Klein believes that we shouldn’t open the can of worms of a Constitutional battle that would have to play out in the courts. He believes – and said yesterday that they debt limit negotiations have failed, but he oddly tempers that despair in arguing to let the process play out:
There’s every reason to believe that the markets expect, and have even priced in, a typical political tussle over the debt ceiling. Frustrating as it may be, what we’re seeing right now is politics-as-usual, and markets tend to take a benign view of Washington’s constant dramas. In 1995, Congress and the president gridlocked over not just the debt ceiling, but also the appropriations bills, yet bond rates barely budged. Now, if the standoff hadn’t eventually been resolved, the market would’ve panicked. But it was resolved. And that further taught the market to ignore these periodic eruptions of Beltway hysteria. When the time comes, the American government always pays its debts.
But that confidence is, I suspect, largely dependent on this debt-ceiling fight looking pretty much like past debt-ceiling fights. So long as bond traders are calling their political fixers and hearing reassuring things about how they’ve seen this before and this is just how Washington works and there’s no way that Boehner and Obama won’t come to a deal before Social Security checks stop going out, they’ll give us time to work it out. What we don’t want them to do is call their political fixers and, after a long silence, hear, “No. I’ve never seen anything this before. I don’t know how this is going to play out.”
This is a very reassuring take compared to… Ezra Klein yesterday. There, he was saying that the parties are “trying to position themselves politically to survive the consequences of their failure,” and that “we’re very likely to get to the point where we have to stop funding certain government services, which could mean as little as delaying payments to military contractors and hospitals or as much as halting Social Security checks.” Given the news today from S&P that they would view any default on even unaffected Treasuries with a significant downgrade, the likely scenario that Klein outlines is very likely to lead to higher borrowing costs. The only way out of that is a reading of the Constitution that allows the government to pay its debts.
But there’s another reason to explore this option (at the very least as something you can threaten, virtually the only leverage the Administration has left). I’m not only worried about the problem of the debt limit. I’m worried about the solution. Near-term fiscal contraction is going to kill an already sick economy. If anything will produce market uncertainty, it’s a double-dip recession, which is entirely possible in an extreme scenario where there’s a lot of deficit reduction at the federal level to match all of it at the state level. No less than Bill Clinton explains this:
“If they [the Republicans] said, look, that now is not the time for big tax increases to harm the recovery, they would be right,” Clinton told ABC News in an exclusive interview at the Clinton Global Initiative America conference in Chicago. “But it’s also right to say that now’s not the time for big spending cuts.
“What I’d like to see them do is agree on the outlines of a 10-year plan and agree not to start either the revenue hikes or the spending cuts until we’ve got this recovery underway,” Clinton added. “The confidence that the Republicans say would be given to investors with a budget plan, they’d get whether we started this year or next year or the year after that, for that matter.”
For the first time, the former president is focusing his Clinton Global Initiative on creating jobs here in the United States. He suggested waiting for the recovery to take hold before pushing spending cuts and tax increases will make the issues clearer.
“We’ve got to get the jobs back in this economy again,” Clinton said. “The more people we get going back to work, the more businesses we start, that’ll bring up the revenue flow, and it will cut down on the expenses. Then, we’ll see what the real dimensions of our problem are.”
That’s exactly right. It’s why the best course of action on the deficit remains doing nothing, letting the Bush tax cuts expire and accomplishing the entire $4 trillion in deficit reduction that everyone is on about. And this can be part of the President’s message when he announces the strategy to ignore the debt limit. “Lest the markets think that this is a pullback from seriously looking at our fiscal obligations, I will make a vow today: I will veto any budget bill that comes to my desk which does not achieve what is assumed in the CBO baseline, which brings the deficit into primary balance.” At that point you let Congress sort it out, with a clear delineation of responsibilities: Congress sets the spending priorities, the executive pays the bills they ring up.
See, I view two sides to this: the consequences of disaster, and the consequences of the resolution. In the “wait for a solution” scenario, there are near-term consequences in allowing some kind of default event, and there are near-term consequences in the solution. In the “constitutional option” scenario, there are no near-term consequences as long as the bills get paid, and there are no near-term consequences in the solution, because deficit reduction gets put off until the end of 2012. I just think that’s far more responsible given the state of the economy.
Besides, Republicans don’t think there are any consequences to letting the debt limit expire. Let’s prove them right!
UPDATE: And Matt Yglesias adds another factor. Regardless of the deal made on the debt limit, the very idea of making a deal where policy items are conceded on this routine procedure has negative implications for the future.