The New Default: A Sad History Of The Debt Limit Fight

Well, we didn’t default.

That’s the most a lot of Democrats can say about the legislation that just passed in the Senate, by a vote of 74-26. Those voting against were 19 Republicans, 6 Democrats and one independent – Vermont’s Bernie Sanders.

Although some Democrats are relieved to have at least avoided the doomsday scenario of default, they’re also deflated by the fact that the GOP has leveraged its control of one house of Congress into complete dominance of the policy debate.

Democrats lost this fight for many reasons, but chief among them is the fact that the consequences of default are as unfathomable as they are unnecessary. That’s why, in the past, raising the debt limit has been a matter of routine, or at worst an occasion for harmless partisan preening. If borrowing authority ever lapses, the country would initially face a major problem, and, soon thereafter, a deadly one.First would come a harmless-sounding but massively disruptive process called “prioritization.”

In deficit times, when revenues are outstripped by obligations, the Treasury makes up the difference by issuing new debt. A failure to raise the debt limit would mean forcing Treasury to choose which bills not to pay. Politics and law suggest the country’s creditors (purchasers of U.S. debt) would get top priority. Principal and interest payments would be paid first, along with obligations to retirees on Medicare and Social Security, veterans, and the military.

That’s when the money would run out. And without the ability to issue new debt, the the government would have to stop paying for the rest of the stuff the federal government does: border security, air-traffic control, health, education, transportation energy programs, and on and on — all would all seize. This, many economists say, would trigger a a recession — further reducing revenue and increasing federal obligations, creating a chaotic feedback loop. Fewer and fewer bills could be paid, until eventually one of those bills came from a creditor — and then we’d be in default. Most likely, before that happened, credit markets would panic, interests rates would spike, businesses would be unable to meet their payrolls, and the economy would completely collapse.

Months ago, as was widely predicted by close observers of U.S. politics, the GOP turned a simple recipe for avoiding this calamity — clean legislation to raise the debt limit — into a time bomb. The code to defuse the time bomb was an arbitrary, but highly ideological, policy formula: First, massive cuts to federal spending — one dollar of budget cuts for every dollar of new borrowing authority. Second, a guarantee that some of those cuts come from Medicare — a cynical gambit to force Democrats to take co-ownership of the GOP’s entitlement onslaught, which backfired on them when they passed a budget that called for the dismantling of that program. Third, caps on discretionary spending — the one part of the budget that hasn’t ballooned in the last decade, and provides most direct services to regular people. Fourth, no new tax revenues.

The Democrats’ first error was not taking this threat seriously. Late last year, President Obama famously claimed to believe incoming House Speaker John Boehner (R-OH) would not put the country at risk to satisfy his rigid, angry base. Senate Majority Leader Harry Reid (D-NV) said he wanted Republicans to have “buy in” on the debt limit.

The party’s second error was its collective decision to buy into the basic ideological theme underlying the debt limit demands: That deficits are an immediate threat that needs to be dealt with now, largely, if not entirely by cutting spending; that improving the country’s fiscal outlook would by some alchemy instill “confidence” in markets, and thus inspire business owners to hire people to serve clients who don’t exist because they’re also out of work.

Once that dynamic had been set into motion, it proved impossible to stop. Weeks ago, President Obama convened a discussion group, led by Vice President Joe Biden, tasked with crafting a deficit reduction package large enough to meet the GOP’s first demand, such that the debt limit could be raised through 2012. That meant a minimum of $2.4 trillion. They started by identifying spending cuts Democrats and Republicans agreed on. But when they ran out of room on that front, and Democrats turned the conversation to tax revenues, Republican negotiators bolted.

Effectively, they kicked the discussion upstairs. In a series of private meetings, Obama and Boehner probed a budget deal so friendly to Republican interests that many outside conservative observers were flummoxed when those discussions fell apart, not once, but twice.

