Washington will pay its bills, for now

In the summer of 2011, President Obama negotiated with Republican leaders over the terms for raising the federal government’s debt ceiling. He soon concluded that he had committed a major blunder, and he was right.

The debt ceiling, an artificial construction, is a separate congressional vote authorizing the treasury to pay bills that Congress has already enacted, including interest and rollover of U.S. treasuries. Those treasuries are universally acknowledged as the safest – the bedrock – asset of international finance, and economists believe that throwing them into doubt would cause havoc to the world economy comparable to or greater than that caused by the Lehman Brothers collapse of September 2008. Of course, no one knows what would really happen, because the federal government has never defaulted on its debt before.

Obama had his reasons for negotiating in 2011. The economy was just, and only faintly, emerging from the 2008 crisis. He faced a re-election campaign the next year. And he had his eyes on a “grand bargain” with Republicans to recast spending and revenues for a more sustainable long-term budget and debt trajectory. He had talks that summer with Republican House Speaker John Boehner – talks that were, by most accounts, constructive and promising. But neither Obama nor Boehner really understood the radicalism and fury of the Tea Party conservatives whom 2010 mid-term elections had installed in the House of Representatives. The basis for a grand bargain – higher revenues in exchange for lower entitlement spending – was anathema to the Tea Party caucus. The debt ceiling was raised, but without the bargain. Instead, a process was set up that led to the brutal sequestering of funds that was meant as a doomsday mechanism to force a more rational agreement – but has since been embraced as a new baseline by the Republican right.

Brinkmanship

Since that summer, the United States has endured brinkmanship over a series of fiscal deadlines, including two more requirements to raise the debt ceiling. Obama has done reasonably well with the leverage he had, and some modest stimulus was pumped into an economy that desperately needed it. But the cost of turmoil, uncertainty and the sequester-forced relative austerity has been high; a new estimate by the Peter G. Peterson Foundation shows that austerity policies have most likely increased the unemployment rate by 1.4 percentage points and reduced economic growth by around half. America’s global standing has also taken a hit. One Chinese commentator, writing for the semi-official Xinhua news agency, said it was time to contemplate a “de-Americanized world.”

Most crucially, because he negotiated over the debt ceiling in 2011, there was some expectation among Republicans – even moderates such as Senator Susan Collins of Maine – that he would do so again. This was the expectation that Obama had said he absolutely had to smash – because allowing American creditworthiness to be held hostage by a radical minority would fundamentally threaten the constitutional order, and the basic governability, of the United States. The audacity of the Republican radicals’ challenge was demonstrated, as I wrote two weeks ago, by their initial demands (which changed over time): to defund or at least delay Obamacare, the legislation that had been passed by Congress, signed into law and upheld by the Supreme Court, and was a central argument of the 2012 campaign, which Obama won decisively.

Last night, the president, and his remarkably united Democrats, won a clear victory. The debt ceiling was raised, and a continuing resolution to reopen the government was passed, without any corresponding concessions. But it was only raised until 7 February 2014, and the government only funded until mid-January. Boehner, again at the last moment, allowed the legislation to come up for a House vote that relied on Democrats and a minority of Republicans. The overriding question is whether America and the world will have to endure this again in just a few months. Logic dictates that this was a very costly defeat that Republicans would be loath to repeat: their “favorability” as a party is at its lowest point since pollsters started asking the question. But this logic was already clear to party stalwarts such as John McCain and Lindsey Graham; they warned all along that the Republicans were on a march of folly, and yet that didn’t stop the party from marching twice. The radicals might be thinking: third time lucky. If so, a least a bit of luck will be on the side of those who think they would really be better off in a de-Americanized world.

This article was first published in the IISS blog on Oct. 21, 2013.

_______________________________

Dr. Dana H. Allin has been Editor since 1998 of Survival: Global Politics and Strategy, with chief responsibility for the bi-monthly journal’s content and style. An accomplished scholar and writer on diverse themes, he is the author or co-author of five books, and was a principal drafter of a sixth, the 1997 report of The International Commission on the Balkans. As IISS Senior Fellow based in London, he comments and writes widely on the strategic challenges and historical, political and social roots of U.S. foreign policy, with special attention in recent years to America’s Middle East dilemmas. His scholarship also has covered a considerable range of European topics, including the Balkans conflicts and the Cold War. His articles and book chapters have appeared in The Financial Times, International Herald Tribune, Wall Street Journal, Frankfurter Allgemeine Zeitung, Survival, International Affairs, World Policy Journal, Strategic Survey, Strategic Comments, The Huffington Post, IISS Voices, and in numerous edited volumes.