President Biden’s “Win” in the Debt Ceiling Battle Was a Better Result than Expected, But Dangerous Nonetheless

Posted in: Tax and Economics

In short order over the last two weeks, the latest debt ceiling crisis was defused, the date of the next crisis was all but set in stone, and the political class quickly moved on to “previously scheduled programming”—that is, to the many ongoing crises that the debt ceiling standoff had pushed off the front pages for more than a month.

Hindsight bias may leave the impression that this result was foreordained, but it was not. For one thing, it is not true that everyone in Washington wanted to avoid the worst outcome. At least based on their public statements, the most extreme Republicans were looking forward to forcing a financial, constitutional, and political crisis that would have engulfed us all had the debt ceiling not been temporarily nullified this time around. And while they were out-voted by the combination of Democrats and less extreme Republicans, given Kevin McCarthy’s tenuous hold on the Speakership, it is easy to imagine that he might have taken a much harder negotiating line to appease his far-right flank.

But even though one might imagine that, say, the Republicans’ patrons on Wall Street did not want a crisis, and Democrats certainly did not want one, wars have been fought because of miscalculations and strategies gone awry. That nothing horrible happened this time does not mean that it could not have happened. Will we continue to be lucky in the future? We fear not.

What about the immediate reaction to the debt ceiling resolution? We have no particular expertise in political handicapping, but the insta-conventional wisdom that President Joe Biden “won” this standoff strikes us as right (or not obviously wrong, in any event). We do, however, wonder whether the President’s decision not to deal with the debt ceiling in a decisive and final way now was wise in a larger sense. To put it simply, did the White House buy short-term tactical victory at the expense of an even bigger strategic problem down the road?

The next time the debt ceiling will spring back to life—although undeath might better describe that ghoulish statute—is January 2, 2025. As we described earlier this week in a column on Dorf on Law, there are various scenarios in which the debt ceiling at that point will be a political non-issue, with an incoming Republican President wanting to increase the debt ceiling and being joined either by a compliant Republican-dominated legislative branch or by a Democratic Party that would not be willing to hold the world hostage. President Biden, however, was not basing his strategy last month on either of those possibilities, because he plans to be the newly reelected incumbent President in early January of 2025.

In a column here on Verdict next week, we will discuss the potential volcano that could erupt barely a year and a half from now because of the debt ceiling’s return. And it is not only for the country and world at large that we care about this issue. It is only a slight exaggeration to say that we worry for our own sanity, given that we will surely be pulled into the vortex of the next crisis, just as we have found ourselves spending untold hours writing and speaking about this issue in the years since Republicans turned the debt ceiling into a dangerous political weapon in 2011.

Even so, we think it only fair to spend some time here discussing the surprising upsides to the deal that President Biden insisted on making with House Speaker Kevin McCarthy. We were, after all, among those who agreed with his initial strategy not to negotiate with hostage-takers, and we were thus shocked when he elevated McCarthy in the eyes of the political class by making him a partner in a negotiation—which, as we have emphasized, carries the larger risk of emboldening Republicans and encouraging future hostage crises.

The President did, however, pull off something that no one thought possible, not only getting something very valuable at a bargain price but getting the Republicans to move the next debt ceiling crisis date after the 2024 elections. And amazingly, he also forestalled what would have been another destabilizing budget crisis later this year. We have previously criticized President Biden’s timidity, so in fairness we now should praise this bold accomplishment.

The best way to describe what the White House team pulled off might be to say that he took a very big risk that paid off handsomely. While other people might be tempted to say that this proves that the President knew what he was doing all along, we think that he was at least in part merely lucky.

To be sure, there is much to the idea that ability and hard work underlie lucky outcomes. Even so, basketball players take ill-chosen shots that win games (with their coaches yelling, “No, no, no—yes, great shot!”), and people invest in risky schemes that very occasionally succeed. That there are lottery winners is not proof that playing the lottery is a good idea.

Still, it is worth thinking about what President Biden won on behalf of the country and the world by pursuing a strategy that we continue to think was unwise. We are happy to support the winning team, no matter how short-lived the victory might be. What good came of the Democrats’ win this month?

The Bad Timeline: A Multi-Dimensional Crisis Starting in June 2023

Perhaps the best way to understand just how good the immediate outcome was for President Biden (to say nothing of the country or the world) is to think about what would be happening at this very moment if he had refused to negotiate his way out of the looming crisis. In that grim timeline, this week would not see people talking about whether, say, Mike Pence has a snowball’s chance in hell of becoming President or Donald Trump will soon face multiple criminal indictments.

As we argued many times, most recently here on Verdict, if the debt ceiling had become binding this week, the President would have been limited to two possible responses: allow the United States for the first time ever to default on its obligations or instruct the Treasury to continue to issue debt securities in order to pay our bills on time and in full. There was never any question that both of those choices were horrible, which is why we have called again and again for the debt ceiling statute to be repealed or otherwise neutralized. Without that happening, the President truly did face two very bad options.

Imagine that he had followed our advice and announced that his oath of office required him to follow the “least unconstitutional option,” minimizing his own power by refusing to pick and choose which of the nation’s bills to pay and instead issuing debt in the normal course of business, sufficient to allow him to carry out his financial duties to the country. The word “normal” means something specific here, because the Treasury would have held bond auctions that would look like bond auctions always look; but the situation overall would have been anything but normal. For the first time, the government would have been selling bonds with a legal cloud hanging over them, with no way of knowing when or even how the skies would clear.

