Refusing once again to take any responsibility for the recent downgrade or any negative events (or lack of positive ones) during the last two years, the president gave a speech last night explaining how the debt-ceiling fight — i.e. those stubborn republicans — was to blame for S&P’s decision.
THE PRESIDENT: And we didn’t need a rating agency to tell us that the gridlock in Washington over the last several months has not been constructive, to say the least. We knew from the outset that a prolonged debate over the debt ceiling — a debate where the threat of default was used as a bargaining chip — could do enormous damage to our economy and the world’s. That threat, coming after a string of economic disruptions in Europe, Japan and the Middle East, has now roiled the markets and dampened consumer confidence and slowed the pace of recovery.
First, let’s set the record straight. The president and Mr. Geithner were the ones waving the threat of default. Second, there is no doubt that fights like this one are less than ideal. But who truly believes that we would have had a deficit-reduction deal if it weren’t for the debt-ceiling fight? Keith Hennessey doesn’t. He writes:
The President’s key implicit and false assumption is that deficit reduction would have been enacted without this legislative threat. He argues that, since both sides agree on the need to reduce the deficit, the threat was unnecessary.
Let’s review recent history:
In January the President’s State of the Union address focused on increasing government “investment.”
The President offered his second budget speech only after House Republicans passed the Ryan budget. He claimed to match Republicans’ $4T of deficit reduction, but later conceded that he was proposing $2.7 T over the same timeframe. He still has not provided scorable policy specifics.
The Senate Democratic majority never began the budget process, providing no venue for negotiations with the House Republicans.
The President began his negotiations with the Speaker only after Republican leaders made clear that a debt limit increase must be accompanied by equal or greater spending cuts.
Had Congressional Republicans not taken a clean debt limit increase hostage, there is no way Washington would have [promised to] cut [future] discretionary spending as much as it just did.
The legislative threat was necessary to achieve spending cuts and deficit reduction.
Hennessey continues to explain that he thinks the fight was effective. I am not sure I agree. As you know, I was disappointed with the deal. I was hoping for some biting institutional reforms to tie Congress’s hands in the future. I was also naively hoping that we could take a few steps forward to address the entitlement crisis, such as bloc granting Medicaid. Obviously, that didn’t happen.
Hennessey’s argument is that this debt-ceiling fight sets a precedent that any future increases will be linked to spending cuts. Chairman Ryan made the same point the day after the debt-ceiling deal was signed by the president:
While far from perfect, the Budget Control Act achieves two-thirds of the discretionary spending cuts called for in the House-passed budget and establishes in law binding caps on government agency spending. Both parties also worked together to establish a clear precedent that any future debt limit increases must be matched by an even larger cut in government spending.
We can only hope that it is the case and that next time around we will get real spending cuts. By the way, Ryan’s response to Gene Sterling about whether or not the super-committee can raise taxes is worth reading. The whole thing is here.