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The Debt Ceiling Hostage Vote Is Systemic Risk

Matthew Zeitlin recently interviewed several law professors who argued that the debt ceiling is unconstitutional, or at the very least, that the Obama administration could make a constitutional argument for ignoring the debt ceiling and paying the Treasury's debts. Several Democratic Senators have expressed interest in the idea. Ezra Klein, though, warns against the strategy:

The danger of the debt limit isn’t that America won’t eventually make good on its debts. We have more than enough money to cover our bills, and the market knows that perfectly well. It’s that the fight over paying our debt will be so brutal, so irresponsible, and so unsettling that the market will reevaluate the faith it puts in America’s political system to pay our bills, reduce our deficit and make sound economic decisions in the years to come. Put slightly differently, the danger isn’t that investors never get paid, but that the way they get paid makes them lose faith in the country’s management, which in turn forces the entire financial system to reevaluate the safety of a bedrock asset — which is essentially exactly what happened in the last financial crisis, but on a much larger scale.
Layering a constitutional crisis over political gridlock may work in the sense that the Obama administration will win the court case. But it’ll fail terribly in terms of sustaining the market’s confidence in our political system. That’s a step toward total breakdown, not evidence that agreement can eventually be reached and economic renewal achieved. 

The logic here makes sense against an alternative world in which Obama and the Republicans can cut a nice deal to lift the debt ceiling and reduce the deficit. But is that the world we live in? Klein is now arguing, in a post published a few hours after the previous one, that the negotiations appear to have failed. We're struck in a standoff where neither party may be able to give in.

Compared to that outcome, a constitutional fight that establishes the Treasury's ability to pay its already-committed debts without a separate vote from Congress -- that is, to do what every other advanced country does -- seems rather tame. Indeed, even aside from the prospects that these particular negotiations succeed, it seems to me that the existence of a debt ceiling vote in Congress is itself a large, ongoing risk factor. The debt ceiling vote was always a stick of dynamite lying around, but as long as the opposition party used it only to embarrass the president, it contained little systemic risk. The novel practice of the debt ceiling as a threat to force other parties to accept otherwise-unacceptable policy goals is completely new, and itself a kind of Constitutional crisis. Matthew Yglesias puts it well:

The basic idea here is that since the federal government will ultimately need to default on the national debt unless all three branches agree on a debt ceiling increase, the two branches controlled by Democrats should surrender entirely to the one branch controlled by Republicans. These things do happen. Once upon a time, the United Kingdom had a three branched system composed of King, Lords, and Commons. But over time it became established that all the real decision-making authority rested with the House of Commons, and we had a de facto unicameral system. The Lords and King lacked the democratic legitimacy to prevail in standoffs, so all power goes to the Commons.
But that would obviously be a total revolution in American constitutional practice, and nobody has laid the groundwork for it or offered an explanation of why you should think of President Obama as similar to a king. After all, if Cantor, McConnell, and Boehner are able to say “national default unless we have an all-cuts deficit reduction package,” then why not also say “national default unless we bomb North Korea” or “national default unless we reinstate Don’t Ask Don’t Tell?” Over the longer term, I don’t think serious people of any ideological persuasion seriously think it’ll be a good thing for America to turn all public policy debates into a series of hostage scenarios with debt default as the price.

Indeed, it's not even clear that the Republican leadership actually wants the enormous and destructive power it now demands. Its base may be demanding a debt ceiling showdown, out of specific opposition to Obama and general ignorance of how the debt ceiling works. But John Boehner knows full well that we can't just ignore the debt ceiling. If Obama successfully asserts the power to ignore the debt ceiling vote, then he'll allow the debt negotiations to proceed in a less fraught environment, and have defused a massive source of ongoing political instability. Cutting a deal to lift the debt ceiling may soothe the markets more in the short term, but it merely pushes the political risk further back.