The End of Debt-Ceiling Hostage Taking

Greg Sargent had a good post yesterday explaining why Democrats are so adamant that they will not give any concessions for raising the debt ceiling:

Democrats, by contrast, don’t believe this constitutes acceptable governing. They don’t believe budget negotiations should proceed under these conditions. They are not making an argument about what the House majority can legally or Constitutionally do; they are making an argument about what they believe the House majority should and shouldn’t do, about what does and doesn’t constitute good governing. They are making an argument about governing norms. The Dem argument is that this practice should be renounced by both sides. Dems believe making concessions under these conditions now will legitimize the GOP demand for negotiations to happen under them, making default later all but certain, because this sort of standoff will happen again and again, ultimately leading to miscalculation and disaster.

Bingo. The key here is that Republicans only have leverage to extract concessions out of Democrats if they really are OK with breaching the debt limit. There are some who are, but the House GOP leadership isn’t. That’s been abundantly clear for weeks now as Boehner has repeatedly commented that the U.S. cannot default on its debts. It’s even clearer if you look at how House Republicans have ramped down their demands.

After Boehner’s plan fell apart in the House yesterday, Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell stepped back in and quickly brokered a deal that would stave off a default. It funds the government until January 7 and raises the debt ceiling until February 15 while strengthening the income verification requirements in Obamacare. It does not include a delay of the reinsurance fee, of the medical device tax or a ban on the Treasury Department’s use of extraordinary measures. It also sets up a bicameral conference committee with the goal of coming to a budget agreement by December 13.  Make no mistake: this is a Republican surrender. The income verification condition is simply an enforcement of current law. The rest is a clean CR and clean debt ceiling hike, exactly what President Obama and Democrats have been calling for the past month.

Due to parliamentary rules, a single senator (cough Ted Cruz cough) could drag out the Senate bill so a vote doesn’t take place until Saturday or Sunday. If all senators agree by unanimous consent to forego debate on the bill, it can be voted on today and head to the House, but that requires the agreement of all senators. If the bill originates in the House and is passed, the Senate can take it up and vote on it soon after. Thus, House Minority Leader Nancy Pelosi is pushing Boehner to bring it to the floor to speed up this entire process. No matter what though, it looks like the speaker will allow a vote on the bill, which will then pass with mostly Democratic support.

There is a more important point here: This is the end of debt-ceiling hostage taking.

It’s over. Boehner and Co. capitulated completely, because their entire strategy was a bluff. This deal proves that Republicans aren’t willing to breach the debt limit. If Boehner ever threatens to do so again in the future, no one should take it seriously. He no longer has the credibility to make those threats. The debt limit is not an extortion device. A minority party cannot use it to extract a policy concession from the majority. This is the new governing norm.

Debt Ceiling Extortion

I have no doubt that Congress will raise the debt ceiling. Republicans simply have no choice, but to accept defeat and move on. The United States government pays its bills. Period.

Beyond that though, it’s remarkable how idiotic this argument has become.

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Republicans cannot hold the debt ceiling hostage.

In 2011, the last time debt ceiling brinksmanship almost caused an international financial crisis, Republicans were screaming that any debt ceiling increase must be offset by equal spending cuts. The entire goal was to reduce the deficit. While playing chicken with the debt ceiling was irresponsible then, there was at least a bit of logic in terms what Republicans were holding hostage and their ransom demands.

This time though, Republicans are holding the debt ceiling hostage while demanding a one-year delay in Obamacare. There is no connection between the two. Republicans are using the debt ceiling to extort the President. Worse, some Republicans seem ready to breach the debt ceiling if Obama does not back down and agrees to delay his signature legislative achievement. This is where things get absurd.

If we do breach the debt ceiling, it will likely have a significant, long-term negative impact on our debt. Rates on U.S. Treasury notes are lower than any other bond because investors are 100% confident that the U.S. will repay its creditors. The chance that a debtor doesn’t pay its creditor is called credit risk. Companies and countries close to bankruptcy have high credit risks. But the United States is never close to bankruptcy because the dollar is the world’s reserve currency and the U.S. can print its own money. It can always pay back its creditors. That’s why interest rates on Treasury bills are so low. But, if we breach the debt ceiling, that non-zero credit risk rises substantially. Suddenly, it becomes a very real possibility that the U.S. could not pay its creditors. Even if Treasury prioritizes bond payments so it does not technically default on its debts, the act of breaching the debt ceiling will likely shock investors and force them to increase the risk assessment of Treasury notes. That means considerably higher-interest rates for the U.S. in the long-term and thus higher interest payments.

In 2011, J.P. Morgan estimated that rates on Treasury Bills would rise 50 basis points if we breached the debt ceiling. They predicted that it in the long-term, that would add $75 billion per year to the deficit.  Compare that to the sequester, which was the result of the 2011 debt ceiling deal. It cut spending by $1.1 trillion over 10 years. Breaching the debt ceiling would effectively undo nearly three-quarters of those cuts in the form of increased interest payments.

So, in 2011, Republicans were so concerned about the deficit that they took the debt ceiling hostage to extract $1.1 trillion in spending cuts.
Now, Republicans are so concerned about Obamacare that they’ve taken the debt ceiling hostage and risked adding $750 billion to our long-term debt.

If Republicans were so worried our long-term debt two years ago, why are they willing to undo most of those spending cuts this time? Does that seem like Republicans actually care about our debt and are using the debt ceiling as a principle to get our fiscal house under control? Or does it seem more like an irresponsible, reckless party risking a global financial collapse in order to extort the President?

That’s why President Obama and Senate Democrats cannot and will not negotiate on the debt ceiling. There is nothing principled about Republican arguments here. The debt ceiling is simply a mechanism to hold the President hostage and force his hand. That’s unacceptable. Enough with debt-ceiling histrionics. Our democracy does not work that way.