The debt ceiling train wreck

With a Republican president and a Republican Congress, raising the debt ceiling should be no big deal. But what about this Republican president and this Republican Congress? In a battle of dysfunction, America’s economy stands on the brink.

President Donald Trump has asked Congress to pass a “clean” increase to the debt ceiling before our current borrowing capacity of $19.85 trillion is exhausted sometime in September or October. That is to say, he wants the House and Senate to authorize the treasury to borrow money to pay for the spending Congress has already approved. That’s a good thing because failing to do so would be calamitous.

We don’t know precisely what would happen if the federal government stopped being able to pay all its bills because it’s never happened. But a good bet is a credit downgrade — the U.S. got its first-ever downgrade merely as a result of uncertainty about raising the limit in 2011. That means the government would pay higher interest rates on its debt, making its financial problems worse. And those higher rates would inexorably trickle into the consumer market, leading to higher rates for mortgages, credit cards, car loans and the like. Meanwhile, some government bills would go unpaid, meaning interruptions to everything from federal worker salaries to payoffs on treasury notes.

Based on the historical pattern, a debt ceiling increase in a time when the White House and Congress are controlled by one party should be easy, with some predictable, cheap political point-making by the opposition party that reflects no real conviction but merely opportunism. Recall, for instance, Illinois Sen. Barack Obama opining in 2006 that raising the debt limit under President George W. Bush represented a “failure of leadership,” and President Barack Obama called Republicans “dysfunctional” for their refusal to pass a clean debt ceiling increase in 2011 and “reckless” when they did the same thing in 2013.

But bizarrely, this time it is the party in power in Congress and the White House that is engaging in the brinkmanship. Key GOP lawmakers in the House are saying they won’t go along with Mr. Trump’s request for a clean increase but will only vote for a bill that also includes sharp spending reductions — the same tactic tea party members used against President Obama. Essentially, they offer a choice between tanking the economy by driving up interest rates and ending the dollar’s run as the world’s default currency or tanking the economy by drastically cutting federal spending, likely with the biggest effects on the poor. When President Obama agreed to the package of budget cuts known as sequestration in exchange for a debt ceiling increase in 2011, it sent Maryland’s economy (and that of Virginia) into a tailspin.

Even more bizarrely, the Trump administration flirted for months with embracing debt ceiling hostage-taking. Although Treasury Secretary Steven Mnuchin has long advocated a clean increase, Budget Director Mick Mulvaney — who as a new Congressman seven years ago questioned whether a default would really be “the end of the world” — floated the idea of using the vote as an opportunity to demand concessions on spending cuts. The Mnuchin faction appears to be in control at the moment, but if we’ve learned anything about the Trump administration so far, it’s not to bet on consistency.

Moreover, real risks lie ahead if the conservative Freedom Caucus tries to use the debt limit as leverage for its goals. If so, Congressional leaders could seek to get Democratic votes for an increase, and they may well seek to extract concessions of their own. Notwithstanding their ire over Republicans’ refusal to give President Obama clean debt ceiling increases, some Democrats have suggested demanding limits on new tax cuts for the wealthy or an abolition of the debt ceiling altogether — either of which would be a good idea but anathema to the White House. That would leave President Trump with the choice to giving in to the Democrats or joining with renegade Republicans on an approach that part of the administration likes already. Meanwhile, the president is in an open feud with the Senate majority leader, Mitch McConnell, who plays a vital role in determining the debt ceiling outcome. What could go wrong?

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