The Not-So-Happy Anniversary of the Debt-Ceiling Crisis

The 2012 election will decide the real political meaning of the showdown over whether the U.S. would pay its debts.

Reuters

One year ago, the United States was engulfed in the debt-ceiling crisis of 2011, a self-inflicted wound as egregious as it was avoidable. As events proceeded in July of last year, people around the world surely must have wondered whether politicians in the United States had gone mad. They were threatening to default on the nation's debt and destroy the world economy. Although the crisis was eventually resolved, it produced a downgrade of the country's credit rating, and some economists believe that the resulting hit to consumer confidence significantly damaged the economic recovery from the Great Recession. A year later, it is worth asking what it all meant. The debt-ceiling crisis was a failed attempt to stage a revolution in American politics with control of only one house of Congress; but the larger meaning of the crisis will depend on the 2012 presidential election.

The crisis began when congressional Republicans announced that they would refuse to authorize what had previously been a routine increase in the debt ceiling. By itself, raising the debt ceiling does not increase federal spending. It merely authorizes the Treasury Department to float new government bonds to pay the money that Congress has already appropriated.

Some congressional Republicans, particularly those allied with the Tea Party, argued that the nation had simply spent too much in the past and that the debt ceiling should not be raised at all. When confronted with the likely economic consequences of this strategy, they either downplayed or denied them. Other Republicans well understood the consequences, but they decided to use the debt ceiling as a fiscal hostage: They refused to vote for an increase unless President Obama agreed to significant cuts in government programs. The Republicans' ostensible goal was debt reduction, but they refused to allow any tax increases to achieve it. All debt reduction would have to come solely from spending cuts.

One solution to the long term deficit problem: Just do nothing. But the fear is that the combination of new taxes and spending cuts will precipitate a new recession.

In the past, some politicians (including then-Senator Barack Obama) have voted against debt-ceiling increases for reasons of symbolism or protest, but not in situations where there was any actual danger that the increase would not occur. Now Republicans changed the rules of the game: They used the threat of economic catastrophe to force the president to adopt their preferred policies. As Senate Minority Leader Mitch McConnell put it in an excess of candor, threatening to default on the nation's debts was "a hostage that's worth ransoming [because] it focuses the Congress on something that must be done."

Obama was caught off guard. He had neglected to include a debt-ceiling increase in the April 2011 budget agreement because he did not believe that the Republicans would dare attempt such a maneuver. Seemingly confounded by the new strategy, he agreed to protracted negotiations with congressional Republicans in the summer of 2011 to resolve the crisis through cuts in federal programs, much to the consternation of his political base. In the meantime the press was filled with insistent warnings that continued intransigence on raising the debt ceiling would send the world economy off a cliff.

After weeks of negotiations, Democrats and Republicans agreed on the Budget Control Act of 2011, which was signed into law on August 2, 2011. The Budget Control Act cut spending by approximately $917 billion over the next decade and simultaneously raised the debt ceiling by $900 billion. (It's important to note that there is no necessary connection between the amount the debt ceiling is raised -- which concerns only spending already appropriated -- and the amount planned for future spending). The act also created a "supercommittee" of six senators and six representatives -- three from each party -- charged with identifying additional cuts that would be presented to both houses for a up-or-down vote. If Congress passed the supercommittee's proposal, or sent a balanced budget amendment to the states, the debt ceiling would be raised by an additional $1.5 trillion.

Neither of these things happened. The supercommittee failed to offer a proposal by the statutory deadline, and on November 18, the House failed to obtain the necessary two-thirds majority to approve a balanced budget amendment. Under the terms of the act, the president was then entitled to authorize an additional $1.2 trillion increase in the debt ceiling, but a series of automatic cuts of approximately $1.2 trillion over 10 years automatically go into effect in January 2013. Approximately half of these cuts will come from defense spending. Not entirely coincidentally, the Bush tax cuts, which had been extended in December 2010, also expire in January 2013. The resulting change would return tax rates to the levels that applied during the Clinton Administration, with a top tax rate of 39.6 percent for income over $250,000. If all of the spending cuts and tax increases go into effect, the Center on Budget and Policy Priorities has calculated that the government will gain $7.1 trillion in new revenue. Meanwhile, the Congressional Budget Office has estimated that the annual federal deficit will decline by more than 80 percent, from a projected $1.1 trillion to less than $200 billion.

