Republican Strategy for the Debt Ceiling Crisis

We are coming up on the deadline for raising the debt ceiling of the country. What should Republican strategy be on this issue?

In the end, the debt ceiling is going to be raised. The question is whether the Republicans can get something in return. Last time they got the sequester only because Obama didn't think they would have the brass to use it. The sequester is a clumsy tool in that it is impacting our defense capabilities in an unhelpful way. But it has worked, which is the reason why Obama is not likely to accede to another one.

But the president has given a critical opening to the Republicans in the House. In a breathtaking example of his refusal ever to take responsibility, the president is arguing that Congress needs to raise the debt ceiling because all the bills that need to be paid are Congress' spending! Of course, this is technically true in that no money can be spent except as approved by Congress. But the reality is that Congress accedes to the priorities of an administration and it has been historically considered that the president is responsible for the levels and priorities of spending.

But if the president's position is that Congress is responsible for spending, then the smart thing for Republicans in the House to do is to take him at his word and seize the day!

Let's look briefly at the spending problem. Stick with me here. There are only a few charts, but each one makes an important point.

Chart I shows Federal Receipts and Outlays from 1953 through estimates for 2013. (All charts start with 1953, the first year of the Eisenhower administration, because that is the first year of normalcy -- as Warren Harding put it -- following World War II, demobilization, and remobilization for the Korean War.)

 

The important year here is 2009, the first year of the Obama administration. The vertical orange line on all charts is 2008, the last year of the Bush administration.

The first red arrow highlights the size of the deficit in 2008, which ran approximately $500 billion ($459 billion). The second red arrow shows the deficit growing by $1 trillion to $1,400 billion ($1.413 trillion) in 2009, the first year of the Obama administration. This breaks down essentially to an increase of $500 billion in spending and a decrease of $500 billion from lower tax receipts from the deep recession caused by the housing and financial crisis.

Where did that additional $500 billion in spending go to in 2009? That was the stimulus, which could also be seen as the "spoils of victory" as Obama handed out rewards to his supporters, primarily in the public sector unions. That spending was also in accord with Keynesian economic theory of increasing spending during economic slowdowns to restart the economy.

You see a very important thing in Chart I, or, as Sherlock Holmes might say, you don't see a very important thing in Chart I. Do you see what it is?

If the $500 billion in additional spending in 2009 was stimulus spending, that is a one-time deal! There should be give-back in 2010 or 2011. But that "one-time" spending goes on and on. God only knows who it is going to.

How did the administration pull that off? In 2009, the Democrats controlled both houses of Congress and they pushed through their budget (not the Bush budget for 2009 as they like to claim). Then, after that, they refused to pass another budget! After they lost the House in 2010, the government has been financed with continuing resolutions, which key off the spending -- called the baseline spending -- of the previous year. So, the emergency spending of 2009 got folded into the baseline spending! Pretty slick. The Democrats had to ignore the budget law to do it, but as Stalin observed, you can't make an omelet without breaking a few eggs.

We have to be fair here. While the administration blew out the budget in 2009, it is also the case (a) that the bill for the welfare state is now coming due as the baby boomer generation retires (1945 + 65 = 2010); and (b) we had the worst recession since the Great Depression in 2009. The problem is that administration is not willing to trim its priorities to adjust to these facts.

Chart II shows the results of these record deficits:

 

The red arrow emphasizes the point that debt as a percent of GDP exploded from 70% at the end of the Bush administration to an estimated 108% at the end of this year (after the debt ceiling is raised and we start borrowing again).

Big problemo! Nobody now living knows where the breaking point is on federal debt. But we don't want to Detroit the country! (Technically, the federal government will always be able to pay its bills because it can print money. But if the day comes when it is perceived as doing that, the value of the dollar will collapse and Detroit will look like a walk in the park.)

The point is that we can't go on like this. And as economist Herbert Stein observed, something that can't go on has to stop.

We have to get the finances of the federal government under control. This is the opportunity that president has given House Republicans by arguing that the bills his administration has rung up are Congress' responsibility.

What to do?

Put spending on a glide path to solvency. It is an achievable goal in the current crisis. It does not require any drastic action before approving a debt ceiling increase. What it does require is getting the president to sign on to a glide path. He will certainly not want to do it, but that is what public argument and private negotiation are for. It is what power is for, and the House has the power to hold out on the budget. It is what governing is for. If you didn't come to Washington to prevent the Republic from being Detroited, what are you here for?

