Why the debt limit fight will be different

Why the debt limit fight will be different

The following is based on my experience working on maybe 8-10 debt limit increase laws from both ends of Pennsylvania Avenue.

Both a debt limit increase and a continuing resolution are typically considered must-pass bills. If a must-pass bill is not enacted into law, something very bad happens, such as a government shutdown or the U.S. government defaulting on a debt payment.

Must-pass bills are incredibly tempting for Members of Congress (and outside advocates). Because most bills never become law, everyone wants to attach their desired policy change to a must-pass bill.

Bills to increase the debt limit are always terrible for Congressional leaders and the White House, because they have to get done but no Member wants to vote for them. Traditionally, the majority party (in each body) delivers most of the aye votes and the members of the minority free ride and vote no. That could betricky this year with a Republican House and a Democratic Senate.

Congressional Republicans are excited to use a needed debt limit increase bill as leverage to get additional spending cuts or budget process reforms, as they did with the FY11 appropriations bill.

I can think of at least three reasons why the debt limit fight should differ from the recently concluded battle on FY11 appropriations.

First, a temporary continuing resolution has a hard deadline, while a debt limit increase does not. Everyone knew that if no agreement was reached and no new CR was enacted by midnight last Friday, the government would shut down at that moment. That precise deadline created pressure on both sides to make decisions.

The debt limit works differently. You have to increase the debt limit, but there isn’t a precise deadline. Treasury has tools to manage its cash and borrowing from financial markets. There are tricks Treasury can use to dip into other, special purpose emergency reserves of cash (or other borrowing authorities) so that the debt subject to limit doesn’t increase quite as quickly as under normal operations.

From a financial management standpoint, each of these tricks is bad policy. As an example, you shouldn’t take cash from the Emergency Stabilization Fund and pay normal government bills with it. The cash in the ESF is there in case there is a currency crisis. Treasury doesn’t want to do these tricks, and they shouldn’t. But if the alternative is defaulting on debt issued to the financial markets, it’s not a hard call. You do the bad cash management policy until you get the new law. Treasury has done this before, in both Republican and Democratic Administrations.

Some of these tricks can buy Treasury days, and a couple of them can buy them weeks. In extremis, Treasury can go for a few months past when they’d like to go. They begin with the least damaging techniques, and work their way to more damaging ones as needed. Treasury hates doing this, and the Secretary of Treasury will quite justifiably complain that he is being put in the position of doing bad policy and damaging American credibility in financial markets.

There is a measurable cost to this delay. The ongoing uncertainty and the acrobatics Treasury would be performing could cause investors to charge the government a higher risk premium for borrowing. This damaging effect could continue even after legislation is signed into law.

Members of Congress who are battling over debt limit legislation need to understand:

  1. Unlike the CR, the Executive Branch will not be able to give them a precise drop-dead date, only a range;
  2. There is flexibility on the back end of that range; but
  3. Using that flexibility is bad policy and carries a real economic and financial cost.

Second, defaulting on a debt obligation is potentially far more serious than a temporary government shutdown. The damage is also more dispersed and harder to understand than troops not getting paid and national parks shutting down.  All the financial market and economic policy types (including me) are terrified of running out of room because it’s never happened before and the worst case scenarios are really, really bad.

Toward the end of the appropriations negotiations, it was conventional wisdom that none of the leaders wanted a shutdown.  Mutliply that X1000 for a failed debt limit increase. They have to get it done, somehow, and Treasury will have to do whatever is legal and necessary to buy time if negotiations bog down.

These two factors interact. You have to increase the debt limit, just not by any specific moment. That makes the legislative negotiating dynamic very different from the appropriations negotiations.

Third, a freestanding debt limit increase bill doesn’t contain any spending cut, so there is no “natural” fiscal policy that should obviously included.

In contrast, the just-concluded spending fight was about appropriations bills. It therefore made procedural and negotiating sense to try to cut the discretionary spending contained within those bills. Democrats attacked Republicans for focusing all their attention on cutting a relatively small portion of the spending pie, but that portion was what Democrats had left unfinished from the prior year. At Democrats’ insistence, some mandatory spending cuts were substituted in place of discretionary cuts, but the scope of negotiation was fairly well constrained to things already in the bill.

On a debt limit bill, a fiscally conservative House majority has more leeway to include anything its members think “should” be linked to a debt limit increase. This added flexibility can be a blessing and a curse for those managing the process. Since there are no natural subject matter boundaries, individual Members or groups can and, I assume will, show up with all sorts of policy changes they believe should be packaged with a debt limit increase.

It’s not obviously apparent (at least to me) that any of these three differences between debt limit legislation and appropriations particularly advantage one side or the other in the upcoming negotiation. The lack of a hard deadline tends to weaken the Executive Branch’s hand relative to the Legislative Branch, but mostly it just makes everyone’s jobs harder because there’s no clear deadline to force decisions.

The far more severe potential impact of a failed debt limit increase is a double-edged sword. It increases pressure on the leaders and provides leverage to rank-and-file Members willing to vote no. The President and Speaker Boehner both clearly wanted to avoid a government shutdown and were willing to compromise to avoid it. Some of their Members were more willing to take the risk of a shutdown, or did not feel the responsibility for the outcome, but only for their individual vote. This difference will be significantly amplified for a debt limit negotiation, making the leaders’ and President’s job even more difficult in this next round.

(photo credit: Ninja M.)

Follow

Get every new post delivered to your Inbox.

Join 6,386 other followers