Alice Rivlin’s Call to Eliminate the Debt Ceiling Threat

We must “defuse this bomb threat to the American and global economy”

The last chapter of “Divided We Fall, Why Consensus Matters” by Alice Rivlin, Sheri Rivlin and Allan Rivlin includes dozens of specific recommendations to make government less partisan, more productive, and more able to solve voters’ most vexing problems. In addition to eliminating the Senate filibuster, shifting to two-year budgeting, and changes in the ways elections are conducted and financed, the book makes a strong case for the elimination of the debt ceiling.

The book examines two times when Republican House Speakers threatened Democratic Presidents with a possible refusal to raise the debt limit unconditionally. Placing conditions on the vote to raise the nation’s borrowing limit is the same as lawmakers telling the world the United States could fail to pay back bondholders. Even if the threat of a default is never realized, the threat itself increases the national debt and makes it more costly because it causes lenders to doubt the safety of the investment. This decreases the attractiveness of US Treasury bonds, lowering their price and raising the interest rates the US must pay to everyone who lends us money. If instead of paying this months credit card bill you wrote back, “Perhaps I will pay you next month,” it would soon harm your level of indebtedness.

The US debt ceiling, also known as the statutory debt limit, is a legislative cap on the total amount of federal debt that the United States government is authorized to issue. It was first established in 1939, not to limit government borrowing but instead, to facilitate deficit spending toward the end of the Great Depression. It was raised several times allowing dramatic debt expansion to fund America’s participation in World War II.  It was first used as a target to restrain federal spending in bipartisan budget negotiations after World War II when we ran budget surpluses to pay down the war debt. A technical error at the Department of Treasury nearly caused the nation to breach the debt ceiling in 1979, and soon after that Rep. Dick Gephardt (D-MO) proposed and passed a House rule that automatically tied debt ceiling increases to passage of the budget.

The first time the national debt ceiling was used in a confrontational manner to restrain spending by a president was when House Speaker Newt Gingrich (R-GA) suspended the Gephardt Rule at the start of 1995 and threatened to shut down government or fail to raise the debt ceiling unless Clinton and the Democrats agreed to deep spending cuts. Alice who was then Clinton’s Budget Director expressed the Administration’s view that the default threat was indefensible.

“In that Congress ‘holds the purse strings’ - that is, Congress passes the taxing and spending bills - it is Congress that runs up the debt. It does not make sense for Congress to limit the debt by triggering a default when Congress has the power to limit the debt by spending less or raising more revenue. But this was not a normal year, and Speaker Gingrich and the congressional leadership made an unusual threat to tie raising the debt ceiling to their spending cuts. To get what they wanted on taxing and spending priorities, the congressional Republicans were threatening to have the US government default on its debt obligations to bond holders - a group that includes many retirement funds, pension plans, insurance companies, corporations, and individuals, both in the United States and around the world. The consequences of a default are impossible to fully calculate, but they would not be good, and would certainly be far worse than a temporary government shutdown.” (Page 153)

This incident ended without the debt ceiling being breached. Treasury Secretary, Robert Rubin was able to transfer funds within the government to postpone the deadline long enough for the budget battles to play themselves out through two government shutdowns where national opinion surveys revealed the public was turning against the Republican tactics. Most people blamed the GOP for the shutdowns, and we learned Americans appreciate what their federal government does for them far more than the Republicans had anticipated. Gingrich reversed course, allowed the government to open and passed a clean debt ceiling increase. Bill Clinton was reelected in 1996 and when Congress returned, the confrontational strategy was replaced by cooperation on the next budget that helped replace the deficits with four years of budget surpluses.

Alice was dismayed when Republicans reprised the confrontational tactics against President Barack Obama and the Democrats after regaining the House majority in 2011. “I was not alone in being surprised when Republicans started talking about using threats of a government shutdown, and even refusal to raise the debt ceiling, to gain leverage in negotiations and force drastic cuts in domestic spending.  Hadn't we seen this kind of constitutional hardball before, when Newt Gingrich tried the same tactic to gain leverage over Bill Clinton?  Didn't that end badly for Republicans? Beyond the question of whether elected officials should threaten harm to people they represent, because certainly closing the government is bad for the economy and for the voters back home, and a federal government debt default would be even worse, there was the simple question of why Republicans would expect the tactic to succeed this time when it had failed a decade earlier. The newly elected Tea Party Republicans, and the Young Guns they chose as their leaders [including Kevin McCarthy (R-CA) as House Whip] viewed this as inside-the-beltway thinking.” (Pages 221-222)

The budget standoff story in 2011-2016 got a lot more complicated and lasted far longer than in 1995-1996 because there were so many moving parts and several years of budgets involved. The debt ceiling story was the simplest aspect of the negotiations. As we explained here the Republicans believed they were playing a game of “chicken” with President Barack Obama, but in August of 2011 they learned they were in a fight they could not win with the credit rating agencies and the bond market. Standard and Poor’s downgraded US Federal Reserve Notes from AAA to AA+, and the Dow Jones Industrial Average dropped 635 points, and Republicans changed course. In a complicated deal that created a “supercommittee” to work out a budget compromise, the debt limit was raised postponing the next debt crisis into 2013, but no budget compromise was reached, and the budget battles would rage on for years.

All of this caused Alice to call for the elimination of the debt ceiling. “Any economist can tell you the cost of actually following through on the threat to not raise the debt ceiling would have been devastating to the national and global economy. The world runs on reliable forms of debt, and US Treasury bonds are considered the most reliable of all. If the US government were to default, there would be an immediate loss of value for nearly every asset on the planet as markets tumble around the world. The full faith and credit of the US economy is worth that much to the global economy.  Had lawmakers made good on their threats to block the debt ceiling increase, the world's richest people and the world's lowest paid workers would all face widespread misery.  There is no reason anyone would want to do this, and Congress should pass a new law so no one can threaten to do it.” (Page 299)

“We have a process to decide how much the government will borrow.  We need to improve this process, and we need to borrow less, but we do not need a process to decide if we will pay our debt for the money we have already borrowed.  There is no argument to be made for the United States to become a deadbeat, losing its status as a great nation and leader of the free world economic order, facing higher interest rates, a collapsing economy at home and abroad, and many other negative consequences.  No American political party should be tempted to gain leverage over the other by threatening harm to Americans, so we should remove this temptation to do so.” (Page 154)