The debt limit threat was undesirable, necessary, and effective

The debt limit threat was undesirable, necessary, and effective

The President spoke today in the Roosevelt Room on S&P’s downgrade of the U.S. government’s credit rating from AAA to AA.

THE PRESIDENT: And we didn’t need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive, to say the least.  We knew from the outset that a prolonged debate over the debt ceiling — a debate where the threat of default was used as a bargaining chip — could do enormous damage to our economy and the world’s.  That threat, coming after a string of economic disruptions in Europe, Japan and the Middle East, has now roiled the markets and dampened consumer confidence and slowed the pace of recovery.

I have a different view. I don’t think the recent legislative debt did “enormous damage to our economy and the world’s.” I think the debt limit threat was undesirable, necessary, and effective.

Undesirable, yes.  Enormous damage, no.

Congressional Republicans’ legislative tactic created temporary liquidity risk that is now gone. That threat was undesirable but unavoidable, given their policy goal and the inaction of other policymakers.

The U.S. economy was weak before the debt limit battle, throughout that battle, and still is weak today. The past few months’ legislative tactics did not cause March’s big drop in consumer confidence. These tactics did not cause U.S. GDP to grow by only 0.4% in the first quarter of this year.

The increased liquidity risk that resulted from those tactics was resolved last Tuesday when the President signed the new law. Problems in Europe, S&P’s downgrade and future solvency risk, and fears of a double-dip recession are better explanations for current market turmoil, not fear of liquidity risk that was eliminated six days ago.

The President is trying to attribute everything bad in the economy and financial markets to a temporary legislative tactic of the opposing party. While this is politically clever, I cannot see how he can back up this claim. Does the President think that 8-12 weeks of fear of a possible bad outcome that came not to pass caused “enormous damage to our economy and the world’s?”

Necessary

The President’s key implicit and false assumption is that deficit reduction would have been enacted without this legislative threat. He argues that, since both sides agree on the need to reduce the deficit, the threat was unnecessary.

Let’s review recent history:

  • In January the President’s State of the Union address focused on increasing government “investment.”
  • The President offered his second budget speech only after House Republicans passed the Ryan budget. He claimed to match Republicans’ $4T of deficit reduction, but later conceded that he was proposing $2.7 T over the same timeframe. He still has not provided scorable policy specifics.
  • The Senate Democratic majority never began the budget process, providing no venue for negotiations with the House Republicans.
  • The President began his negotiations with the Speaker only after Republican leaders made clear that a debt limit increase must be accompanied by equal or greater spending cuts.

Had Congressional Republicans not taken a clean debt limit increase hostage, there is no way Washington would have [promised to] cut [future] discretionary spending as much as it just did.

The legislative threat was necessary to achieve spending cuts and deficit reduction.

Effective

The $2.1 T of deficit reduction just enacted into law results directly from Speaker Boehner’s insistence that a debt limit increase be matched dollar-for-dollar with spending cuts. The Speaker’s principle implemented a less focused but intense refusal by freshman and other conservative House Republicans to support the clean debt limit increase requested by the President. Congressional Republicans increased liquidity risk to make progress on reducing solvency risk.

While conservatives did not achieve their ultimate fiscal goals, the threat was effective both in reframing the policy debate and making progress toward those goals. The tactic worked.

Since the tactic was both necessary and effective, the cost of that tactic must be weighed against the benefits of the result. The President exaggerates the cost and ignores the benefit.

Painful but constructive

I disagree with the President when he says “the gridlock in Washington over the last several months has not been constructive.” That at times raucous battle resulted in a new law that promises to cut government spending and deficits by $2.1 T over the next decade. That battle resulted in a negotiating structure and a fallback sequester to achieve at least another $1.2 T of deficit reduction. That battle resulted in a negotiated list of hundreds of billions of dollars of additional entitlement spending cuts that I presume will form the foundation of that second stage process. That battle resulted in the President sticking his fiscal toe in the water on Medicare spending and CPI. That battle caused the President to start talking positively about the Bowles-Simpson recommendations that he had previously ignored.

These results are big for Washington but small relative to the remaining underlying problem left to be solved. Had everyone gone along quietly and politely with a clean debt limit increase, even this limited progress would be absent.

It would be great if policymakers in Washington could make hard choices without someone acting aggressively to force them to do so. It would have been great if the President had proposed specific and scorable deficit reduction policies, if Senate Budget Committee Chairman Conrad had proposed and marked up a budget in his committee, and if Senate Majority Leader Reid had brought a budget to the Senate floor for debate and votes. It would have been a far better process if deficit reduction had come through structured negotiations between the House and Senate on budget plans passed by each body. There would then have been no need to attach spending cuts to a debt limit.

Alas, the only way to make progress was for those most fiercely committed to spending cuts and deficit reduction to use an aggressive legislative tactic. I’m glad they did.

(photo credit: Cyberslayer)

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