A conservative plan for the US debt limit
American conservatives have been unfairly painted as a threat to global financial stability, with critics on the left suggesting that the US right is seeking to engender a crisis over the federal budget as a path to gutting the US social safety net. But conservatives are actually the key to avoiding such a financial crisis.
In a few months, the US will hit its congressionally mandated debt limit of $14,300bn, a step that could lead to a debt default. In early January, Tim Geithner, Treasury secretary, therefore asked Congress to raise the limit. This should hardly have been a surprise. The US has been running enormous deficits – more than $1,000bn and roughly 10 per cent of gross domestic product – for years. Indeed, President Barack Obama had already run through one large debt limit increase of $1,900bn in just over a year.
The surprising aspect was that Mr Geithner felt compelled to lecture the Congress, saying that “failure to increase the limit would be deeply irresponsible”. This was odd, because historically the outcome of a debt-limit increase request was easy to predict. While the wick of the debt limit bomb burnt, the Senate would stall and the Treasury would be forced to deploy its standard bag of tricks to minimise debt issuance: payments to federal worker retiree plans were skipped, foreign exchange stabilisation funds were raided, and so on. Then, after this brief faux drama, the limit would be raised.
This all worked because a long-standing rules loophole meant the House of Representatives did not have to vote on such increases. Instead, when it passed its budget, the debt limit rise was “deemed” to have passed. In the Senate a bipartisan conspiracy granted those up for re-election the luxury of voting no, while the remainder made sure the limit got raised.
Now, driven by angry voters demanding reduced spending and more accountability, the House of Representatives has pledged to vote on any increase. In the face of public outrage over government finances, few senators can easily vote yes. In both bodies some new conservatives also campaigned on pledges not to raise the limit. So at a glance, raising the limit seems difficult.
The White House embraced this view in its political strategy of asserting that conservative Republicans were irresponsible. “I don’t see why anybody’s talking about playing chicken with the debt ceiling,” Mr Obama’s top economist Austan Goolsbee said back in January, echoing Mr Geithner’s message. Yet in spite of this seemingly inhospitable environment, conservatives now have a clear path to both political success and superior policy during the current two-week extension, agreed in early March.
This should involve passing a debt-limit increase soon, and then pairing its passage with spending controls that ensure lower future deficits and debt. How would this work? Conservatives who promised not to raise the debt limit conveyed an important sentiment: the rules of profligacy and borrow-as-you-go had to change. Unfortunately, a debt-limit increase is ultimately not a statement about the future. It is a reflection of the past. Moreover, failing to raise the limit in a timely fashion courts international financial volatility at odds with pro-growth policies and a pledge to be efficient managers of government functions.
Thus, in the end, conservatives will raise the debt limit. By moving early they can stop the White House pinning any delay on them – if the debate drags on, Democrats in the Senate, and Mr Obama, must shoulder some of the blame. Also, by including in the same legislation controls on future federal spending, conservatives can change the debate to the friendly turf of whether the government should be pared back.
In the coming weeks, conservatives can prove they are no threat to US credit ratings, by moving quickly to raise the debt ceiling. In the process they can also help to control federal spending, reduce deficits and avert US fiscal distress spilling into world capital markets. Recent experience with stopgap funding is instructive. Democrats have attempted to portray Republicans as a party that wants to shut down government. But by including reductions in federal programmes in a recent funding, Republicans changed the debate. If this is whether to shut the government, conservatives will lose. But if it is over the need to control federal spending, they will have already won.
This article was originally published in the Financial Times.