Dancing Round the Ceiling

Published

President Obama probably has better things to do than reflect on the irony that the debt ceiling, the limit that Congress places on the total amount of debt that the Federal Government can legally hold, was originally designed to make borrowing easier for the executive. Before its introduction in 1917, each round of borrowing had to be approved by Congress individually. This was considered inflexible in the wake of American entry into World War I, which necessitated a considerable increase in the public debt.

The current debt ceiling, last raised in February 2010, was technically reached in May of this year. Due to some clever accounting, Secretary of the Treasury Timothy Geithner managed to extend the deadline to August 2nd. Beyond that point, the Federal Government may not be able to pay its commitments to either the American citizenry (Medicare, Social Security, and other government services) or its creditors. Crucially, if it cannot pay the interest on the debt, it will have to default, which would have significant negative effects on the US economy as interest rates would in all probability rise sharply, and the consequences would impact on the world economy as a whole.

Who would refuse to raise the debt ceiling and risk a US default in such parlous times, with economic growth anaemic at best? The Republican-controlled House of Representatives, betting on the assumption that Obama, being a relatively sober, practical sort, would not want to unduly jeopardise the economy, are using the refusal to raise the debt limit to extract concessions of trillions of dollars in spending cuts over the next decade. There is the possibility of adding a “balanced budget amendment” to the American Constitution. This amendment in its’ most recent formulations would not only prevent the government from spending in deficit, but also cap Federal Government spending at 19.9% of GDP. Federal Government spending is currently around 25% of GDP, and as a comparison, most of Ronald Reagan’s budgets would not have met this requirement. In addition, the amendment would require a voting super-majority in Congress in order to raise taxes.

More reactionary Republicans (it’s difficult to call people engaged in such radical action “conservatives”) rankle at even this, viewing any rise in the debt ceiling as a betrayal of conservative principles and a default – no matter the economic pain – as just punishment for America’s perceived fiscal sins.

Obama appears to be in a no-win situation. Despite the fact that a significant proportion of the budget deficit is due to the recession, and the impact of the revenue lost when Bush-era tax cuts were passed (a package of tax cuts heavily skewed toward the wealthy, which all but reversed the healthy budget outlooks in the late 1990s), the impossibility of getting Republicans to agree on tax increases, especially on higher incomes, make his options unappealing. To prevent default, if he felt the need to still be seen as “post-partisan”, he could agree to the deal currently at vote in Congress (if it meets a happier fate than the previous negotiations, and actually passes), with all the attendant issues of cutting government spending to such a vast degree during an uncertain recovery. An alternative strategy might be a lesser package of cuts, which would raise the debt ceiling, but only by a small amount (which would make the issue appear again, conveniently for the Republicans, at exactly the right time to make it a major issue for the 2012 presidential election).

If he felt bolder, he could prioritise spending to certain departments and have a partial government shutdown, as happened in 1995-96 under Bill Clinton. This poses significant political risk, and technical as well as legal challenges. If he is feeling bolder still, he could risk impeachment by claiming that the Constitution, which compels the Federal Government to pay its debts, allows him to ignore the debt ceiling and continue borrowing.

The most likely approach, however, is the strategy of negotiation with Republicans in Congress, and the improbably large spending cuts this entails. The millions of Americans without jobs and struggling to make ends meet will be no doubt be happy to hear that although their prospects remain bleak, at least no-one can credibly call Obama a socialist until 2012, when it will become the Republican epithet of choice, definitions be damned.

Alan Sharkey – Glasgow Guardian