Republicans' leverage from debt ceiling vastly overrated

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In classic game-theoretical chicken, both players must choose whether to go straight or to swerve. Swerving loses face, and so is less desirable than holding steady, but it is nevertheless far better than the horrible accident that results if both players refuse to swerve.

How does the current situation fit into this model, and why do some Republicans think it favors their side? Democrats going straight with Republicans swerving represents Republicans agreeing to raise the debt limit without extracting weighty policy concessions. Both parties swerving represents a compromise deal of one sort or another: a familiar can-kicking that promises another go-round soon, or (less likely) a grander bargain partially addressing our long-term debt problem. Republicans going straight and Democrats swerving represents Obama capitulating to Republican demands, presumably in the form of large long-term spending cuts, in order to get a debt ceiling increase. Finally, there is the transfixing possibility of a straight-straight crash, in which the world economy is thrown into chaos by a U.S. sovereign default. 

Two factors supposedly give Republicans the upper hand. First, for the aforementioned economists and some in the Republican caucus, can-kicking actually seems worse for the long term than a crash, which, despite its obvious costs, they believe would bring about a necessary reckoning with the welfare state’s unaffordability. Second, because Obama is unwilling to risk derailing his second term (or his legacy) with a governance catastrophe, he will ultimately have no stomach for risking a head-on collision. 

All this seems sensible enough, but the real-life mechanics of a debt-ceiling showdown are sufficiently different to render this logic moot. In the classic game discussed above, both players choose their strategy and must then live with the consequences. The ability for either player to swerve is strictly time-limited — after the cars come close enough to each other, it is simply too late for either one to swerve.

But a “crash” in the case of the debt ceiling would not happen like that. Although the Secretary of the Treasury may identify a date at which “extraordinary measures” will no longer be sufficient, when the clock strikes twelve that morning it will not really be “too late” to avoid default. Instead, the measures employed will simply have to become far more extraordinary.

At that point, the president will be faced with a choice about which laws he wishes to break — either legislated appropriations or other commitments, or the debt ceiling itself. Choosing the latter would create a constitutional showdown and potentially complicate Treasury markets wary of politically toxic new debt — so let’s pass over that scenario. Instead, assume that the President would choose the former. Using fresh revenues as they come in, the President could honor something like half of the government’s commitments, choosing which appropriations to withhold and which contracts to break. He would almost certainly wisely decide that debt service was worth prioritizing, lest bondholders refuse to turn over expiring debt and escalate the crisis.

At that point, Obama would be a spending autocrat, making his decisions to punish the hold-outs’ constituents (perhaps by withholding social security checks). Each day these constituents would suffer while the president demanded a clean debt limit increase. It is hard to see how the advocates of cuts would maintain their resolve as this impasse went on. Most likely, this would become apparent to them and they would capitulate within days.

To be sure, this is an ugly scenario that would cause immense human suffering. But the president could rightly claim, all the while: “I just want to ‘take care that the laws be faithfully executed,’ but congressional intransigence makes that humanly impossible.” It is hard to see how it would end well for Republicans.

Defenders of debt-ceiling chicken also ignore the historical record. Newt Gingrich tried to use the debt ceiling as a lever to pass major parts of his Contract with America in 1995, only to back down when he realized that the political optics would be disastrous for Republicans. The debt ceiling has been wielded by proponents of spending restraint for nearly a century now, including active showdowns during the 1950s and 1960s. But its track record is poor. If the debt ceiling restrains debt accumulation, why hasn’t debt accumulation been restrained?

Advocates of spending restraint should recognize that it is their side that will be swerving — just as they always have. Before it comes to that, they should use whatever leverage the need to raise the debt ceiling gives them to trade this faulty instrument for something better.

Wallach is a fellow in Governance Studies at the Brookings Institution. His current research focuses on regulatory policy, including financial regulation, climate change policy, and statutory interpretation issues.

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