A small deal won’t cut it
There’s no longer much space to be creative, or incremental, or indecisive, on the debt ceiling. Perhaps there was two or three or four months ago. If we had raised it clean, or attempted the McConnell deal, or invoked the 14th Amendment, or gone for a series of short-term increases, that might have been enough. It isn’t now. Three months ago, all we had to do to keep the markets calm was raise the debt ceiling. Today, if all we do is raise the debt ceiling, there’s a very good chance the markets will turn on us anyway.
It’s easy to get caught up in the dealmaking and forget about what the debt ceiling is really about. It’s not about spending cuts. Nor is it about borrowing. It’s about keeping the market confident in our ability to pay our bills, both now and in the future. It’s about keeping the market confident in us.
And Congress, unfortunately, has made that job a lot harder. A year ago, the market didn’t question our ability to raise the debt ceiling, nor our ability to come to a deficit deal in some reasonable period of time. Standard & Poor’s didn’t even think we should mix the two issues together. “It’s best practice for governments to enact [deficit] reforms ... using the broader and longer-term perspective occasioned by debate on the budget proposal as a whole,” wrote the credit-rating agency. Plus, the debt ceiling had to be raised this year, but the deficit was a long-term problem that we had, at the least, “three to five years” to address.
But we didn’t take their advice. We yoked the deficit to the debt ceiling. We began negotiating everything at once. But rather than showing how responsible Washington was, the negotiations uncovered how irresponsible and unpredictable it had become.
Partisan plans to reduce the deficit, like the proposal released by Rep. Paul Ryan in March and the White House in April, went nowhere. Bipartisan negotiations, like those conducted by the Fiscal Commission, the Gang of Six, and then the White House and the congressional leadership, continued stalling out. Republicans proved much less interested in a deal, and much more opposed to taxes, than anyone had realized. Many House Republicans seemed to oppose raising the debt ceiling, not to mention revenues, under any circumstances. And the White House, though it kept holding talks and trotting out the president for news conferences, couldn’t get the ball over the goal line.
And so the market reacted. Now the question isn’t simply whether we can raise the debt ceiling and pay our bills; it’s whether we can make the sort of tough choices necessary to pay our bills later. Standard Poor’s, for one, has sharply moved the goalposts. Now they say that if “Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future,” then they could downgrade us “in the next three months.”
We have, in other words, made our job harder. Simply increasing the debt ceiling might have sufficed a few months ago. It probably won’t now. That goes double for a solution relying on the 14th Amendment, which would add legal uncertainty to an increase in the debt ceiling and show that our broken political system has forced us into completely unprecedented and unpredictable territory. A short-term increase in the debt ceiling, as some Republicans have called for, is also likely to affirm the market’s fears that we can’t make tough compromises.
The market did not tie the debt ceiling to a $4 trillion deal on the deficit. Washington did. But now that it’s not clear that Washington can get the deal, the market may not let it undo the knot.