Normal Fiscal Politics Can Resolve the Debt Ceiling Crisis

We just need to make sure Treasury can fudge long enough to get us through that process.

Dear readers,

Ramesh Ponnuru is worried that people aren't worried enough about the debt ceiling. He writes for the Washington Post (where he has a new column) that close observers with a stake in the outcome of the fight are blasé: They’ve seen this movie repeatedly, it’s always worked out fine, and we’ll just use the same old roadmap that we’re accustomed to using for averting catastrophe.

The problem, he writes, is that Democrats and Republicans are confident about getting down different roads:

Republicans in Washington think Democrats will keep saying that they will never negotiate over a debt ceiling bill right up until the end, when they will make a deal — just as President Barack Obama agreed to spending cuts in exchange for raising the ceiling in 2011, the last time the parties had this kind of a knockdown over the issue.

Democrats think Obama set a dangerous precedent and want to set a new one: You don’t negotiate with hostage-takers. In their view, Congress has a responsibility to pass a “clean” increase in the debt ceiling with no spending cuts attached.

I want to lay my cards on the table: I’m not that worried, because I don’t think we’re headed down the road either party expects. There is a middle way out of this crisis with a strong precedent based in the resolution of the 2015 debt ceiling standoff — a standoff nobody remembers because the resolution was so simple and orderly.

Here is what I think:

1. The current fiscal year ends on September 30. Eventually — probably some number of weeks or months after September 30 — there will have to be a bipartisan agreement on funding the government for the next fiscal year.

2. The debt ceiling can be raised as part of that agreement.

3. Treasury needs to be able to fudge the debt limit until that agreement comes together. This is why I’m so focused on strategies to delay the “X-date,” or the last day the government can keep borrowing without a debt limit increase — these strategies don’t need to render the debt limit forever irrelevant, but they may need to buy us a few months more than the current tools, which might only allow us to stave off crisis until June.

There’s an odd mythology that has arisen around the debt ceiling: That, except in one aberrant case in 2011, the debt ceiling has not been tied up in negotiations around taxes and spending. What I think is accurate to say is that 2011 is the only time that fiscal negotiations around the debt limit have resulted in steep spending cuts that Democrats came to find extremely regrettable. But other debt limit increases have not been consistently “clean” — they have often been tied to agreements on how much the government will tax or spend going forward.

Dall-E image generation for “debt ceiling crisis, 35mm photo”

For example, in 1996, Bill Clinton won an agreement to raise the debt limit by $600 billion by agreeing to sign three bills that were Republican priorities: reducing taxes on Social Security recipients who also had earned income; making it easier for small businesses to sue over federal regulations; and creating a line-item veto (this third item was ultimately deemed unconstitutional by the Supreme Court). This agreement was a far cry from the significant spending cuts Republicans started seeking in 1995, but it was an agreement — one in which the debt limit increase was tied to policy concessions.

The agreement to end the 1985 debt ceiling crisis was intended to have much more consequential fiscal effects: It established rules for automatic budget cuts that were intended to balance the federal budget by 1991. (These, too, got thrown out as unconstitutional.)

But the 2015 agreement is probably the most instructive for us.

The dull and soothing precedent of 2015

While Republicans clearly won the 2011 standoff, and Democrats won the 2013-14 standoff (which ended with Speaker John Boehner enraging much of his caucus by putting a clean debt ceiling increase on the House floor to pass mostly with Democratic votes), the 2015 standoff was kind of a draw, ending with the sort of face-saving bipartisan agreement that we might hope to replicate this year.

As the New York Times described it at the time:

After five years of bitter clashes, Republican congressional leaders and President Obama on Monday night appeared to settle their last budget fight by reaching a tentative deal that would modestly increase spending over the next two years, cut some social programs, and raise the federal borrowing limit.

This agreement came after Barack Obama spent years declaring he would not negotiate over the debt limit again. He succeeded in getting a no-negotiation deal in 2014, but he ended up negotiating again in 2015. And that brings me back to Ramesh’s observation: He says Republicans think Democrats are bluffing when they say they’ll never negotiate over the debt limit. Well, they are bluffing. The truth is Democrats will negotiate so long as the scope of the negotiation is reasonable — as it was in 2015:

The agreement would raise spending by $80 billion over two years, not including a $32 billion increase included in an emergency war fund. Those increases would be offset by cuts in spending on Medicare and Social Security disability benefits, as well as savings or revenue from an array of other programs, including selling oil from the nation’s strategic petroleum reserves. The Medicare savings would come from cuts in payments to doctors and other health care providers.

This is the sort of negotiation Democrats can and will engage in over raising the debt limit: tinkering at the edges of a multi-trillion dollar federal budget.

