How to end the debt ceiling stand-off democratically:  set fiscal policy through elections, not hostage taking

The Biden administration and congressional Democrats have so far refused to negotiate with House Republicans over spending cuts to resolve the looming debt ceiling crisis.  This tactic has successfully pressured Republicans into passing a bill with unpopular spending cuts that Democrats will quite rightly use to their advantage in the upcoming election.  But now that the House Republicans have put a plan on the table it will be difficult for Democrats to sustain their “no negotiation” posture. 

To get the best possible outcome, President Biden and the Democrats need to persuade the public that their rejection of GOP spending cuts is justified, not just a stubborn and possibly dangerous refusal to compromise.

How can they do this?  By pointing out that we just had an election, and that the Republicans misled the public by not acknowledging their plan to use the debt ceiling to jam through harsh and unpopular spending cuts.  Biden and the Democrats should state clearly what should be obvious:  We live in a democracy.  We need to have a responsible fiscal policy, but we must have a public debate over the future of Social Security, Medicare, Medicaid, and other programs that so many Americans rely on.  Then voters should have the opportunity to weigh in.  In other words, Democrats should turn the coming election into a referendum on the future of fiscal policy. 

This strategy allows Democrats to reject spending cuts now without seeming stubborn, partisan, or fiscally irresponsible.  They can acknowledge the need for reform and welcome Republican ideas for strengthening our core social insurance programs.  This is the best way for Democrats to maximize their leverage in the coming debt ceiling show-down.  It is also their best strategy for winning control of Congress and for keeping President Biden in office.

Accusing the Republicans of “hostage taking” won’t cut the mustard

Democrats have justified their refusal to negotiate spending cuts by accusing Republicans of “hostage taking”, by pointing out that Congress has effectively required the government to borrow by authorizing spending that exceeds revenue, by accusing Republicans of fiscal extremism, etc. 

These arguments are all correct as far as they go.  But it is not at all clear how persuasive they will be with swing voters.  

As a general matter, if fiscal restraint is needed, which will surely seem plausible to many voters in a time of higher-than-normal inflation, then it is not clear why spending cuts should not be on the table. 

More specifically, to many voters lifting the debt ceiling and cutting spending may seem like a reasonable compromise:  Democrats get the debt ceiling lifted, which many people will think of as an increase in spending, while Republicans get what they want, which is spending cuts.  Of course, lifting the debt ceiling is not an increase in spending.  It just allows the government to make payments on existing debt and to fund spending already authorized by Congress.  But this is a subtle point, and if people do not understand it refusing to “compromise” by accepting some spending cuts may come across as stubborn, reckless partisanship.

Reframing the debate

The way to mitigate this risk is to invite the Republicans to a wide-ranging debate over the future of fiscal policy in the upcoming election. 

The choice we face is not “stubbornly refuse to negotiate” or “compromise with Republicans on spending cuts”.  The choice is between 1) accepting harsh cuts that do nothing to ensure the solvency of Social Security, Medicare, and Medicaid, and were not disclosed to the public during the recent election campaign, and 2) having a robust debate about whether we should address the funding gap for Social Security, Medicare, and Medicaid by controlling health care costs and modestly raising taxes, or by cutting benefits.  Democrats should come down firmly on the side of debate, democracy, and giving voters the opportunity to decide what kind of country they want to live in.  And, of course, they should make the case for strengthening our core social insurance programs, rather than cutting benefits.

Polls and history

Many Democrats seem to believe that negotiating with Republicans over the debt ceiling is a mistake.  This reasoning has two elements, a belief that negotiations just encourage future hostage taking, and a belief that the public tends to side with Democrats on fiscal standoffs.  Both assumptions are debatable. 

Biden’s advisors apparently believe that public opinion is on their side.  I obviously do not know what the Democrats’ internal polling shows, but Nathaniel Rakich provides a good summary of public opinion during past debt ceiling negotiations and government shutdowns here.

