Americans are disgusted with Washington. Polls show record or near-record low approval of Congress (10 percent), Republicans (28 percent), Democrats (43 percent), Obama (44 percent), Obamacare (38 percent) and the direction of the country (18 percent). The irony is that Washington is finally getting its house in order. The latest showdown, though not itself very productive, locked in the August 2011 settlement by which, after a decade of fiscal irresponsibility, Congress changed course and began the long road back to sustainable budgets. Then as now, brinkmanship served as the prelude to Washington doing something sensible, namely the sequester, part of the Budget Control Act of 2011.
In the long run, the U.S. is on a path towards bankruptcy because of ever-increasing expenditures on Social Security, Medicare and Medicaid. Making matters worse, the Bush and Obama administrations continually increased spending until in 2009 the deficit was over 10 percent of GDP, and national debt was soaring. The new Republican House majority in 2010 would have had little leverage without the debt ceiling, a law that limits the amount of outstanding debt the Treasury can issue. Thanks to that law, the Obama administration needed specific Congressional authorization to finance its huge deficits. House Republicans demanded a deficit reduction deal in return.
After months of intransigence, and just before the debt ceiling was breached, Obama and the GOP agreed on a law that imposed $1.2 billion of across-the-board spending “cuts”—not necessarily actual cuts, but cuts relative to a rising trend of planned spending—that started in March 2013, along with the expiration of various tax cuts. Though Keynesian economics predicts that such a “fiscal cliff” would cause a recession, the fiscal cliff does not seem to have slowed the economy’s recovery. Austerity has been offset by a surging stock market, reflecting a revival of business confidence as falling deficits reduce political risk.
Some have attacked legitimacy of the debt ceiling. True, a threat not to raise the debt ceiling is a risky tactic, and other advanced nations place no statutory limits on the government’s authorization to borrow. A prolonged debt-ceiling crisis would almost certainly cause chaos in financial markets, and the real economy might also suffer. To have a debt ceiling thus involves an intermittent risk of crisis if politicians cannot agree. Hence the irresponsible “hostage-taking” rhetoric.
But the truth is no one in Washington has consistent, principled objections to debt-ceiling negotiations. Obama voted against an increase in 2006. When the House GOP offered a “clean” debt ceiling increase, the Democrats refused. They set conditions of their own before the debt ceiling could be raised, namely, that Republicans authorize a continuing resolution to reopen the government. Some Senate Democrats wanted to attach spending increases to an increase.
The debt ceiling is a dangerous feature of the American system of checks and balances, yet it would be even more dangerous to get rid of it. Politicians tend to be myopic, focusing only on the next election rather than the long-run well-being of the nation. Worse, they try to lock in their ideological agendas while dumping the bills on future taxpayers. This can lead to creeping debt crisis, ending in a sudden collapse of market confidence, such as in Greece. The debt ceiling is a like a fire drill: it creates artificial crises to prevent real tragedies.
The latest showdown involved Obamacare, which micromanages health insurance markets in a way unfair to young people who already face rising college tuitions, stagnant wages and an unfriendly job market, while Social Security and Medicare tax fast food employees to pay unsustainable benefits, not only to impoverished seniors unable to work, which would be defensible, but to able seniors in good health and even affluent seniors who don’t need taxpayer money.
Until now, young people had one thing going for them: since they are usually in good health, insurance companies offered them policies with low premiums. Obamacare takes that away by limiting insurance companies’ ability to price for risk, and young people, especially young men, will be wildly overcharged in order to finance health care for older and sicker, but often more affluent, people. Repeal of Obamacare would be nice, but if that is impossible, future Congresses can eviscerate the law by allowing insurers to create new, affordable options for low-risk people.
Still, the good news from Washington is that the government, like a family that has been on a spree and just got a scary credit card bill, is grumpily facing the need to cut the budget. Let us hope for more angry, productive showdowns in the years ahead.