Cliff Avoided, Up Against the Debt Ceiling

If everyone stands by what they’ve been saying, then the United States is heading for default for the first time in its history.

No sooner had a deal been struck to avoid toppling over the “fiscal cliff” when Treasury Secretary Timothy Geithner announced that the country has already reached its statutory borrowing limit of $16.4 trillion — the limit set a year and a half ago by Congress after a contentious battle with the White House. There are accounting maneuvers by which Geithner can scrounge for funds, but around the end of February, if Congress doesn’t raise the debt ceiling yet again, the United States is out of money to pay its bills.

But as the nation’s “Full Faith and Credit” guaranteed by Article IV of the Constitution is at stake, surely this will be resolved amicably, will it not?

All indications so far point to the contrary. President Obama has said he will not accept any conditions attached to the debt ceiling issue, which is precisely what Republicans in the House intend to do. Obama has washed his hands of the problem this time:

“I will not have another debate with this Congress over whether or not they should pay the bills that they’ve already racked up through the laws that they passed”, he said. “Let me repeat: We can’t not pay bills that we’ve already incurred. If Congress refuses to give the United States government the ability to pay these bills on time, the consequences for the entire global economy would be catastrophic — far worse than the impact of a fiscal cliff."

House Speaker John Boehner has said there won’t be any one-on-one negotiating with the President this time. Nor with Senate Majority Leader Harry Reid, it would seem. Encountering Reid on arrival at a White House meeting, CNN and Politico both reported that Boehner told Reid to “Go f--- yourself”. Reid had characterized Boehner’s management of the House as a “dictatorship”.

Mitch McConnell will step back as well. He faces re-election in 2014 and is taking heat for being co-conspirator with Vice President Biden in crafting the tax increase deal that skirted the cliff. So he has declared that the Senate will now follow its formal procedures of committees and debate rather than private deals. Republicans are furious that the cliff deal raised taxes while spending cuts disappeared and the mounting costs of Medicare and Social Security were untouched. The debt ceiling affords them the opportunity for revenge and they lie in wait.

We suspect that most in the general public think that Congress’s zeal in keeping the debt limit from rising is to prevent the Obama administration from spending uncontrollably. To the contrary. It is Congress, in its appropriation bills, that decides how much the various departments of government may spend each year. So if Republicans decide to keep the lid on the debt limit, they will be refusing to pay for what Congress itself has already told the government to spend. One could say that Congress will be refusing to pay its own debts.

Republicans in the House are expected to use the sequester as well to force the administration to collapse at the bargaining table. The sequester is the mandate by law to cut $1.2 trillion in spending across ten years that took effect when a joint Republican-Democrat committee could not come up with a deal last November for how the cuts would be apportioned. The cuts — half from defense, half from other discretionary spending — were supposed to kick in automatically this January 1, making it one of the items poised at the edge of the cliff. But, instead, it was pushed down the calendar a couple of months where it will compound problems by coinciding with the debt ceiling farrago. Republicans will demand that the sequester’s cuts of defense spending be eliminated in return for raising the debt ceiling, and some want the defense cuts to double up the cuts to social programs.

Even though the debt ceiling was raised in 2011, the fallout from the dispute was acute. Stock prices tanked and the nation’s AAA rating was downgraded, with Standard & Poor’s specifically citing the government’s dysfunction as the primary cause. But that first downgrade had little effect, as money worldwide continued to flow into the American safe haven. An actual default, however, would be a of different order of magnitude.

Most Democrats and Republicans realize this, but their preventive demands are polar opposites. Republicans, especially, have indicated that they must have their way and get spending cuts this time or they will let default happen. The Moody’s rating’s service has already signaled that it would lower the nation’s credit rating again. New York Times financial reporter Binyamin Appelbaum said it well:

“The belief that lending money to the U.S. government is virtually risk-free is a basic tenet of the global financial system. The risks of other investments are measured by comparison, and priced accordingly”.

Jeopardizing trust in the dollar is an insane way to run the government.

The dollar would drop sharply in value, affecting all Americans. Another drop in the nation’s credit rating means higher interest costs for business and all levels of government, as well as a drop in the value of all debt outstanding. (Current debt will be worth less because new debt will be paying higher interest.) The loss of the Triple-A rating last year cost the government an additional $1.3 billion in interest costs in 2011 and is projected to cost $18.9 billion over 10 years. So there is the paradox of Republicans zealously advocating cost cutting yet their actions add to the government’s interest costs when they cause rating downgrades.

After all year insisting that those earning more than $250,000 pay a higher tax rate he called their “fair share”, President Obama smoothed over that line in the sand and yielded to a $450,000 cutoff. Instead of yielding, one strategy was to go over the cliff, letting tax rates rise for everyone, in the belief that, in their ardor for low taxes, Republicans could be forced to raise the debt limit as part of any deal to restore the "Bush" tax cuts. Second thoughts probably said that, even though most of the public would blame the Republicans for letting everyone’s taxes rise, a sizable percentage would fault the president for his obstinacy in refusing anything less that his demand to raise taxes for all earning over $250,000 a year.

But the threat of letting all Bush tax cuts expire was his leverage. His tax deal gave that leverage away, leaving him holding no cards to counter the debt ceiling threat in the Republicans’ hand. Democrats fear that, much as he relented on the $250,000 demand — which had been his pledge as far back as his 2008 election campaign — he will fold yet again when the debt ceiling brawl verges on crisis, which this time will mean caving to Republican demands for cuts in the entitlement programs. The Democratic base continues to resist any change in Medicare and Social Security and gives no sign of ever facing up to their unsustainable futures.

This time around President Obama may be signaling that, if Congress doesn’t work out a deal that he is willing to sign, he’ll rule by fiat, using the 14th Amendment as grounds. Deep in that long 1868 amendment, more renowned for its due process clause, are these words: “The validity of the public debt of the United States...shall not be questioned”. Its use would be a stretch, though, as the elided words in that phrase and much of the amendment are really concerned with guaranteeing in the wake of the Civil War the payment of pensions to those who aided in suppressing insurrection. Its authors did not have saving the trust in the nation's credit in mind.