The data Rakich reviews does indeed suggest that Republicans have generally gotten most of the blame for these manufactured crises.

Unfortunately, this history is of limited relevance to our present circumstances.  The closest analogy to the current moment is the 2011 standoff over the debt ceiling between President Obama and congressional Republicans.  As Rakich shows, it seems this protracted standoff hurt Republicans more than Obama, but there are two differences with the current standoff. 

First, Obama made a very public effort to negotiate with the Republicans.  Many Democrats believe these negotiations were an error, and they may be right.  But it is entirely possible that voters would have judged Obama more harshly if he had refused to compromise.  

The key question is who gets blamed for a debt default, if we stumble into one

The more important point, however, is simply that past standoffs did not lead to an actual debt default.  We have experienced government shutdowns, and shutdowns are bad, but the damage is contained and for the most part is quickly reversed once the shutdown ends.  Default is a real possibility right now.  We have no idea how bad it will be if it happens, but it could be very, very bad, and the pain could last for months or even years.  

It is far from clear that Biden and the Democrats will avoid blame if a debt default triggers a global financial crisis and recession, especially if they refuse to negotiate.  Furthermore, if there is a major economic downturn, Trump – apparently Biden’s most likely opponent in 2024 – will undoubtedly point out that the government did not default when he was President.  The fact that this is only true because Democrats in Congress behaved responsibly and worked with Republicans to raise the debt ceiling may not seem all that relevant to unemployed voters.  In fact, it seems safe to say that many voters will simply be unaware of this history.  We can make our best arguments and admonish the media to do a better job educating the public, but we all know that this is hardly a failsafe plan.

The upshot is that Democrats need to appear reasonable and open to responsible fiscal reform.  This will bolster their bargaining position by making it more likely that Republicans will get blamed if the government stumbles into a default.  And the way to appear reasonable is not to capitulate to Republican blackmail, but to say that Democrats would welcome an honest, wide-ranging national debate over fiscal policy in the coming election campaign.  Doing this is also the best way to deter future efforts by Republicans to use the debt ceiling to force concessions on spending, because open debate over fiscal policy is likely to go very badly for the GOP, and they know it.

What if negotiations fail?

There is a real chance that negotiations to raise the debt ceiling will fail.  (For pessimistic analysis see here, here, and, here.)

If this happens, Biden should absolutely take non-conventional measures to avoid a default.  I have no view on which approach would be preferable – minting the platinum coin, issuing debt with a low or zero face value and a high interest rate, arguing that the debt limit is unconstitutional or can be ignored because it conflicts with appropriations statutes, etc. 

My point here is simply that any unconventional measures will lead to predictable criticism from opportunistic Republicans and small-minded pundits who are in thrall to the idea of business as usual.  To minimize the political cost of this criticism, Biden needs to gain the moral high ground by being open to reform but insisting on the right of the people to decide on the future of the country.  He needs to welcome debate to show that he is not a stubborn partisan, and that his hand was forced by radical, intransigent Republicans.

Giving Republicans a fig leaf is fine

None of this means that President Biden and the Democrats should reject any compromise that allows both sides to claim victory and avoids a fiscal calamity. 

Whether such a compromise is possible is far from clear, but this is normal politics, and it’s fine.  What is critical is to endorse fiscal responsibility*, to bring Social Security, Medicare, and Medicaid into the debate, and to insist that the future of these programs must be decided by the voters.  Putting these popular programs at the center of the debate over fiscal policy is the key to deterring future hostage taking stunts.  And it is the best way to beat Republicans or to force them to moderate on fiscal issues.

[* just to be clear, endorsing fiscal responsibility does not mean insisting on immediately balancing the budget, or slashing spending, or preventing any rise the ratio of debt to GDP.  I hope to discuss this further in future posts.  For current purposes endorsing fiscal responsibility simply means acknowledging that we need to ensure that revenues and expenses stay in reasonable balance over the next few decades as the population ages and the demands on our social insurance programs grow.]