Charts III and IV show what this would look like:

 

Note that Chart III goes to 2013 as do Charts I and II, but that Chart IV goes to 2019.

Chart III shows federal spending as a percent of GDP. The red arrow emphasizes the surge in spending in the first year of the Obama administration. Spending surged to 25% of GDP that year, a peacetime record.

The arithmetic is obvious, but is worth stating anyway. There is only 100% of the pie. We can talk about "growing our way out of the problem" and lowering tax rates to stimulate the economy and they are important. But there is only 100% of the economy. The more the federal government takes, the less the private sector retains. And what is not shown on Chart III is that state and local governments now account for 18% of GDP. So if we add federal + state and local spending we get 43% in 2009! That is quite a load for the private sector to carry.

Chart IV shows what the Republicans should do: establish a glide path back to solvency and get the president to sign on to it. It is based on getting spending back to 20% of GDP, the average since the beginning of the Eisenhower administration. Wiser heads may say that this number needs to be greater than 20%. OK. Let's get that out in the open and negotiate it. But let's have some limit rather than ratcheting it up to higher and higher percents of GDP, which is pretty obviously the Democrats' stealth strategy.

Why might this happen? First, the president is not selling his level of spending. He pretends that the 2009 spending was left over from the Bush administration, meaning he is not owning it. Further, the president is taking credit for the reduction in spending as a percent of GDP in subsequent years of his administration even though it remains at essentially record levels by this measure, matched only by two years in the Reagan administration. So the president is not selling himself as "the 25% man."

A glide path still allows room for nominal growth in spending in the next six years, about 2.5% per year. This is nominal spending, meaning not adjusted for inflation, so it is actually a very small real increase in spending.

Doubtless, many AT readers are going to say that this strategy is lame because it does not involve any changes between now and October, when the debt ceiling runs out. Well, politics is the art of the possible. This strategy turns a lot of the president's arguments on him. In the out years, these numbers that look very calm on Chart IV will be a very tight corset for the federal government. They will require intense management of affairs and many changes in entitlements -- means testing, qualifications testing, less benefits. We can expect a high level of Pelosiation, meaning shrieks of agony as reality crashes into Democratic fantasies. But do we want to Detroit the country?

This an exit ramp off the highway to Detroit for the US of A. 

We are coming up on the deadline for raising the debt ceiling of the country. What should Republican strategy be on this issue?

In the end, the debt ceiling is going to be raised. The question is whether the Republicans can get something in return. Last time they got the sequester only because Obama didn't think they would have the brass to use it. The sequester is a clumsy tool in that it is impacting our defense capabilities in an unhelpful way. But it has worked, which is the reason why Obama is not likely to accede to another one.

But the president has given a critical opening to the Republicans in the House. In a breathtaking example of his refusal ever to take responsibility, the president is arguing that Congress needs to raise the debt ceiling because all the bills that need to be paid are Congress' spending! Of course, this is technically true in that no money can be spent except as approved by Congress. But the reality is that Congress accedes to the priorities of an administration and it has been historically considered that the president is responsible for the levels and priorities of spending.

But if the president's position is that Congress is responsible for spending, then the smart thing for Republicans in the House to do is to take him at his word and seize the day!

Let's look briefly at the spending problem. Stick with me here. There are only a few charts, but each one makes an important point.

Chart I shows Federal Receipts and Outlays from 1953 through estimates for 2013. (All charts start with 1953, the first year of the Eisenhower administration, because that is the first year of normalcy -- as Warren Harding put it -- following World War II, demobilization, and remobilization for the Korean War.)

 

The important year here is 2009, the first year of the Obama administration. The vertical orange line on all charts is 2008, the last year of the Bush administration.

The first red arrow highlights the size of the deficit in 2008, which ran approximately $500 billion ($459 billion). The second red arrow shows the deficit growing by $1 trillion to $1,400 billion ($1.413 trillion) in 2009, the first year of the Obama administration. This breaks down essentially to an increase of $500 billion in spending and a decrease of $500 billion from lower tax receipts from the deep recession caused by the housing and financial crisis.

Where did that additional $500 billion in spending go to in 2009? That was the stimulus, which could also be seen as the "spoils of victory" as Obama handed out rewards to his supporters, primarily in the public sector unions. That spending was also in accord with Keynesian economic theory of increasing spending during economic slowdowns to restart the economy.

You see a very important thing in Chart I, or, as Sherlock Holmes might say, you don't see a very important thing in Chart I. Do you see what it is?

