After our most recent adventure with the debt ceiling, the peculiar American budgeting institution’s reputation may be at an all-time low. But many fiscal conservatives are still willing to defend the debt ceiling because they buy a reasonable, public-choice-flavored argument in its defense. To permanently do away with the debt ceiling, fiscal conservatives who oppose it must offer a clear answer to this defense that looks at the debt ceiling’s benefits and costs, as well as what could take its place.
The sophisticated defense of the debt ceiling goes something like this: If purely rational decision-makers were in control of our budgeting process, it’s true we wouldn’t need a debt ceiling. They would realize that choices about levels of spending and taxation imply another decision about necessary debt accumulation. But we don’t have a rational process; we have a political one. Politicians always have the incentive to please myopic constituents by spending more and taxing less, and they would like to sweep the consequences under the rug. Happily, the debt ceiling makes it harder for them to do that by forcing separate consideration of debt. Quite sensibly, Americans overwhelmingly disapprove of “more debt,” so they don’t like raising the debt ceiling. Sure, they don’t fully think through the implications of not raising the limit — recent polls revealed that more than a third of Americans believed that raising it was not essential. But the electorate’s distaste for debt still makes the showdowns opportune moments for considering the big picture and charting a course away from profligacy and fiscal ruin.
That argument is coherent and plausible-sounding, but that does not make it correct. And in fact, it suffers from a fatal flaw: Once fiscal-conservative opposition to debt coalesces around the mechanism of the debt ceiling, it has nowhere to go and must be dissipated in surrender. Republicans’ recent back-down was completely predictable.
A number of fiscal conservatives look back at the negotiations from 2011 and draw a very different conclusion: Then, they say, the debt ceiling did provide great leverage for fiscal conservatives to demand spending cuts. But they have drawn the wrong lesson. The debt ceiling has provided occasions for anti-debt speechifying for decades, and these moments have almost never yielded lasting budget change. Nor did it really provide the decisive advantage to Republicans in their marginally successful 2011 fight.
Instead, Republicans had leverage thanks to their historic gains in the 2010 congressional elections. President Obama felt compelled by that political result to seek some kind of “grand bargain” on spending cuts. There’s a good case to be made that more sensible and durable budget cuts could have been negotiated if the debt-ceiling deadline had not summarily ended the deliberations and left us with a hapless supercommittee and backup sequester, which remains likely to be reversed or quietly whittled away in the years to come.
So much for the supposed fiscal-conservative benefits of the debt ceiling. What about the costs?
Two kinds of defenders of the recent Republican debt-ceiling maneuver view the costs in different ways.
Type-1 defenders see the world and economics radically differently than I, and mainstream economists, do, and say that embracing the hard discipline imposed by a frozen debt ceiling would be no big deal, or even a good thing.
Type-2 defenders have a far more subtle argument: They say that debt-ceiling showdowns will always end in debt-ceiling raises, and that makes them okay. This is a somewhat puzzling argument — if everyone were to believe it, after all, then there would be no point in pretending that debt-ceiling negotiations offer anyone negotiating leverage. But, as noted above, debt-ceiling defenders tend to argue from a kind of realist perspective, and so they have a natural retort. Not everyone — in the electorate or in Congress — clearly sees the certainty of this endgame, and so threats retain some potency. Fiscal conservatives get a chance to take a stand against deficit spending, which will sometimes have beneficial effects, and when one thinks calmly and clearly about how the debt-ceiling game will end, the expected costs are nonexistent.
Others have done a good job of explaining why the Type-1 defense is badly mistaken, and I have argued above why I think the benefits of brinkmanship envisioned by Type-2 defenders are likely illusory.
But put aside logical argumentation for a moment and instead think probabilistically.
How sure are Type-1 defenders that hitting the debt ceiling will be a non-event? Scores of experts, from academia to Wall Street to corporate America, disagree with them, and say that the fallout would be awful. If type-1 defenders admit even a small chance, say 15 percent, that the experts are right, that ought to discredit the maneuver. Russian roulette with the nation’s economy is not a game anyone should be willing to play. (If people are willing to assign near-zero probability to the balance of expert opinion, perhaps we should be willing to ask what this says about the reliability of their judgment.)
What about the Type-2 defenders? They agree that the probability of disaster would be high if we hit the ceiling, but they estimate the probability of hitting it at zero. They look back at previous standoffs and see they didn’t end in disaster, notwithstanding breathless media coverage. Type-2 defenders are definitely thinking on a higher level than their type-1 counterparts, but they seem to be similarly misunderstanding tail risks and their consequences for expected value.
Suppose there are modest expected benefits for fiscal conservatives from using the debt ceiling as a weapon. And let us also suppose that the Type-2 argument is almost certainly correct.
Even a 1 percent chance that debt-ceiling brinkmanship will end in default would make the expected value for our nation (even from a purely fiscal perspective) deeply negative. A financial crisis or deep recession would do so much damage to our fiscal prospects that even a remote chance is enough to negate the possible benefits of using the debt ceiling as a weapon (which, moreover, has a limited chance of winning real policy victories). Playing Russian roulette with a hundred-chambered gun also isn’t a game we should be willing to play.
Of course, if Type-2 defenders believe the probability they are wrong is negligible, they will be unmoved by this argument. But such certainty about their own clever read of the situation sits uneasily with little-c conservative habits of mind. Emphasizing the fallibility of all people, as conservatives do, should awaken us to the very real possibility that our government leaders will fail to make things work out as smoothly as logic seems to dictate, so we should steer far away from this kind of maneuver.
If fiscal conservatives are convinced by my arguments, they can use ending the debt ceiling as an opportunity to implement some alternative mechanism better suited to advancing their aims. There are plenty to choose from: New Zealand requires its treasury minister to provide an explanation whenever debt deviates from “prudent levels,” and we could follow suit by creating a statutory requirement for leaders of both parties to offer asterisk-free debt-reduction plans when they authorize deficit spending. If we despair of fixing our budget process, we could at least change the consequences of perennial failure by requiring continuing resolutions to automatically push us toward budget balance, so that an unsustainable trajectory could not be sustained simply through inertia. Or we could take another whack at “No Budget, No Pay”: The largely forgotten compromise of early 2013 put a rule into place that required each chamber of Congress to pass a budget to receive their pay on time, but it said nothing about forcing the two houses to cooperate with each other. “No Budget Compromise between the House and Senate, Late Pay” isn’t much of a slogan, but why not give it a try? For more on these possibilities and others, I have a new post at Brookings’s FixGov blog.
Whatever fiscal conservatives choose, they must find a way to make fiscal tradeoffs evident to voters so that hard decisions get made. Achieving this kind of clarity will undoubtedly be difficult for fiscal conservatives. (Even harder will be doing so in a way that does not simply lead the public to forsake the least well-off—Tyler Cowen’s rueful prediction in his bracing new book, Average is Over.) Having a fiscally responsible democracy is hard.
But it isn’t impossible. “Holding the line on the debt ceiling” is. The more fiscal conservatives rally behind the debt ceiling as their standard, the harder they’ll find it to put their principles into practice.
— Philip A. Wallach is a fellow at the Brookings Institution.