One might think that this is the perfect solution to the long-term deficit problem: Just do nothing. However, the fear is that the combination of new taxes and spending cuts will further slow the already weak economy and precipitate a new recession. Members of both parties, depending on their politics, also object to cuts to defense and social programs. As a result, the final outcome of bargaining will probably produce less revenue and reduce the deficit less than the do-nothing solution. Even so, the combination of the sequester and the expiration of the Bush tax cuts creates a completely different bargaining situation than the one prevailing during the debt crisis of 2011 -- one that greatly favors the Democrats over the Republicans.

***

During intense political struggles, opposing sides often turn to the Constitution to justify their positions, and the debt-ceiling crisis was no exception. Probably the most important constitutional debate centered around section 4 of the 14th Amendment, which provides that "the validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned." There were two arguments. The first, which is probably correct, is that both Congress and the president have a constitutional duty not to bring the validity of the public debt into question. Section 4 was enacted out of fear that the Southern senators and representatives returning to Congress after the Civil War would attempt to hold payment of the country's debt hostage to block or repeal Congress's efforts at Reconstruction. The purpose of section 4 was to put such hostage-taking maneuvers beyond ordinary politics so that future politicians would not try to threaten the country's finances in order to get their way. This interpretation, however, does not settle what parts of the budget constitute "the public debt of the United States;" nor does it tell us what it means to put the validity of that debt "into question." The narrowest reading of the amendment would hold only that the government may not repudiate payments of interest on existing bonds and similar obligations.

The second and more controversial argument about section 4 was that if Congress refused to act, the president had authority unilaterally to raise the debt ceiling by instructing the secretary of the Treasury to issue new bonds without congressional approval. This argument is more of a stretch. Article I, section 8 of the Constitution gives Congress, not the president, the authority to borrow on the credit of the United States. The best version of the argument would be that the president has been caught in a catch-22: Congress has ordered him to spend appropriated money, but it has forbidden him to issue new debt to do so. If these contradictory commands would cause the president to violate section 4, then he has a constitutional duty to treat at least one of the laws as unconstitutional as applied to the current circumstances. The president could therefore treat the debt ceiling limit as unconstitutional and order the Treasury to issue new debt. However, even if the president had this authority, it would only exist if he had no other practical alternatives to issuing new debt. It is likely that the president would have some alternatives. Moreover, as explained below, things would probably never come to that point.

It is worth noting that President Obama -- again, much to the chagrin of many members of his party -- seemed eager to avoid turning the dispute into a constitutional question. He denied that he had constitutional authority to raise the debt ceiling by himself. In fact, Obama actually wanted to be painted into a corner: He thought he could achieve a grand bargain on debt reduction with congressional Republicans. Invoking section 4 would absolve them of any responsibility to negotiate in good faith. Bill Clinton, by contrast, argued that Obama should not have taken this possibility off the table. He should have threatened to invoke the 14th Amendment early on, and dared the courts to tell him otherwise.

These interesting constitutional questions were not resolved by the debt-ceiling crisis. They are unlikely to be resolved in the future, and for a fairly straightforward reason. Consistent with the government's duties under section 4 of the 14th Amendment, the Obama Administration calmly informed bondholders that no matter what happened, they would be paid on time. Giving priority to bondholders meant that some government programs would not be funded, which would inevitably lead to a partial government shutdown. Once the shutdown began, it would be more or less a replay of 1995. Both sides would quickly reach an agreement to raise the debt ceiling, and, once again, it is likely that the Republicans in Congress would take most of the blame for the fiasco. (Moreover, if the shutdown continued, the markets might also begin to decline precipitously, making an agreement even more urgent.) Knowing this, congressional Republicans had good reason to agree to raise the debt ceiling before a shutdown occurred, and that is precisely what happened.

