Next on the Agenda for Washington: Fight Over Debt
The down-to-the-wire partisan struggle over cuts to this year’s federal budget has intensified concern in Washington, on Wall Street and among economists about the more consequential clash coming over increasing the government’s borrowing limit.
Congressional Republicans are vowing that before they will agree to raise the current $14.25 trillion federal debt ceiling — a step that will become necessary in as little as five weeks — President Obama and Senate Democrats will have to agree to far deeper spending cuts for next year and beyond than those contained in the six-month budget deal agreed to late Friday night that cut $38 billion and averted a government shutdown.
Republicans have also signaled that they will again demand fundamental changes in policy on health care, the environment, abortion rights and more, as the price of their support for raising the debt ceiling.
In a letter last week, Treasury Secretary Timothy F. Geithner told Congressional leaders the government would hit the limit no later than May 16. He outlined “extraordinary measures” — essentially moving money among federal accounts — that could buy time until July 8.
Once the limit is reached, the Treasury Department would not be able to borrow as it does routinely to finance federal operations and roll over existing debt; ultimately it would be unable to pay off maturing debt, putting the United States government — the global standard-setter for creditworthiness — into default.
The repercussions in that event would be as much economic as political, rippling from the bond market into the lives of ordinary citizens through higher interest rates and financial uncertainty of the sort that the economy is only now overcoming, more than three years after the onset of the last recession.
Given the short time frame for action and the prospect of an intractable political clash, leaders in both government and business are already moving to avert a crisis that most likely would be “a recovery-ending event,” as Ben S. Bernanke, the Federal Reserve chairman, testified recently in the Senate. He described a sequence of events that “would cascade through the financial markets,” provoking another credit crisis like that in 2008 and causing interest rates to jump.
Mr. Geithner has been meeting privately with senior lawmakers of both parties to underscore the economic stakes. At the White House, Mr. Obama’s chief economic adviser, Gene Sperling, peeled away from the spending fight in recent weeks to turn nearly full time to developing the administration’s strategy for the debt-limit debate.
Central to that, administration officials say, is whether Mr. Obama initiates bipartisan talks on a long-term debt-reduction plan that tackles taxes, military spending and fast-growing entitlement programs like Medicare and Medicaid.
Executives of the nation’s largest financial institutions in recent days met with Mr. Geithner, House Speaker John A. Boehner, Republican of Ohio, and other lawmakers, arguing for the importance of raising the debt ceiling. Jamie Dimon, the chief executive of JPMorgan Chase, told them that his bank had devised contingency plans to protect its global business in the event of a default.
“If anyone wants to push that button, which I think would be catastrophic and unpredictable, I think they’re crazy,” Mr. Dimon said recently at the United States Chamber of Commerce.
The United States is one of the few nations that limits its debt by law, and votes in Congress to raise the ceiling, something that happens every few years, are perhaps the least popular that lawmakers face.
Financial and government leaders alike have grown accustomed to some political brinkmanship over raising the cap, confident that Congress ultimately would do so, usually with the party holding the White House supplying most votes. (So it was that Mr. Obama, as a Democratic senator in 2006, voted against a Bush administration request to raise the debt limit; it passed with mostly Republican votes.)
What makes this year different, people in both parties say, is the large number of Congressional Republicans, including the many newcomers who gave the party a House majority, who are strenuously opposed to government spending, and egged on by the activist Tea Party movement to use the leverage of the debt-limit vote to make their stand.
“We want to see real structural, cultural-type changes tied to this debt ceiling. We’re not interested in a one-off kind of savings, or anything small,” said Representative Mick Mulvaney, a first-term Republican from South Carolina. “There has got to be game-changing kinds of changes to get us to vote for it.”
He dismissed warnings about default as “just posturing,” and said Democrats should bear the responsibility for passing any measure to increase the borrowing limit.
“It’s their debt,” he said. “Make them do it. That’s my attitude.”
In fact, the debt was created by both parties and past presidents as well as Mr. Obama.