The key question then is whether these sorts of terms can ultimately be satisfactory to enough Republicans to achieve an agreement. Obviously, the sort of agreement I’m describing above would not please the right-wing Republican rebels who held up Kevin McCarthy’s speaker election for a week. But there is a strong political force working in favor of enough Republicans getting to yes — the same force that has driven each of the many bipartisan spending agreements that Congress has reached since 2013.

Remember, since spending bills need 60 votes to move through the Senate, these spending agreements are always bipartisan, even when one party controls both houses of Congress. And we keep managing to reach these agreements, in spite of wide partisan disagreements on taxes and spending, because there are a lot of Republicans who care a lot about the defense budget.

Defense spending is the lever to get an overall deal

In 2011, the big Republican win in the debt limit negotiations produced the “sequestration” budget cuts that tightly capped both defense and non-defense discretionary spending.¹ But those caps worked too well — Republicans felt the resulting defense budgets were woefully insufficient. And the basic contour of spending agreements since 2013 has been a trade-off: Republicans get spending on defense, and Democrats get spending on non-defense.

In theory, McCarthy’s deal with conservative rebels is supposed to require him to quickly pass a budget resolution that sets targets for deep spending cuts that would balance the federal budget within 10 years. After that, the House is only supposed to consider spending bills that align with the adopted budget.

In practice, I doubt that the House will pass any budget resolution this year, because I do not believe you will get 218 Republicans to agree to any set of spending targets. That means that, as October rolls around, there won’t be a House budget to benchmark spending bills to — and that Republicans won’t have coalesced around a set of shared demands to tie to funding the government and raising the debt limit.

A government shutdown is very likely. And Republican defense hawks will be antsy. They’ll be impacted by the lack of agreement on spending bills, just like people who care about any other area of discretionary spending. The need for an agreement on defense spending is what has broken the logjam in the past, and it’s what I expect will break the logjam again — even if, like in 2015, the agreement that’s ultimately reached only garners the support of about a third of House Republicans.

Importantly, this deal would not be a humiliation for either side. In fact, each side could claim with a straight face that they won: Democrats would say they didn’t negotiate over the debt limit (the debt limit just happens to be alongside a negotiated spending agreement) while Republicans would say they’d gotten something in exchange for the debt limit increase.

We do need to get through the end of the year

The main problem with the roadmap I lay out above is that it’s a way to reach a deal to raise the debt limit before the end of the year. But it’s not a given that we have that long: We have technically already hit the debt limit, and the Treasury Department is currently implementing “extraordinary measures” that should work to stave off default at least until sometime in June.

How can we bridge the gap?

The simplest option is that Congress could raise the debt limit before a spending deal is reached. This is what happened in 1995-6: Republicans spent months haggling over spending with President Clinton and periodically shutting down the government; along the way, they passed a number of stopgap bills that modestly increased the government’s ability to borrow, often delaying a default crisis by just weeks at a time. By March 1996, they still did not have a long-term agreement on spending, and as I described above, Republicans agreed to a larger debt-limit increase in exchange for concessions only tangentially related to the budget.

While everyone focuses on the particularly shambolic nature of this House majority, it’s worth remembering that negotiating with Newt Gingrich was not exactly a picnic. So, don’t discount the possibility that a deal like this could be reached. For example, maybe Republicans would agree to a short debt limit increase in exchange for terminating the COVID emergency declaration, which is something some Democrats already support doing anyway.

I also don’t discount the possibility that such a deal won’t be reached, which is why I think the Treasury Department should ready a strategy of using premium bonds to manage the debt limit — and it’s also why I am at pains to frame this not as a stunning vitiation of the limit, but as a technical extension of the sort of “extraordinary measures” we’ve grown used to.²

We might need the added time this strategy would afford to reach a deal. But I do believe we will be able to get to "yes," sooner or later.

Very seriously,

Josh

1. Discretionary spending is federal spending that must be reauthorized by Congress every year. This is in contrast to mandatory spending programs like Social Security and Medicare, where the government spends whatever amount is necessary in order to provide statutorily mandated benefits, unless Congress actively legislates to change the terms of those benefits.

2. I also want to flag a simpler idea that the economist Dean Baker has floated: Instead of selling new bonds at a premium, Treasury could buy back outstanding Treasury bonds at a discount and then issue new bonds at par. There are lots of outstanding Treasury bonds that trade at a discount because they were issued when prevailing interest rates were lower than they are today. If Treasury buys back a low-yielding long-term $1,000 bond for, say, $800, and then issues a new bond with a face amount of $1,000, then it has borrowed $200 without using up any headroom under the debt ceiling. Much like issuing premium bonds, this strategy works by converting obligations to pay principal (which are capped by the debt ceiling law) into obligations to pay interest (which are not). It wouldn’t work forever — eventually, Treasury would run out of low-yielding bonds to buy — but it could buy us months of additional time before running out of room to borrow.