With Obama set to meet with congressional leaders from both parties on Thursday in the hopes of working out a deal to raise the debt ceiling, it’s a good time to step back from the details of the controversy and assess the bigger picture. My conclusion: We can’t get through the presidential election without addressing the fundamental issues facing the country and dividing the parties—the size of government, the level of taxation, and the future of Medicare and Medicaid. But with Republicans committed to their anti-tax orthodoxy and Democrats unwilling to surrender to it, the possibility of a compromise in the next 27 days seems as remote as the consequences of a failure to raise the ceiling seem dire. In place of both these options there’s a third possibility—an interim agreement, which has many longer-term downsides but may be the best we can do right now. Here’s the analysis that leads to me this conclusion.
The current negotiations can yield three possible outcomes. First, the parties might defy the odds and reach a grand bargain that includes revenues, Medicare, and Medicaid, as well as domestic and defense discretionary spending. According to some reports, before the Biden talks broke down, negotiators had identified possible spending cuts totaling at least $1.9 trillion (excluding interest savings). But as long as Republicans refuse to consider any revenue increases, the grand bargain won’t happen.
Nor should it. Yes, we’re spending too much. But we’re also taxing too little—or, if you prefer, spending too much through the tax code. Writing in the most recent issue of the conservative-leaning journal National Affairs, Donald Marron (a former CEA member and CBO director under George W. Bush) says that “America needs to fix its broken tax system and find additional revenue to help reduce our persistent budget deficits. The best way to achieve both aims is to take a hatchet to the thicket of spending-like tax preference.” He’s absolutely right. Obama and the congressional Democrats should not accept any deal lending credibility to the view that we can stabilize our long-term finances without additional revenues.
A second possible outcome is that the contending parties can’t converge on an interim solution and that we reach August 2nd without an agreement. What then? One possibility might be called “son of TARP”: the markets crash, panic spreads, and those who previously doubted the significance of a default see the error of their ways. Some economists believe that even a very short default would have long-lasting consequences for the perceived credit-worthiness of the United States, and therefore for interest rates. Putting their projection to the test of events strikes me as a reckless risk that no one should choose to run. Each party has now advanced its favored scenario for avoiding default in the absence of an agreement. Led by Senator Pat Toomey, some Republicans believe that the Secretary of the Treasury could avert default by moving U.S. debt to the head of the line as the first claimant on government revenues. Secretary Geithner denies that he has such authority and insists that the failure to meet our full range of obligations would be perceived as, and have the same effect as, a default on our debt.
An analysis released yesterday by the Bipartisan Policy Center dramatizes this point. The day after the August 2 deadline, the government will have about $12 billion in receipts versus $32 billion in commitments, including a $23 billion Social Security payment. Even if the government reneged on all obligations other than Social Security, it couldn’t send out the checks in full and on time. And that’s just Day 1. By the end of the month, the government would have failed to meet $134 billion in legal obligations.
For their part, some Democrats have urged President Obama to invoke Section 4 of the 14th Amendment, which states that “the validity of the public debt of the United States … shall not be questioned.” Doing so would plunge the government into uncharted constitutional waters and all-out partisan warfare. On the one hand, Article I, Section 8 of the Constitution clearly vests the power to “borrow Money on the credit of the United States” in the legislative branch, casting doubt on the president’s ability to issue debt in the absence of congressional authorization. On the other hand, the power to borrow money entails the obligation to repay it, and it is up to Congress to meet that obligation—a legal obligation reinforced by the 14th Amendment. While the amendment’s language is rooted in the specific circumstances of the Civil War, the Supreme Court has been inclined to read it more broadly. In Perry v. the United States, one of the Gold Standard cases decided in 1935, the Court declared that:
The Constitution gives to the Congress the power to borrow money on the credit of the United States, an unqualified power, a power vital to the Government, upon which in an extremity its very life may depend. The binding quality of the promise of the United States is of the essence of the credit which is so pledged. Having this power to authorize the issue of definite obligations for the payment of money borrowed, the Congress has not been vested with authority to alter or destroy those obligations.
The majority went on to consider, and reject, a narrow reading of the Constitution that would have confined the reach of the 14th Amendment to Civil War-era debt. We can perceive no reason, they said “for not considering the expression ‘the validity of the public debt’ as embracing whatever concerns the integrity of the public obligations.”
It is also at least possible—some observers believe probable—that the Supreme Court would invoke the hoary doctrine of “political questions” to avoid adjudicating the pitched battle between the executive and legislative branches that an invocation of emergency presidential powers to issue debt without congressional authorization would doubtless create. So the president might be able to get away it. But whether this course would be prudent is another question altogether. If the ultimate objective is to reassure restive lenders at home and abroad that the United States stands foursquare behind its legal obligations, an inter-branch war that would paralyze the government for months (at least) is not the way to go.
This brings us to the third possibility: an interim outcome that codifies the spending reductions on which Democratic and Republican negotiators have already agreed. Because of the opacity of the negotiations, it’s hard to be sure what these items are. But if they amount to even $1 trillion, they could buy an additional six or seven months for the parties to reach a broader agreement.
In brief remarks on July 5, President Obama opposed such an idea. “There may be some in Congress,” he said, “who want to do just enough to make sure that American avoids defaulting on our debt in the short term but then want to kick the can down the road when it comes to solving the larger problem of our deficit. I don’t share that view.” Instead, he called on lawmakers to seize what he characterized as a “unique opportunity to do something big to tackle our deficit in a way that forces our government to live within its means.” But by repeating his call for a “balanced approach” that includes revenue increases, the president is resting his larger aspirations on the slender hope that the Republicans will change their minds. What if they won’t? As August 2nd draws closer, it would be surprising if either side were willing to roll the dice and declare an interim agreement unacceptable.
To be sure, as the metaphor “buying time” indicates, this transaction would not be cost-free. It would push the ultimate decision back into a presidential election year—not exactly the most promising time for reasonable compromises. In addition, the interim agreement would pluck all the low-hanging fruit, leaving the negotiators glaring at each other across the core issues—revenues and health care programs—that divide them. There’s no way around this, because almost no one believes that cuts in discretionary spending alone can generate the roughly $2 trillion we need to get past next year’s election. But it’s hard to avoid the conclusion that if an interim agreement is the best we can do in the next four weeks, each party would be well-advised to accept it and then spend the rest of the year trying to persuade the country that its preferred resolution of the broader issues is the one that merits the people’s support.
By contrast, it would be an unmitigated disaster if the president were to throw his weight behind a package of spending cuts alone that’s large enough to get us through 2012. Every Republican candidate would claim vindication for the party’s core contention that we can put our fiscal house in order without revenue increases, and the GOP would enter the next round of negotiations more intransigent than ever. This is Obama’s moment of truth. He’s right to insist on a balanced approach. Now we’ll find out whether he’s willing to fight for it.