At the nadir of these negotiations, in a revealing way, Senate Minority Leader Mitch McConnell (R-KY) proposed a detente of sorts. Republicans would simply hand President Obama the authority to raise the debt limit in a way designed to maximally embarrass Democrats, but that forced no spending cuts. It was the clearest sign in months that Republicans — at least at the leadership level — knew default was an untenable threat and that they would ultimately have to abandon their demands.

Conservatives revolted. But instead of leaving establishment Republicans with the task of calming that revolt, Democrats unfathomably agreed to hand them their spending cuts anyhow. That was Democrats’ last way out, and they squandered it. After that, all hope of avoiding an unnecessary and economically damaging austerity program vanished. Days of negotiations between party leaders on Capitol Hill centered on whether or not Republicans would yield in any way — by accepting illusory spending cuts, and counting them toward new borrowing authority, or by treating the creation of a new deficit-cutting congressional committee as a guaranteed source of spending cuts.

Democrats had thus abandoned their demand of fundamental fairness — that wealthy people contribute to deficit reduction by paying more in taxes, and that a debt bargain include extended unemployment benefits, or a payroll tax holiday, or some form of economic stimulus. They reluctantly accepted a framework pairing $2.4 trillion in spending cuts (some now, some later) with a concomitant debt limit increase.

But when the GOP remained inflexible, Reid and House Minority Leader Nancy Pelosi (D-CA) made one last bid to break the GOP’s resolve. Last week, they said “this far and no further” and left Boehner to face a jarring but obvious reality: He needed to appease Democrats, if only in trivial ways. Left to find consensus in his own party meant passing legislation so far to the right that the Senate and the President could easily and credibly reject it. Playing ball with Democrats in a reasonable way meant achieving a consensus that alienated a huge swath of his party — perhaps jeopardizing his Speakership.

Reid and Pelosi had Boehner over a barrel — a small consolation given how far they’d already moved in his direction, but also an opportunity to dramatically reorient legislative politics. The GOP’s gameplan in the 112th Congress had been to force Democrats to accept deals that cost Boehner minimal support in his own caucus. Armed with the knowledge that both Boehner and McConnell were unwilling to allow the country to default, Reid and Pelosi were about to force Boehner to accept a deal that ripped his party in half.

Then, inexplicably, the White House came to Boehner’s rescue. Maybe officials truly believed Boehner had been too weakened to marshall even minimal support for Reid’s debt limit bill. Perhaps the risk of continuing the brinksmanship was too great. Whatever reason, Obama and Biden re-entered negotiations, this time with McConnell, and began negotiating the terms of their surrender.

Thus, the bill Obama signed Tuesday cuts discretionary spending by about $1 trillion over 10 years. It will also task a new congressional committee with finding at least $1.2 trillion in further deficit savings — either from tax increases or from further spending cuts, or both. Entitlement cuts will be on the table in a real way. And if the GOP refuses to budge on tax revenue, and the committee fails, the result will be automatic cuts, split evenly between domestic and defense and security spending. Medicare providers would take a two percent across the board cut. Defense spending would be cut by $500 billion over 10 years.

That leaves Democrats with some leverage, and perhaps the epilogue of this manufactured crisis will find Democrats winning a significant tax concession from Republicans in the months ahead. It’s plausible that the architecture of the debt limit deal will pit GOP defense hawks against GOP anti-tax zealots, and cleave the party in two. It’s just as easy to imagine Republicans have no intention of raising taxes or of allowing automatic defense cuts to take place, and will flip the blame for both on to Democrats.

Even the rosiest interpretation of the outcome, though, can’t brighten two overarching facts: First, that Democrats are locked into an unsustainable negotiating posture vis-a-vis the opposing party, and have no idea how to escape it. Second, and more importantly, that Washington has fully embraced austerity, and placed it indefinitely atop the national agenda. With unemployment again on the rise, that bodes poorly for President Obama and the Democratic party, as election season nears. But more importantly it spells prolonged misery for the millions of Americans who never recovered from the recession, and perhaps new problems for some of those who did.

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