Sunday, May 15, 2011

My Take on the Debt Ceiling

As the game of chicken continues over the national debt, I might was well put in my two cents' worth.

The Republicans ultimately backed down from a government shutdown, for reasons that are no secret. Three times the President and Congress have reached an impass over spending that led to a government shutdown, once between Ronald Reagan and a Democratic Congress and twice between Bill Clinton and a Republican Congress. In all three cases, public opinion backed the President. The Clinton era shutdowns made a particularly strong impresion on Republicans. They ran for office proclaiming the federal government a monster of tyranny and government spending an outrage that called for massive, MASSIVE cuts, made with a meat axe, if not a chain saw. Voters lapped it up and gave the Republicans a landslide. Republicans then took voters at their word and assumed they actually hated government as much as they claimed to. They assumed that if the voters hated government that much, a shutdown would be popular. So they allowed a shutdown. It quickly turned out that, in fact, the American people considered the federal government a monster of tyranny and government spending a outrage that called for massive, MASSIVE cuts, made with a meat axe, if not a chain saw -- unless it caused any sort of personal inconvenience, in which case, forget it.

Republicans have taken that lesson to heart this time and backed down from a government shutdown. But they have convinced themselves that refusal to raise the debt ceiling is different. I believe about 40% of the federal budget is now financed by borrowing. The more extreme budget cutters believe that cutting off the federal government's ability to borrow will force an immediate 40% budget cut. More moderate Republicans, including the House leadership, recognize that instant 40% cuts are not realistic, but hope to use that prospect to leverage less immediate and less drastic cuts. No doubt bolstering Republican confidence are numerous polls showing that the American people overwhelmingly oppos raising the debt ceiling. The unpopularity of raising the debt ceiling has convinced Republicans that they will pay little political price for refusing to do so.

I am unconvinced. So far as I can tell, refusal to raise the debt ceiling will act as a sort of partial shutdown in slow motion. As we have been told numerous times, once we hit the debt ceiling, the federal government willimmediately lose its ability to borrow. But, by resorting to "extraordinary measures," it can keep from defaulting for about two and a half months. Simply put, those "extraordinary measures" mean shutting down more and more government services until current expenditures come into line with current revenue.

Such cuts will be painful. The focus of cuts has been on discretionary non-defense spending. Assume it is cut to zero. This will mean, among other things, shutting down the Veteran's Health Administration, the FBI, the federal prison system and all national parks; laying off all federal civilian employees (payroll is part of discretional non-defense spending); and cancelling all federal contracts. Drastic as such cuts would be, discretionary non-defense spending makes up only about 15% of the total budget. Assuming the deficit is about 40% of the budget, these drastic measures would go less than half way towards balancing the budget. We would still have to make 25% cuts in defense and entitlement spending, including Social Security and Medicare. Does anyone consider such a prospect politically realistic? Can anyone seriously believe the American people would simply bite the bullet and accept such cutswhen a far less painful alternative, in the form of raising the debt ceiling, was available?

The same consideration applies to a lesser degree to people who think the unpopularity of raising the debt ceiling will make it a good bargaining tool. The Clinton era shutdown also began as a dispute over raising the debt ceiling. It lasted considerably less than two and a half months. Raising the debt ceiling is unpopular now. How long will this principaled opposition last when it turns out that refusal means closing national parks, suspending clinical research, halting cleanup of toxic waste sites, and other inconveniences of the sort that accompanied the last shutdown? My own guess is that the American people will be dead set against raising the debt ceiling -- until the refusal begins to cause them any personal inconveniece. At that point, political pressure will start risig fast to reach some sort of resolution, principled opposition be damned.



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