Debt Ceiling Deal Is More Important Than Long-Term Budget Deal

A suspect many readers will say this just shows I’ve been slow on the uptake, but watching President Obama’s performance at yesterday’s press conference, I had a kind of gestalt shift in my perception of the situation. Suddenly it became clear that we’re not looking at an administration strategy to get an increase in the debt ceiling, with the negotiations over the long-term fiscal balance being a means to an end. We’re looking at an administration strategy to get a bipartisan deal over long-term fiscal balance. It’s a strategy whose purpose is to try to change the dynamic in which we alternate between Democrats-only balanced deficit reduction bills (like the 1993 Clinton budget) and GOP-led deficit increasing bills (like the 2001 and 2003 tax cuts). It’s the debt ceiling that’s a means to an end. And you can see that the key Democratic bargaining position here is to insist on revenue increases rather than to try to minimize spending cuts.

This is, certainly, a bold strategy. Rather than fighting the GOP’s effort to create a debt ceiling hostage crisis, Obama called their bluff. He’s willing to do huge amounts of deficit reduction, including giant spending cuts, but he’s not willing to resolve the crisis without some tax hikes. The victim has become the hostage taker. In an instrumental sense, it’s inspired, and of course has created the circumstances under which it might be possible for the administration to sell congressional Democrats on cuts they would otherwise never accept.

But on the merits, saying we can only raise the debt ceiling if we do several trillions of dollars worth of balanced austerity is only somewhat more reasonable than saying we can only raise the debt ceiling if we do several trillions of dollars worth of spending-only austerity. The world is currently grappling with a number of severe economic problems. There is, among other things, a continued “flight to quality” effect in which people want safe assets, and it’s concurrent with serious sovereign debt issues in southern europe. The fact that there’s apparently a bipartisan consensus in the United States that we ought to deliberately engineer a sovereign debt crisis right now as part of tactical bargaining over Medicare is pretty scary.