This could be the most economically irresponsible backroom deal in Republican history
ROBERT REICH in Robertreich.Substack.Com
After that, the Treasury Department will be forced to take
“extraordinary measures” to avoid defaulting on the debt, which would likely
trigger a global financial crisis.
Congress could defuse this bomb by simply raising the debt limit, as it has dozens of times under presidents of both parties for decades.
But the MAGA radicals now in control of the House of Representatives are
refusing to raise the debt ceiling unless President Biden agrees to devastating
cuts to Social Security, Medicare, and other key programs.
I was involved in a similar fight over the debt ceiling fight twenty-eight years ago, which holds some lessons for what happens now.
In November 1995, Republicans refused to raise the debt ceiling
unless Bill Clinton agreed to a package of sweeping spending cuts, welfare
overhaul, restraints on Medicare and Medicaid growth, and a balanced budget
within seven years.
I and other Clinton advisers urged him not to negotiate. Even if
the public didn’t understand that the debt ceiling had less to do with the nation’s future debt
than with obligations the United States had made in the past, we
couldn’t allow the Republicans to hold the economy hostage. The full faith and
credit of the United States was at stake. It should not be negotiable.
Clinton agreed. “If they send me a budget that says simply, ‘You
take our cuts or we’ll let the country go into default,’ I will veto it,” he
said. He called the Republican tactics “economic blackmail,” which they were.
When the Republican House then passed a bill increasing the debt ceiling through December, as well as a continuing resolution that included higher Medicare premiums and other spending cuts, Clinton vetoed both bills.
“America has never liked pressure tactics, and I would be wrong to permit these
kind of pressure tactics to dramatically change the course of American life,”
he said. “I cannot do it, and I will not do it.”
What happened next? The government shut down. And as you may
recall, the American public was furious — with the Republicans, who paid dearly
in the subsequent midterm elections.
The budget standoff was resolved in early January 1996 but the
debt ceiling issue remained. When Treasury Secretary Robert Rubin wrote to
Speaker of the House Newt Gingrich that Congress had only until March 1 before
the Treasury defaulted on its obligations, Moody’s rating agency announced it
was considering downgrading the rating on U.S. Treasury bonds.
Republicans quickly folded, offering to raise the debt ceiling
in return for a few modest measures.
The debt ceiling fight of 2011 was different. The Obama administration did negotiate with House Republicans, resulting in the Budget Control Act of 2011.
When the debt ceiling had to be raised again
in 2013, Obama returned to negotiations. During this standoff, the government
was partially closed down. Here again, Republicans took the brunt of the blame.
In these fights, some Republicans presented a fallback position:
Instead of raising the debt ceiling, the federal government should prioritize which
bills to pay — starting with interest payments to lenders to the United States
(holders of federal bonds). That way, they argued, there’d be no technical
default.
The idea never went anywhere because such prioritization would
still spook credit markets. It would also cause the economy to tank and the
stock market to plunge because of the sudden elimination of huge amounts of
government spending.
But now, so-called “debt prioritization” is back. According to Friday’s Washington Post, it was part of the secret agreement Kevin McCarthy made with his detractors to support him for Speaker.
They agreed that
when Republicans hold firm on not raising the debt ceiling, they’ll pass a bill
instructing the Treasury to prioritize: 1) first, debt service payments, 2)
next, Social Security, Medicare and veterans benefits, and 3) third, military
funding.
Everything else would be sacrificed—including critical federal expenditures
such as Medicaid, food safety inspections, border control, and air traffic
control. The U.S. would be forced to halt payment for as much as 20 percent of
money it already promised to spend.
This could be the most economically irresponsible backroom deal
in Republican history (even conservative economists are warning that the
consequences could include a stock-market spiral and significant job losses).
It’s also the most politically foolish. It would, in effect, put
the interest of bondholders — including Chinese lenders to the United States —
over the wellbeing of Americans.
As George W. might say, “bring ‘em on.”
© 2021 robertreich.substack.com
ROBERT REICH is the Chancellor's Professor of Public Policy at the University of California, Berkeley, and a senior fellow at the Blum Center for Developing Economies. He served as secretary of labor in the Clinton administration, for which Time magazine named him one of the 10 most effective cabinet secretaries of the twentieth century. His book include: "Aftershock" (2011), "The Work of Nations" (1992), "Beyond Outrage" (2012) and, "Saving Capitalism" (2016). He is also a founding editor of The American Prospect magazine, former chairman of Common Cause, a member of the American Academy of Arts and Sciences, and co-creator of the award-winning documentary, "Inequality For All." Reich's newest book is "The Common Good" (2019). He's co-creator of the Netflix original documentary "Saving Capitalism," which is streaming now.