As the sun rises in the east, the debt ceiling will be raised. Getting there, however, will be harrowing. Which is a good thing.
Treasury Secretary Tim Geithner warns that failure to raise the limit would be disastrous. In that he is correct. But he is disingenuous when he suggests that we must raise the ceiling by Aug. 2 or the sky falls.
There is no drop-dead date. There is no overnight default. Debt service amounts to about 6 percent of the federal budget and only about 10 percent of federal revenue. This means that for every $1 of interest payments, there is roughly $9 of revenue the government spends elsewhere.
Move money around — and you’ve covered the debt service. Cover the debt service — and there is no default. What scares Geithner is not that we won’t be able to pay our creditors but that his Treasury won’t be able to continue spending the obscene amounts of money (about $120 billion a month) it doesn’t have and will (temporarily) be unable to borrow.
Good. The government will (temporarily) be forced to establish priorities. A salutary exercise.
Equally salutary is the air of crisis that will be generated by the fear of default. We shall have a preview of what happens when we hit the real debt ceiling several years from now, i.e., face real default. That’s our current fiscal trajectory. Under President Obama’s budgets, debt service, now $214 billion a year, climbs to $931 billion in a decade.
The current debt-ceiling showdown, therefore, is an instructive dry run of an actual Greek-like default, which awaits if we don’t solve our debt problem.
With one difference, of course. During today’s debt-ceiling fight, if the markets start to get jittery, interest rates on U.S. debt spike and the economy begins to teeter, the whole exercise can be called off with a push of a button — an act of Congress hiking the debt ceiling. When the real crisis comes, however, there is no button. There is no flight-simulator reset. We default, and the economy really does crash.
Which is why the current debt-ceiling showdown is to be welcomed. It creates leverage to force fiscal sanity.
But it can be a dangerous game. Republican demands must therefore be well-crafted. Fortunately, they are. Senate Minority Leader Mitch McConnell is pushing for budget cuts in the next two years. The effect would be real and multiplicative — when you cut the baseline budget, the savings get repeated year after year.
Spending caps are more problematic. They have a baleful history. Experience shows that Congress can padlock the refrigerator door, but as long as Congress can still access the key, the gorging never stops.
I would suggest, therefore, enacting spending caps that could be overturned in future years only by
supermajority — say, two-thirds of both houses. Now, of course, a future Congress could undo this whole scheme by repealing the caps through legislation that would require only a simple majority in both houses. But as long as Republicans maintain control of the House, they could block this maneuver. The caps would be essentially unrepealable.
In this spending-cut tug of war, it is of paramount importance to frame your demands in a way that the public sees as reasonable. The side that can command public opinion will prevail — the other side will ultimately cave for fear of being blamed for whatever dislocation occurs. Republicans should not be asking for, say, repeal of Obamacare as the quid pro quo for raising the debt limit. These are bridges much too far for these negotiations.
Which is why House Speaker John Boehner’s offer of a dollar-for-dollar deal — raise the debt ceiling to match corresponding spending cuts — is a thing of beauty. It is eminently logical and easy to understand. In a country with a 47 percent to 19 percent plurality opposed to raising the debt ceiling, the Boehner offer is difficult for the president to refuse.
After all, it invites Obama to choose how much to cut. For example, $500 billion buys him a $500 billion debt-limit hike — and only a short-term extension. Not wanting to go through this process again, Obama would like a $2 trillion debt-limit hike to get him past Election Day 2012. For that, he’ll have to come up with $2 trillion in spending cuts.
It may be blackmail. But it is progress.