If the $500 billion in additional spending in 2009 was stimulus spending, that is a one-time deal! There should be give-back in 2010 or 2011. But that "one-time" spending goes on and on. God only knows who it is going to.

How did the administration pull that off? In 2009, the Democrats controlled both houses of Congress and they pushed through their budget (not the Bush budget for 2009 as they like to claim). Then, after that, they refused to pass another budget! After they lost the House in 2010, the government has been financed with continuing resolutions, which key off the spending -- called the baseline spending -- of the previous year. So, the emergency spending of 2009 got folded into the baseline spending! Pretty slick. The Democrats had to ignore the budget law to do it, but as Stalin observed, you can't make an omelet without breaking a few eggs.

We have to be fair here. While the administration blew out the budget in 2009, it is also the case (a) that the bill for the welfare state is now coming due as the baby boomer generation retires (1945 + 65 = 2010); and (b) we had the worst recession since the Great Depression in 2009. The problem is that administration is not willing to trim its priorities to adjust to these facts.

Chart II shows the results of these record deficits:

 

The red arrow emphasizes the point that debt as a percent of GDP exploded from 70% at the end of the Bush administration to an estimated 108% at the end of this year (after the debt ceiling is raised and we start borrowing again).

Big problemo! Nobody now living knows where the breaking point is on federal debt. But we don't want to Detroit the country! (Technically, the federal government will always be able to pay its bills because it can print money. But if the day comes when it is perceived as doing that, the value of the dollar will collapse and Detroit will look like a walk in the park.)

The point is that we can't go on like this. And as economist Herbert Stein observed, something that can't go on has to stop.

We have to get the finances of the federal government under control. This is the opportunity that president has given House Republicans by arguing that the bills his administration has rung up are Congress' responsibility.

What to do?

Put spending on a glide path to solvency. It is an achievable goal in the current crisis. It does not require any drastic action before approving a debt ceiling increase. What it does require is getting the president to sign on to a glide path. He will certainly not want to do it, but that is what public argument and private negotiation are for. It is what power is for, and the House has the power to hold out on the budget. It is what governing is for. If you didn't come to Washington to prevent the Republic from being Detroited, what are you here for?

Charts III and IV show what this would look like:

 

Note that Chart III goes to 2013 as do Charts I and II, but that Chart IV goes to 2019.

Chart III shows federal spending as a percent of GDP. The red arrow emphasizes the surge in spending in the first year of the Obama administration. Spending surged to 25% of GDP that year, a peacetime record.

The arithmetic is obvious, but is worth stating anyway. There is only 100% of the pie. We can talk about "growing our way out of the problem" and lowering tax rates to stimulate the economy and they are important. But there is only 100% of the economy. The more the federal government takes, the less the private sector retains. And what is not shown on Chart III is that state and local governments now account for 18% of GDP. So if we add federal + state and local spending we get 43% in 2009! That is quite a load for the private sector to carry.

Chart IV shows what the Republicans should do: establish a glide path back to solvency and get the president to sign on to it. It is based on getting spending back to 20% of GDP, the average since the beginning of the Eisenhower administration. Wiser heads may say that this number needs to be greater than 20%. OK. Let's get that out in the open and negotiate it. But let's have some limit rather than ratcheting it up to higher and higher percents of GDP, which is pretty obviously the Democrats' stealth strategy.

Why might this happen? First, the president is not selling his level of spending. He pretends that the 2009 spending was left over from the Bush administration, meaning he is not owning it. Further, the president is taking credit for the reduction in spending as a percent of GDP in subsequent years of his administration even though it remains at essentially record levels by this measure, matched only by two years in the Reagan administration. So the president is not selling himself as "the 25% man."

A glide path still allows room for nominal growth in spending in the next six years, about 2.5% per year. This is nominal spending, meaning not adjusted for inflation, so it is actually a very small real increase in spending.

Doubtless, many AT readers are going to say that this strategy is lame because it does not involve any changes between now and October, when the debt ceiling runs out. Well, politics is the art of the possible. This strategy turns a lot of the president's arguments on him. In the out years, these numbers that look very calm on Chart IV will be a very tight corset for the federal government. They will require intense management of affairs and many changes in entitlements -- means testing, qualifications testing, less benefits. We can expect a high level of Pelosiation, meaning shrieks of agony as reality crashes into Democratic fantasies. But do we want to Detroit the country?

This an exit ramp off the highway to Detroit for the US of A.