Fear the Debt Ceiling, Not the Fiscal Cliff

A determined minority of lawmakers that can’t get its way through elections or the normal budget process can hold the economy hostage over the debt limit.

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Chad Stone is chief economist at the Center on Budget and Policy Priorities.

Here's the part of Washington's budget debate that I wish was getting more attention: the Republican threat to again take the country to the brink of default on the national debt. That, not the so-called "fiscal cliff," is the real danger to the economy.

As I've written here before, the debt limit is an anachronism that most serious analysts believe plays no useful role in fiscal policy. Lawmakers make decisions about taxes and spending, and the Treasury must pay the bills when they come due, borrowing the money when necessary. As Washington Post columnist Matt Miller likes to observe, everyone who voted for House Budget Committee Chairman Paul Ryan's budget voted for policies that would add several trillion dollars to the debt, and thus require a correspondingly higher debt limit, over the next 10 years.

[See a collection of political cartoons on the fiscal cliff.]

A debt limit won't keep the bills from past budget decisions from coming due. Lawmakers' failure to raise the debt limit can, however, create a crisis over whether the Treasury should break the law by ignoring the limit and continuing to borrow or by failing to honor its financial obligations. Because neither outcome is acceptable, a determined minority of lawmakers that can't get its way through elections or the normal budget process can hold the economy hostage over the debt limit if they think they can get away with it.

That's possible if the preeminent centrist political analysts—the Brookings Institution's Thomas Mann and the American Enterprise Institute's Norman Ornstein—are right about the pernicious effect of Republican political tactics on the media's ability to give the public the information it needs to hold politicians responsible for their actions.

For example, contrary to much of the rhetoric about it, the fiscal cliff is not a debt problem or a spending problem, as House Speaker John Boehner implied in recent remarks. The recovery is not threatened because there will be too little deficit reduction; it's threatened because there will be too much deficit reduction, too fast. For policymakers, the challenge is to enact policies that nurture the recovery by accepting larger deficits in the short term while putting in place deficit-reduction measures that phase in as the economy gets stronger and ultimately are large enough to stabilize the debt (so that it stops growing as a share of the economy).

[See a collection of political cartoons on the budget and deficit.]

Contrary to Speaker Boehner's claim that it lacks specifics, the proposal from President Obama has all the necessary detail. Republicans don't like it because it doesn't include their favorite policy—extending the high-income Bush-era tax cuts—and it doesn't cut spending the way they would like. They seem to recognize that they're in a poor bargaining position if they seek to hold hostage the middle class tax cuts that both parties want to extend unless policymakers meet their demand to extend the upper income tax cuts. But they see the debt limit as an opportunity for another bite at the apple.

GOP insistence that most deficit reduction must come from spending cuts—and that policymakers must offset every dollar increase in the debt limit with spending cuts—does not reflect a realistic assessment of what policymakers can achieve, or what the public would likely tolerate. For example, if you think that Social Security and Medicare can generate big savings through "painless" changes like raising the eligibility age or switching to an alternative price index for calculating annual cost-of-living adjustments—or, by contrast, if you would not support any change at all in Social Security and Medicare—then I urge you to read this superb analysis by Brookings economist Henry Aaron.

[See a collection of political cartoons on the economy.]

To be sure, financial markets won't like it if policymakers go past the end of the year without a deal on the fiscal cliff. But, policymakers can easily reverse the financial turmoil in early 2013 with limited economic damage by offering evidence of progress and then striking a quick deal.

A federal default, however, is another matter altogether. Nothing can reverse the damage that the U.S. reputation would suffer. Moreover, the economic damage would be serious and lasting.

Good government requires two responsible parties. There's a lively debate inside and outside the party about whether the GOP has to change to succeed, but political scientist Jonathan Bernstein warns: "the dysfunction in the current GOP makes successful governing if they do win extremely difficult." The problem now is that it also makes it extremely difficult when they don't.

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