Raising the Debt Ceiling Is Paying Our Bills

October 21, 2013Danny Vinik 1 Comment

President Barack Obama says we need to pay our bills. I agree. But raising our debt limit without reform is not paying our bills. It is asking China, bond holders and other creditors to pay our bills.

The president says we need to avert a default. I agree. But raising our debt limit without any reform is not averting default. It is merely postponing default. Instead of simply opening up a new credit card in our childrens’ name because we’ve maxed out all of our own, we must take responsibility and stop business as usual in Washington. We owe it to our children and grandchildren to end the spending spree and start making the tough choices that will finally force the government to live within its means.

Here’s how U.S. fiscal policy works: The federal government takes in a certain amount of money and spends a certain amount of money each year. Congress passed laws that dictate what people have to pay to the government and how much the government will spend. In the U.S., the federal government almost always spends more than it takes in. It makes up the difference by taking on debt, but the debt ceiling prevents us from taking on more debt. It doesn’t change how much we’re spending or taking in. When Congress refuses to pay the debt ceiling, it stops us from making up that gap. The amount we owe doesn’t change. We just aren’t paying our bills.

The part about China is particularly bad. Rep. Barr really thinks that raising the debt limit is us asking China to pay our bills? China’s decision to purchase Treasuries has nothing to do with helping the U.S. out. China makes its own fiscal policy decisions that it thinks is best for itself, not the United States.

Finally, raising the debt ceiling without reforms does nothing to our odds of a future default. In fact, the only reason there is a chance the U.S. breaches the debt limit in the future (and I don’t think there is one) is the Tea Party’s willingness to do so. In a sane world, Congress would abolish the debt ceiling and there would be zero chance of a U.S. default, but sadly we don’t live in a sane world. Raising the debt ceiling now only increases the odds of a future default in that it makes Tea Party Republicans even more anxious to commit economic suicide.

“Go Out There and Win an Election”

October 17, 2013Danny Vinik 1 Comment

Those were the words President Obama directed towards the Republican Party today as he further emphasized that this was the end of debt-ceiling hostage-taking. If the Republican Party doesn’t like the president or his policies, it should take its message to the American people and win elections. It’s a simple argument and it also applies to moderate Republicans. If they want to take back their party, win elections. Defeat Tea Party candidates in primaries.

Liberals are hopeful that this complete and utter defeat of the Republican Party in the debt-ceiling battle will lead to a change of GOP strategy. The theory goes that the Tea Party will see that its extreme tactics don’t work and will look for more practical methods to fight the president. This is highly unlikely to happen.

Boehner did an excellent job keeping his members unified, but grassroots organizations around the country have had about enough. Molly Ball has a great story today about how many conservative activists are ready to leave the GOP and want to primary every Republican who voted for the bill. Their belief is that Republican tactics didn’t fail, their leadership did. For the moment, there’s a gap between the opinions of these activists and the Tea Party members in Congress. These congressmen had nothing, but positive things to say about the speaker yesterday while Eric Erickson, Rush Limbaugh and other notable conservatives weren’t so kind. That gap will disappear soon enough as those congressmen look to stay on the good side of Erickson and Co.

Many reform conservatives were appalled with the Tea Party’s tactics. Ross Douthat hopes this was a learning exercise for the party so that it won’t “pull this kind of stunt again.” David Frum is ready for the Tea Party to exit altogether. He’s not alone in that opinion.

But Boehner and Republican leaders know that as much as they want to do that, they can’t. Whether they like it or not, the Republican Party needs the Tea Party as much as they need the moderates. They are listening to the Tea Party and not the moderates, because the Tea Party has no problem declaring war on the establishment and jumping ship. That may be electoral suicide, but the right wing doesn’t fear those consequences. The moderates do. It’s the same reason the hard-liners didn’t fear the political consequences of a futile government shutdown or the economic consequences of breaching the debt ceiling. It’s a game of chicken between the moderates and radicals. Whoever is willing to ditch the party and cause electoral defeat for both has control. Right now, that’s the Tea Party.

That’s why Boehner can’t simply cast aside his conservative members. It’s why he must do everything in his power to keep them happy and listen to them.

The way moderates take back the party is not through a civil war, but by defeating them in elections. As these extreme tactics fail, the moderate Republicans will earn more support from the marginal Tea Party voter. Slowly, they will win back their trust. This won’t be an overnight change. It will take at least the 2014 election cycle, probably longer and there’s nothing either party can do to speed it along. It’s deeply frustrating for Democrats to look across the aisle and see a party held captive by a small fraction of extreme members. For Republicans, it’s even more frustrating to be the ones held captive by those members. But casting aside those members in a nasty civil war will be political suicide for both the establishment and the Tea Party. The best thing moderate Republicans can do is win elections.

It’s A Great Day For American Political Institutions

October 16, 2013Danny Vinik 1 Comment

Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell have officially unveiled their agreement to reopen the government and prevent us from breaching the debt ceiling. Speaker John Boehner has finally surrendered and will allow a vote on the bill; it is all but certain to pass with mostly Democratic support. Hurrah! We have avoided committing financial suicide, even if it took us until the 11th hour to strike a deal.

As the House bill fell apart yesterday afternoon, many people began wondering if a default was a real possibility. Fitch put the country on “Credit Watch Negative,” citing the debt-ceiling brinksmanship that has cast doubt on the ability of the federal government to uphold the full faith and credit of the United States.

Ezra Klein has argued recently that confidence in our political institutions may be a bubble ready to burst. In today’s Wonkbook, he cited the Fitch analysis and maintained that our political system is fundamentally broken:

Here’s why it does matter: Fitch is right. Does anyone really want to argue with this statement? “Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default.”

…

Fitch and S&P aren’t saying anything that the rest of the country doesn’t believe. They’re not even saying anything that Wall Street doesn’t believe. Everyone knows that American politics has become a game of Calvinball played with live ammunition. The question facing traders is when to finally bet that this is the day when someone doesn’t make it out alive.

What you see with the Fitch and S&P calls is that the market price on the U.S. political system doesn’t reflect what market participants are coming to believe about it: that a once capable and reliable system is now dysfunctional and unpredictable.

Derek Thompson says this repeated debt ceiling brinksmanship is “like Groundhog Day, but 720x longer and completely horrible.” Neil Irwin and Matt Yglesias argue that we’ll be doing this all over again in a few months.

They’re all wrong.

Today is the best day for America’s political institutions in a long time. We have permanently disarmed the financial nuclear bomb known as the debt ceiling.

Why do I say permanently? Because the McConnell-Reid deal confirms that Boehner and GOP House leadership were bluffing the entire time. President Obama has called for a clean CR and clean debt ceiling hike for weeks. The final deal is a clean CR, a clean debt ceiling hike and enforcement of existing law in Obamacare (income verification). If Boehner and Co. were willing to cause an international financial crisis, they surely wouldn’t accept this deal. The fact that they’re surrendering reveals that they will never let us default.

Whenever we hit the debt ceiling next, Boehner will have no credibility to threaten a U.S. default if Republicans do not get what they want. President Obama can refuse to negotiate again with the full knowledge that the speaker will cave at the last minute. The world now knows that Boehner will not let us breach the debt ceiling

This is what Democrats have been fighting for this entire time. They have created a new governing norm that eliminates any possibility that the United States won’t pay its bills. Our government may have a number of problems, but for the first time in Obama’s presidency, we can confidently say that the debt ceiling cannot be used as an extortion device. That’s a massive victory for our political institutions.