***

For this reason, the debt-ceiling crisis was a phony crisis, entirely self-inflicted. There was little doubt, at the end of the day, that the president and Congress would agree to raise the debt ceiling. The only issue was the price that would be exacted, and how much damage the economy would suffer in the interim. Moreover, both the president and Congress negotiated against the backdrop of the expiration of the Bush tax cuts in January 2013, which would go a long way toward resolving current concerns about the deficit.

That does not mean that the debt-ceiling crisis was unimportant. After all, it slowed down the economic recovery, and probably increased economic misery. Politically, the most interesting feature of the debt ceiling crisis is that it marked yet another episode in the continuing struggles of an increasingly radicalized movement party -- the Republicans -- to remake American government.

It should come as no surprise that the contemporary Republican Party is a social movement party; what is remarkable is how radical an insurgency it has become. For a generation or more, Republicans have tried to complete the Reagan revolution and fundamentally change the way government is conducted in the United States. Yet they have repeatedly failed, each failure leading to a new wave of insurgency more radical than the last. The present Republican Party, strongly influenced by the Tea Party, is the most extreme version of all.

The debt-ceiling crisis achieved some debt-reduction measures and made President Obama look weak. Yet despite the Republicans' temporary gains, the crisis was a failure -- an attempt to stage a political revolution by leveraging control of only one chamber of Congress. It demonstrated that the Republicans need to control the presidency to have a genuine chance at realizing their vision.

The problem is that it is very hard for a political party to fundamentally change government if it does not control the White House. In fact, if a party does not hold the presidency, it's hard to achieve lasting change even with control of both houses of Congress.

Think about two transformational moments in 20th-century American governance. In 1932 and 1936, Franklin Roosevelt enjoyed two landslide victories, along with overwhelming majorities in both houses of Congress that enabled him to push for New Deal reforms. In 1964, Lyndon Johnson -- who also won a landslide victory -- benefitted from a bipartisan liberal majority in Congress that made it possible to pass the landmark civil rights acts and his Great Society programs.

The conservative movement has long sought a transformation as significant as these two. But since 1980 it has had only one similar opportunity.

If Mitt Romney wins the presidency and the Republicans take the Senate, the first thing they'll probably do is reform the filibuster rules. If Barack Obama is reelected, on the other hand, the debt ceiling crisis will have a very different meaning.

Ronald Reagan was much more successful at stating broad principles than actually dismantling the basic structure of government created by the New Deal and the Great Society. The central social insurance programs remained intact. Moreover, due in part to Reagan's tax cuts and a large defense buildup, federal deficits soared, and Reagan was forced repeatedly to raise taxes.

Three waves of conservative mobilization have sought to finish the task that Reagan started. The first was led by Newt Gingrich in 1994. Gingrich tried to direct domestic policy as speaker of the House. His attempt crashed on the rocks of the government shutdown in the winter of 1995. President Clinton faced down the revolutionaries, who ultimately blinked, and Clinton coasted to reelection in 1996. The radicals in the House, taking full advantage of Clinton's self-destructive tendencies, then impeached him, effectively crippling the second term of his presidency.