Of the nearly $14.2 trillion in debt, roughly $5 trillion is money the government has borrowed from other accounts, mostly from Social Security revenues, according to federal figures. Several major policies from the past decade when Republicans controlled the White House and Congress — tax cuts, a Medicare prescription-drug benefit and wars in Iraq and Afghanistan — account for more than $3.2 trillion.
The recession cost more than $800 billion in lost revenues from businesses and individuals and in automatic spending for safety-net programs like unemployment compensation. Mr. Obama’s stimulus spending and tax cuts added about $600 billion through the fiscal year that ended Sept. 30.
Though the recent standoff that consumed Washington over spending for the 2011 fiscal year ended without a government shutdown, the messy process and 11th-hour settlement have stoked trepidation about the debt-limit fight to come. If Republicans and Democrats found it so hard to compromise over a few billion dollars, the thinking goes, how can they ever come together on a multi-year, multitrillion-dollar plan to cut the debt within weeks or months?
“If I were still Treasury secretary, it would worry the hell out of me,” said James A. Baker III, who served in that office for President Ronald Reagan, during a time when the total federal debt nearly tripled over his two terms. “But it doesn’t worry me as a good Republican, and one who wants to finally see some fiscal responsibility in this country.”
Mr. Baker, long known as a deal-maker, said Republicans were right to say, “O.K., we’ll increase the debt limit, Democrats, if you will enact enforceable spending restraint.”
Neither the White House nor Congressional leaders are certain how they will get enough votes to raise the limit. The White House and Democrats in Congress will urge passage of a “clean” debt limit increase, without amendments, though they acknowledge that cannot pass in the Republican-controlled House.
While the House is the focus of most concern, passage in the Democratic-controlled Senate will be a challenge as well. Republican conservatives there, reinforced by Tea Party adherents elected last November, vow to filibuster any increase in the debt limit, which would require a 60-vote supermajority to overcome.
The Republican leader, Senator Mitch McConnell of Kentucky, has privately urged the conservatives not to filibuster, without success, say three people familiar with the talks. He argued that if Republicans did not filibuster and just 50 votes were needed for passage, the Republicans could try to force all the votes to come from the 51 Democrats — including 17 who are up for re-election.
But if 60 votes are required because of a filibuster, ultimately some Republicans would have to vote for the increase lest the party be blamed for a debt crisis.
In the House, Mr. Boehner said after the November elections that his new members would have to deal with the debt limit “as adults.” But with many Tea Party-backed Republicans feeling that they already compromised more than they wanted on the current year’s budget, it is not clear how receptive the freshman Republicans will be to a deal this time.
The just-concluded budget fight has spawned talk that the White House and Congress will perhaps resort to a series of short-term extensions of the debt limit while they bargain over a debt-reduction plan or some other mandatory budget restraints. The question is, how might global financial markets react?
After this week, Congress recesses until early May, returning just two weeks before Treasury hits the debt ceiling. Even stretching the deadline for action to July, there would be little time to reach a debt-reduction accord.
So attention is turning to a bipartisan “Gang of Six” in the Senate. The senators, three from each party, have met for 10 months to negotiate a comprehensive plan on taxes, entitlement programs and military spending. They have considered recommendations made by Mr. Obama’s bipartisan fiscal commission in December.
“It would be nice to have it in a package form by the debt-limit” debate, said Senator Saxby Chambliss, a Republican of Georgia. But even if the six agree, he added, “hitting everyone else with something this major, it’s going to take some time to be digested. Plus you’ve got to go through the various committees.”
House Republicans in effect outlined their starting position last week, when, amid the fight over 2011 spending, they unveiled their budget for the 2012 fiscal year and beyond. It would cut $6 trillion over 10 years, mostly from projected spending for Medicare and Medicaid.
But those savings would be offset by about $4 trillion in tax cuts. The result, according to the Congressional Budget Office, would be continued annual deficits until 2040 — necessitating more votes to raise the debt limit, even under House Republicans’ plan, for decades to come.