Robert Rubin: The risk is greater today than it was in 1995
By Ezra Klein,
The last time Congress allowed the debt ceiling to elapse was November of 1995, when the Gingrich-led House attached cuts and conditions to a debt-ceiling increase that were unacceptable to the Clinton-led White House, The standoff continued for four months, requiring the Treasury secretary, Robert Rubin, to do some extraordinarily fancy fiscal footwork to keep the government from defaulting altogether. Last night, I spoke with Rubin, now co-chairman of the Council on Foreign Relations, about why 2011 is a more dangerous moment for a debt-ceiling showdown than 1995, whether we can pay back the market but default on other commitments, and whether we need a debt ceiling at all. An edited transcript of our conversation follows.
Ezra Klein: The United States hit the debt limit on Monday. You were Treasury secretary when we last hit the debt limit in the mid-1990s. So what’s the job of the Treasury secretary at this point?
Robert Rubin: Your job as secretary of the Treasury is to do exactly what Tim Geithner has been doing, which is carefully and candidly explaining to the American public and to policymakers the severe consequences of failing to raise the debt ceiling and failing to meet our commitments. Meanwhile, you need to identify with legal counsel all of your options if the debt ceiling isn’t raised so you can continue to meet the commitments of the federal government for as long as those options allow. He has done that and has calculated we can meet our commitments without another increase in the debt limit until about August 2nd.
EK: There seem to be a couple of different camps in the debt-ceiling negotiations. One camp wants to quickly pass a clean bill raising the debt ceiling and taking default off the table. Another argues that the debt ceiling is a useful forcing mechanism for a broader fiscal deal that brings down the deficit and changes various features of the state. Where do you fall?
RR: Defaulting on our commitments is unthinkable and dangerous, and the debt ceiling should be raised now without conditions. But as a separate matter, our fiscal outlook is unsustainable and deeply threatening and must be effectively addressed through our political processes on both the revenue and the spending sides.
EK: Some Republicans have advanced the argument that these are all scare tactics, that so long as we clearly state our intention to pay back our bondholders, refusing to raise the debt ceiling wouldn’t have major consequences in the market. In fact, it could be a good thing, as it’ll force us to live within our means. Do you think that’s a plausible view?
RR: No. I don’t think it’s even remotely plausible. That would be viewed by markets as a failure of the U.S. government to meet its legal payment obligations. Their argument is that if you hit the point where you’ve run out of resources to meet all of your commitments, you can pay your interest so you don’t default on the debt and stop sending out Social Security checks or halt payments to the troops, or air-traffic controllers, or whoever you choose not to pay. I think that would be viewed by markets as being a failure of the federal government of the United States to meet its financial commitments and the equivalent of a default on debt. Just imagine if a major American company announced they were short of resources and they were going to pay interest on their debt but not employees or suppliers. That company’s credit standing would be immensely affected; so, too, would it be with the federal government.
EK: When you sat down with your lawyers in 1995, what stalling mechanisms did you come up with?
RR: I wouldn’t call it “stalling.” What we did was borrow from the public-service pension funds. When you borrow from these funds, that isn’t considered debt. So as long as those resources lasted, we could meet the federal government’s commitments. And we were forced to do that from roughly November 13th of 1995 to March of 1996 to avoid default.
EK: Did that have adverse consequences for those funds?
RR: No. The pension funds get paid back and there were no adverse consequences. There is the adverse consequence for confidence in the U.S. government of having to engage in these unusual measures in order to act responsibly by meeting its commitments.
EK: I’ve gone back and looked at the market’s reaction to the debt-ceiling fight in 1995, and it’s very hard to detect much concern. The market seems pretty calm all the way through. And yet people who know the market seem very worried that it could flip unpredictably, and in particular, that the market might give us less time to pass the debt ceiling than we think we have. How concerned are you about a timing problem like that?
RR: I think the risk of having some serious reaction is much greater today than back then; and back then, I thought it was unacceptable. When the debt-limit fight occurred in 1995, we had already put in place a powerful deficit-reduction program in 1993 and our fiscal position was repairing. Today, you have an unsustainable fiscal outlook. The longer the debt-ceiling debate goes on, the greater the risk is that markets will look at our political system and decide they don’t like what they see, and that the market’s confidence in our political system’s ability to address our fiscal situation will be negatively affected. And once you’ve catalyzed that change in the market’s psychology, it’s not at all clear that raising the debt ceiling would change the course of that psychology. None of this is a risk worth taking.
EK: Do you think we should have a debt ceiling at all?
RR: No, it’s an anachronism.