The disputed 2000 election gave conservatives a second chance -- their best so far. Indeed, one would think that George W. Bush's election should have completed the Reagan Revolution. After all, for most of the period between 2001 and 2007, the Republicans controlled the White House and both houses of Congress, as well as enjoying a conservative majority on the Supreme Court. This is as close as Republicans have gotten to the configuration enjoyed by Roosevelt and Johnson, albeit with smaller majorities in Congress. Yet after Bush pushed through two large tax cuts early in his first term, the conservative revolution stalled. Government did not get smaller; it only got bigger. Bush's signature domestic accomplishments expanded Medicare and federal regulation of education. Following the 9/11 attacks, Bush oversaw extensive growth in national surveillance capacities and the creation of the Department of Homeland Security, which further expanded government. Perhaps even more important, he also conducted two expensive wars in Afghanistan and Iraq without paying for them with new taxes. His second term plan to partially privatize Social Security went nowhere. Bush's presidency was ultimately consumed by his decision to attack and occupy Iraq, and, as, in Reagan's presidency, federal deficits soared. Finally, as Bush left office, the entire economy collapsed.

Bush's failures led to the third wave of conservative radicalism, embodied by the Tea Party. The Tea Party was a response to the Republican Party's failure to do what it had promised once it gained complete power over the political branches -- shrink government and limit the growth of federal spending. As in 1995, Republican insurgents tried to stage a revolution without holding the White House, but this time, they controlled only one house of Congress plus a cohesive Senate minority that was willing to use the filibuster as a routine instrument of politics.

Even so, the Republicans obtained significant concessions from Obama, who appeared to be far less canny than Bill Clinton. As Speaker John Boehner explained, he got 98 percent of what he wanted, while Democratic Representative Emanuel Cleaver compared passing the Budget Control Act to a "sugar-coated satan sandwich."

And yet the victory may prove pyrrhic unless Mitt Romney gains the White House in 2012. The balanced budget amendment went nowhere. The supercommittee, stocked with Republicans adamantly opposed to tax increases, failed to reach agreement with their Democratic counterparts. This triggered automatic cuts to defense spending that are unacceptable to most congressional Republicans. Perhaps most important, all of the central issues of taxation and spending will have to be refought again after the election -- either in the lame duck session, or after January 2013, when the tax cuts expire and the sequester goes into effect. And when that happens, the Republicans, who were perfectly willing to hold the economy hostage to score a political victory, will find that the shoe is now on the other foot. All the Democrats have to do is sit on their hands and tax rates will return to Clinton-era levels, government revenues will increase by trillions, and the federal budget will go a long way toward being balanced once again, as it was during the Clinton Administration. No wonder Republican politicians have begun, without a hint of shame or irony, to accuse the Democrats of taking hostages.

If Mitt Romney wins the presidency and the Republicans take the Senate, they can effect major changes. The first thing Republicans will probably do is reform the filibuster rules. After all, Mitch McConnell surely has no intention of allowing the Democrats to block him in the way that he repeatedly blocked the Democrats. Next, the Republicans can repeal the Affordable Care Act. They can pass a version of the Ryan budget, converting Medicare into a premium support program that pushes the elderly into private insurance markets. And they can enact Romney's proposed tax policies, producing a significant redistribution from lower income workers to the wealthiest Americans. Whether these results will actually shrink government or produce deficit reduction is quite unclear. It is also possible that once Republicans control all the levers of government, we will see a repeat of the Bush years: tax cuts mostly for the benefit of the rich, a bellicose -- and expensive -- foreign policy, and expanding deficits. Either way, the debt-ceiling crisis will have proved, in hindsight, to have been a political battle lost that helped Republicans win the electoral war, because it weakened both Obama and the U.S. economy, and therefore led to Obama's defeat.

If Barack Obama is reelected, on the other hand, the debt-ceiling crisis will have a very different meaning. It will be yet another failed attempt in the conservative movement's crusade to transform government, a bookend to the 1995 government shutdown. But it will by no means be the end of the story. Conservatives will regroup, continue to harass Obama in any way they can, and wait for another Reaganite savior to arise.

Presented by

Jack M. Balkin is the Knight Professor of Constitutional Law and the First Amendment at Yale Law School, and the founder and director of Yale's Information Society Project.

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