Photo: Intelligencer. Photos: Getty Images
the national interest

Debt-Ceiling Deal Bought Biden Time at a Terrible Long-Term Cost

What happens the next time Republicans take a hostage?

Photo: Intelligencer. Photos: Getty Images

The simplest way to understand the debt-ceiling agreement is that the two parties were focused on different, orthogonal objectives. Democrats wished to minimize the direct harm of the terms of the deal itself to vital government programs, and especially assistance for the poor. Republicans wanted to establish the principle that holding the debt ceiling hostage is a normal, accepted way to govern.

Both parties got what they wanted. President Biden negotiated the ransom for freeing the debt ceiling down to about the lowest possible level he could have. (As a side benefit, Biden refuted doubts about his capacity, leaving his opponents fuming that they had somehow been “outsmarted by a president who can’t find his pants,” as Representative Nancy Mace paradoxically complained.)

Republicans obtained spending cuts only slightly deeper than what they likely would have won in a normal budget process absent the threat of default, but were able to avoid giving even a token offer to Democrats, preserving their core objective of demonstrating that the only thing Democrats would “win” was freeing the hostage.

The Washington press corps, like Wall Street, has trained its focus almost entirely on the short-term objective of avoiding default. By this measure — the short-term objectives that Democrats pursued — the deal is a triumph. And yet the principle Republicans were fighting to establish, and unambiguously won, has a long-term significance that has largely escaped attention. Hardly anybody has given a thought as to what happens next.

The argument over the legitimacy of debt-ceiling extortion may be settled now, but at the outset of the year, it was very much a contested thing. The two parties each pointed to dueling precedents. In 2011, the Republican Congress threatened default, and the Obama administration tried to steer this process into a negotiated grand bargain over fiscal policy. Only after it was too late did President Obama grasp that what he mistook for a negotiation was actually extortion, and he escaped catastrophe by handing Republicans spending cuts without any concessions.

Obama emerged from the debacle determined never to repeat it. When the debt ceiling came up again in 2013, the president vowed not to pay any ransom at all. Republicans refused to take his position seriously, but ultimately, Obama’s complete refusal to negotiate the debt ceiling succeeded: The Republican Congress raised the debt limit without extraction concessions.

Democrats believed they had solved the extortion problem: simply refusing to negotiate with hostage-takers would force them to release the hostage, since the alternative — default and an economic crisis — would impose harm on the Republican Party’s own economic elites.

But Republicans either ignored the 2013 precedent or chalked it up to their party’s own internal disorganization at the time. A more unified and effective hostage demand, they believed, would succeed. And in Biden they saw a more inviting target. Republicans always preferred negotiating with Biden to negotiating with Obama, and Biden’s statement the previous fall that it would be “irresponsible” to abolish the debt ceiling confirmed their impression of his pliability.

And so, even though Biden repeated the Obama formulation — no rewarding hostage-takers — Republicans believed they could force him to relent. Their confidence was rewarded.

The fact Republicans were focused on the principle of extortion, rather than on the particularity of the ransom, is underscored by their internal messaging. House Speaker Kevin McCarthy showed fellow Republicans a montage of Democrats repeating their refusal to pay a ransom, gloating that they had forced precisely this outcome.

After backing down from their refusal to negotiate, Democrats attempted to rescue the situation by asking for token concessions — closing a minuscule tax loophole here or there. Republicans held firm not just because they wouldn’t violate their no-taxes-ever principle, but also because allowing the deal to contain even the appearance of real horse-trading would enable Democrats to come out of it saying they hadn’t submitted to extortion. If there was trading, it might not look like a ransom, so there couldn’t be trading.

In the short run, barring some unexpected collapse on the House floor, Biden’s strategy is likely to work out splendidly. The economy will avoid an induced catastrophe, and his reputation for moderation and dealmaking will be enhanced.

But what will happen the next time a Democratic president needs a Republican House to lift the debt ceiling? There is no reason the ransom demand will be small. Indeed, given that Republicans have probably cut domestic discretionary spending as low as they can tolerate if not lower, the next round of demands will likely cut deeper into anti-poverty programs that were spared this time. Or possibly, Republicans will creatively demand concessions on immigration, abortion, or any other social issue that has seized their imagination at the moment.

When you are holding a gun to the head of the global economy, and both sides understand the president has no option but to pay off the hostage-takers, there’s no natural limit to the size of the ransom. Arguably, Republicans were constrained this time by the desire of most of their caucus to posture against a deal rather than support it, but there’s hardly an iron law requiring such a dynamic.

A decade ago, Obama decided that debt-ceiling hostage-taking “changes the constitutional structure of this government entirely” for two reasons. First, it overturned the connection between elections and governing results. The normal historic choice for a party is either to win control of government or have to compromise with the opposition. Debt-ceiling extortion allows a party to lose an election and still impose terms.

Second, regularizing a process by which two sides would negotiate a ransom under the threat of default creates a recurrent process with an inherent risk of catastrophic failure. Yes, the two sides settled on a mutually acceptable ransom before the hostage died this time. But the more times the game is played, the higher the odds of failure.

In an iterative game like this, the worst possible move is to insist you won’t submit to extortion and then back down. It destroys not only your credibility but the credibility of your successors. The task facing Democrats going forward will be to find opportunities to abolish the debt ceiling permanently. (They might consider making permanent abolition their own demand the next time a Republican president needs a debt-ceiling hike.)

In the short run, Democrats have won Biden and the economy a stay of execution. Only in retrospect will we know how dear the long-term cost of the reprieve will be.

Debt-Limit Deal Buys Biden Time at a Terrible Long-Term Cost