This is what least-bad would have looked like: the financial markets would be in turmoil, the Republicans would have been screaming for the President to be impeached, a recession would have been all but certain—and as the least important consequence, commentators with no expertise in the matter would have been debating us about all of this on cable TV shows. Who would not want to avoid all of that?

As if that were not bad enough, the very best imaginable outcome would have been followed by another crisis only a few months down the road. That is, even if the markets had quickly stabilized and the House Republicans had caved in to demands that they pass a “clean” increase in the debt ceiling, the next round of budget negotiations would be only months away. With the government’s fiscal year ending on September 30, a highly poisonous atmosphere in Congress would have made it all but impossible to pass the necessary appropriations bills to fund the federal government’s activities—from law enforcement to transportation management to running the national parks, and on and on.

In other words, there would have been a government shutdown starting on October 1. In our commentary regarding the debt ceiling, we often found it necessary to explain that a debt ceiling crisis is quite different from a shutdown—with a failure to increase the debt ceiling being the nuclear bomb to a government shutdown’s trainload of TNT. That is, while neither is good, one is orders of magnitude worse than the other.

As a legal matter, moreover, a shutdown simply does not implicate any of our least-unconstitutional-option analysis. The problem with a debt ceiling crisis is that the President is faced with a trilemma—three sets of laws (spending, taxing, and borrowing) that cannot possibly be obeyed simultaneously—that forces him to choose not to execute one set of laws or another. A shutdown happens when the necessary laws have not even been passed in the first place.

Again, a shutdown would be bad. We know this because there have in fact been government shutdowns in the US, and they have become more frequent in recent years. Each time, bad things happen. Government services are suspended, salaries are at least temporarily unpaid, lives are upended, and the economy suffers. As bad as all of that is, however, it is nothing compared to reaching the drop-dead date on the debt ceiling, which thankfully has never happened.

To repeat, it is almost certain that there would have been a shutdown later this year if the President had done what we suggested, precisely because Republicans know that shutdowns are not as big a deal as the constitutional and economic crisis induced by a deadlock on the debt ceiling. Indeed, they might well have agreed to pass only short-term funding bills, creating a rolling set of shutdowns and re-openings all the way through the 2024 presidential election.

That means that Biden’s decisions allowed us not only to avoid the uncertainties that would arise from issuing unauthorized debt late in the spring but to prevent a government shutdown early in the next winter (and quite possibly for months thereafter).

What Did the President’s Decisions Cost Him (and the Country)?

Viewed as a matter of buying domestic and global tranquility, then, what Joe Biden pulled off over the last month is in some sense nothing short of a miracle. As we noted above, he moved the next debt ceiling crisis to early 2025 (if it happens at all), which bought the world more than twice as much time as the House Republicans’ bill would have given us before the next crisis. And he did so while making sure that there would be no shutdown later this year.

We should note that it is always possible that the yet-to-be-executed parts of the agreement between President Biden and Speaker McCarthy might yet be somehow undermined, simply because they have not been passed yet. But we are willing to take the agreement as advertised, which is to say that both parties have agreed on the content of the spending bills that will keep the government running through the next election.

In any case, the most positive—and, to be clear, the entirely accurate—way to think about what just happened is that the President looked at two big problems that would arise over the space of half a year and solved them both at once. “Wow, just wow,” is generally used in a negative sense, as when a person makes a terrible argument that leaves listeners slack jawed. Here, however, “wow” in its positive sense seems apt. The Biden administration defused two crises in one high-stakes negotiation.

We thus are more than willing to concede that the President not only “won” the politics of the debt ceiling but also cleared away the next huge hurdle that could have brought down his presidency. But achieving an excellent outcome, even one that is doubly impressive, does not necessarily mean that it came at an acceptable total cost.

What were the immediate costs? Pretty much every Democrat —including the President himself—in Washington hated the concessions to which the President agreed. For starters, he imposed useless and cruel bureaucratic hurdles (misleadingly called work requirements, even though they do not lead to increased employment) on safety-net programs. Even though new exceptions for veterans, young adults coming out of foster care, and unhoused persons neutralize the new hurdles’ impact on the total number of people eligible for benefits, hungry Americans are not fungible.

Other provisions in the deal lack even the appearance of an offset. President Biden partially capitulated to Republicans’ efforts to defund the tax police, allowing high-income tax fraud to continue apace. A bill that supposedly was designed to decrease spending threw even more money at the Pentagon. There was even a gratuitous anti-environmental giveaway in the final legislation.

Although we bring unique and specific expertise to the debt ceiling discussion, we are merely citizens when it comes to asking whether a negotiated compromise is acceptable. Every compromise contains good and bad elements, and often it is impossible to know whether a better overall deal would have been available. For what it is worth, however, and despite the objections we have just noted, on its own terms the downsides of the final deal seem rather minor compared to the good outcomes that we have described here—no drop-dead date, and (probably) no government shutdown this year.

In our next column, however, we will return to the bigger picture. Having acknowledged here that President Biden appears not only to have won the politics of 2023 and 2024 but sidestepped another crisis to boot, we will discuss why the purchase of relative calm for nineteen months will come at a very high price. The 2025 version of Joe Biden might well look back at the 2023 version of himself and wonder whether he should not have made the hard choices now.

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