The current debt-ceiling dramatics put politicians at center stage in a high-stakes drama, and provide onlookers with a mixture of amusement, disgust and sheer horror at the dismal spectacle of the nation’s credit standing held hostage to intractable disputes over taxes and spending. There has to be, one intuitively feels, a better way. And there is.
The idea is simple: Decouple debt service — payment of interest and principal due on the nation’s debt – from budgetary disputes.
What is pulling both sides towards the brink, despite near-unanimity on the necessity of avoiding a default caused by failure to pay interest and principal in full and on time, is that debt service is enmeshed in the long-running, highly emotional policy disputes on the budget. These disputes reflect deep-rooted philosophical differences between the two parties on the size of government, who pays for it and how powers are distributed between the federal and local governments. The only way to resolve these issues without risk of default is to separate the issue everyone agrees on — the need to responsibly service debt — from those that generate deep divisions in the body politic.
So how can we implement procedures to avoid the appalling spectacle of the world’s leading power seemingly unable to discharge its obligations in a timely, orderly manner?
Congress should pass a law mandating that the debt ceiling is automatically adjusted as necessary to permit full payment of interest and any principal currently due, without additional action by Congress or the president. Budget matters must be expressly denied inclusion in any automatic ceiling adjustment.
Voter cynicism with politics is fueled by these periodic political contests that amount to a high-stakes game of political chicken. Politicians are forced, for their part, to take bet-the-company risks, with consequences that are catastrophic for the country as a whole, and equally so for the political party that shoulders primary blame.
Budget matters should not be resolved now in a long-term deal. Neither the 2008 nor 2010 elections turned on budget priorities. President Obama campaigned on his broad theme of “hope and change you can believe in,” restoring economic growth and redistributing wealth. The GOP off-year sweep of 2010 turned on excessive spending and a poor economy, but off-year elections, as politics maven Jay Cost notes, do not confer full mandates. Only when a party takes the White House can it plausibly proclaim a mandate for major change.
Thus the 2012 election should be fought not simply on the economy, but also on the longer-term picture of where America should go. Most Democrats, including President Obama and the Congressional leadership, desire a European-style welfare state with a vast federal establishment, dominant over state governments and the private sector as well. European-level spending would be financed by huge tax increases, targeting not simply the wealthy but of necessity, the middle class as well. Such requires a government of at least a 25 percent share of gross domestic product; European government GDP shares can top 50 percent.
Republicans seek a return to the historic share of GDP claimed by the federal government, around 18 percent. Taxes would be lower and flatter. Closing loopholes, which would raise tax revenues, would be offset by cutting tax rates and additional spending cuts. State governments would take over many responsibilities that the federal government has claimed over the past 80 years. While not small by any stretch of the imagination, the GOP federal government would no longer be the leviathan Democrats champion.
These public policy issues are of grand sweep, affecting those not yet born as well as those presently alive. They need not be saddled with hundreds of billions, perhaps even a trillion dollars or more, of added interest rate charges in the coming years due to a technical default, now or in the future.
While passing an automatic escalator removes the risk of technical default, the risk of a credit rating downgrade would remain, if the nation fails to solve its budgetary problems. Those problems can only be resolved, ultimately, by the 2012 election. Put simply, the conditions for a constructive grand bargain are not present. And the idea that the crucible of default pressure can force solution to budget disputes ignores vast chasms of bedrock disagreement and thus invites hasty, poorly-crafted compromises.
A national conversation on budget priorities should not be conducted under the gun of looming debt service default. The issues are too important for the two to be conflated. Doing so risks a default virtually no one wants, for inability to agree on issues only the voters can settle, come 2012.
Congress should put a permanent end to debt ceiling dramatics, by passing a mandatory debt service adjustment. Dramatics belong in the theater, with actors who on stage are more compelling than politicians playing financial chicken.