The debt ceiling’s silver lining
What’s worse than the perennial and often brief Washington game of chicken over raising the debt ceiling with the constant threat of defaults compromising the “full faith and credit of the United States,” economists fretting, markets swooning and the media glued to the skirmish? The six-month debt ceiling tussle we are about to endure: The U.S. Treasury recently pushed the button on time-tested “extraordinary measures,” which will ensure that this episode plays out until the summer.
But rest assured, there will be no default, only the predictable ritual dance punctuated by brinkmanship, feigned righteousness and rank political maneuvering. The ceiling will ultimately be raised with little gained by anyone — in Shakespeare’s words, lots of “sound and fury signifying nothing.”
So, what’s the value in a process that puts the world on edge and rattles markets yet typically results in both sides overplaying their hand for little political gain?
The answer is that it’s a rare opportunity in our politics for the few remaining champions of fiscal prudence in either party to make their case in a forum that galvanizes global attention. Despite the dust and haze kicked up, we get a valuable periodic report card on America’s fiscal health.
Stipulated, there is much to criticize in the law. To start, it’s redundant to the budget and appropriations process, which virtually always generates spending amounts that exceed the previously approved debt ceiling and which are not technically available until the limit is raised. That’s a reality left unsaid, for example, amid the hullabaloo over the recent $1.7 trillion omnibus.
Since such large appropriations often require a future debt ceiling increase in order to be fully spent, the law also imposes a lingering uncertainty over government finances, the bane of business, economists and rating agencies. Indeed, political wrangling over the debt ceiling helped drive S&P’s 2011 U.S. sovereign debt downgrade.
And sadly, every debt-ceiling debate inevitably devolves into the same Kabuki theater of hypocrisy and demagoguery, with the previous actors simply reversing roles. Whichever party occupies the White House wants to raise the ceiling to avoid economic dislocation on their watch; the Capitol Hill opposition always seeks to score political points around the perils of unconstrained spending or another topic du jour.
When I was the debt-ceiling point person at the George W. Bush Treasury, both Sens. Obama (D-Ill.) and Biden (D-Del.) were consistent “no” votes, with the former righteously saying, “America has a debt problem and a failure of leadership,” suggesting he was willing to put the country in default. As president, Obama was more practical: “We have to [pass] it by next Tuesday or we won’t be able to pay all our bills.” He later came clean, admitting his position was “a political vote.”
Then-Sen. Biden’s 2006 position against raising the ceiling? “I refuse to be associated with the policies that brought us to this point.” Today, President Biden appears eager to embrace “the policies that have brought us to this point” with $31 trillion in national red ink, now lecturing that it would be “irresponsible” to eliminate the debt ceiling.
I predict that GOP’s hypocrisy may now actually exceed Democrats’. Sen. Ted Cruz (R-Texas) filibustered a debt-ceiling hike during the Obama administration, only to become a reliable yes vote for President Trump. Expect déjà vu all over again as Republicans back-flip once more, especially as House Speaker Kevin McCarthy (R-Calif.) must prove his spending chops after his 15-ballot selection debacle.
One fundamental reality: History suggests the law really has no teeth. Since the late 1950s, sitting presidents’ debt-ceiling success record is 100 percent because no politician will dare take the career-ending step of touching the third rail of default. In 2006, as Senate Leader Harry Reid (D-Nev.) and his fellow Democrats took to the Senate floor keelhauling President Bush over spending, his staff was frantically calling my office to ensure we weren’t out of time to lift the ceiling and avoid default. It provided us a good laugh.
Prepare for similar chuckles from McCarthy and Republicans, who are girding for a fight with spending restraint their stated goal. While they can’t say it publicly, they understand well that their leverage with the administration lies not in the empty threat of forcing default, but in the opportunity for an open and very public conversation, where they will highlight Biden’s role in recent record spending. Their risk is that they push too hard and look foolish by fomenting panic only to beat a hasty retreat.
Amid protests of pending economic Armageddon, the Biden team’s real calculus in considering concessions to team McCarthy will not be their fear of default but instead how much damage his presidency can withstand from the daily reminders over the next six months of the spending bonanza of last two years, and its resulting historic inflation. With 2024 right around the corner, the stakes are high.
For all its flaws and despite all the preening and posturing, the debt ceiling two-step forces an all-too-rare debate on the nation’s balance sheet that forces all of Washington to engage and, importantly, the media to cover it. Given that no president since Bill Clinton has avoided deficits resulting in record debt, political posturing and brinksmanship seem an acceptable price to pay for the value of occasionally reminding America of the perils of fiscal profligacy.
Emil Henry, formerly assistant secretary of the Treasury, is CEO of private equity firm Tiger Infrastructure Partners.
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