiling will be no big deal. They certainly don't believe that a forced spending cut of 40% will somehow make us extra-super-more-likely to make us pay off our debt.
No, they're relatively calm because they simply cannot bring themselves to believe that we're not, in the end, going to raise the ceiling. It's too outlandish that we would, through the collective action of our congressmen, suddenly and for no apparent reason shoot ourselves in the head.
The basic problem here is that Wall Street has massively underestimated the loony determination of the Republican right. McArdle's description reminded me of Ellis, the financial hot shot in "Die Hard" who thinks he can deal with the terrorists the way he deals with corporate takeovers in his regular work:
The failure to understand the crisis we were entering was widely shared among centrist types. When Republicans first proposed tying a debt ceiling hike to a measure to reduce the deficit, President Obama instead proposed a traditional, clean debt ceiling hike. He found this position politically untenable for many reasons, one of them being that deficit scolds insisted that using the debt ceiling to force a fiscal adjustment was a terrific idea, and that connecting the deficit debate to a potentially cataclysmic financial event was the mark of seriousness. The Committee for a Responsible Federal Budget argued:
[F]ailing to use this debt ceiling ‘hammer’ to force serious fiscal reforms would be a dangerous lost opportunity. This country needs a deal to achieve $4 to $5 trillion in deficit reduction, and we need to put such a deal in place as quickly as possible
The Concord Coalition chimed in:
[T]he need to raise the debt limit does provide an opportunity to assess past fiscal decisions and, if necessary, make corrections. In the past, major increases in the debt limit have often been accompanied by the enactment of deficit reduction plans such as the November 1990 increase of $915 billion, the August 1993 increase of $530 billion, and the August 1997 increase of $450 billion. In the absence of such linkage, Congress has been reluctant to raise the debt limit by more than is necessary to get through a short period of time. Thus, while the debt limit is not, by itself, a fiscal firewall, in the absence of other more effective mechanisms, it is one of the few budgetary speed bumps left to provide a sense of fiscal discipline.
And the Washington Post editorial page repeatedly endorsed using the debt ceiling to force a deficit reduction. The operating assumption was that both parties required encouragement to act on reducing the deficit:
[W]e retain some shred of hope that the bipartisan group of senators known as the Gang of Six will come forward with a productive contribution. The group is working off a blueprint produced by the fiscal commission that the president convened and then abandoned. Perhaps the fact that the other main alternative on the table is the considerably less centrist plan put forward by House Budget Committee Chairman Paul Ryan (R-Wis.) will lure the White House into the fray.
The political assumptions here turned out to be badly wrong. The main problem is that the Republican Party does not actually care very much about the deficit. It cares about, in order: Low taxes for high-income earners; reducing social spending, especially for the poor; protecting the defense budget; and low deficits. The Obama administration and many Democrats actually do care about the deficit and are willing to sacrifice their priorities in order to achieve it, a desire that was on full display during the health care reform debate. Republicans care about deficit reduction only to the extent that it can be undertaken without impeding upon other, higher priorities. Primarily "deficit reduction" is a framing device for their opposition to social spending, as opposed to a genuine belief that revenue and outlays ought to bear some relationship to each other.
The Post has since published a series of increasingly terrified-sounding editorials pleading for a debt ceiling hike backing away from its bold hopes that the debt ceiling would produce a bipartisan compromise. In retrospect, they now see what should have been obvious: Increasing the political leverage of the Republican Party made a Grand Bargain less, not more, likely. Moreover, the deficit hawks who represent the center of Washington establishment thought badly underestimated the danger entailed by tying high stakes negotiations involving the Republican Party to a cataclysmic event. Happy visions of Bob Dole and Tip O'Neill danced in their heads, oblivious to the reality of what they were facing.