THE THREAT OF DEFAULT AS POLITICAL STRATEGY: THE POLITICAL BUSINESS CYCLE

           The debt ceiling issue has been resolved for now. But before we move on from this episode, let’s reflect on the recent history of the debt-ceiling law and its negative impact on rational economic policy. Perhaps a clearer understanding of the law would help us get rid of it. 

         First,  the debt ceiling law is a cap on the amount the government can borrow even when borrowing would be necessary to meet all the spending commitments Congress has made. The cap would force the government to renege, or "default," on its obligations. The nation came close to default in early June 2023, but this was forestalled by bipartisan agreement to lift the ceiling until 2025.  

         Second, the nation was brought to this crisis by Republicans. That is, the application of the law is asymmetric: Democrats do not impose pre-conditions for raising the ceiling when Republicans occupy the White House, yet  Republicans do impose pre-conditions when Democrats occupy the White House.   This practice is long-standing and has become known as "the political business cycle."

         For example, prior to this latest default threat, the debt ceiling was raised three times during the Trump administration, in 2017, 2018, and 2019, without any default threat at all. The first two of these debt-ceiling increases were approved on a bipartisan basis without any pre-conditions; the 2019 increase was approved on a bipartisan basis, offset by a $77 billion cut in administrative spending.

 

The Economics Behind the Strategy

          This asymmetric political business cycle strategy relies on macroeconomics, a branch of economics designed as a tool for good -- achieving full employment with low inflation – – but which, like any tool,  can be abused. 

A closer look at core economic principles will show why the political business cycle works.  First, national product equals the total value of all the goods and services that people produce and distribute. This total derives from the huge number of daily trades between foreign and domestic individuals, business firms, and government agencies.  

          Second, all spending is someone's income. When a good or service is purchased, money is exchanged to reward the people who made, distributed, and provided for the sale of that good or service.

         Third, all spending is comprised of four categories: consumption, private sector investment, government spending, and net exports. If the total of these spending categories rises, the total demand for goods and services rises, thereby generating more jobs and income for those producing the goods and services.    In this scenario, the improvement in economic conditions improves the political prospects for the party in the White House.

         If, on the other hand, the rate of total spending is decreased, then the opposite is true; demand for goods and services will decline, as will the demand for the people who produce those goods and services.  Here the political prospects worsen for the party in the White House.

         The political business cycle strategy works because government spending -- a key component of total spending – is determined by policy.  Sure enough,   during Republican presidential administrations -- Reagan/Bush '41,  Bush '43, and Trump -- the debt ceiling was raised and spending on defense and non-defense categories rose.  By contrast, during Democratic presidential administrations --Clinton,  Obama and the Biden years thus far -- we have a curtailment in the rate of spending and, in the case of Obama, an out-right decline.     Moreover, those increases in the debt ceiling during Republican administrations --  three times during the Trump administration and several times during the Reagan Bush and GW Bush administrations -- were all with bi-partisan votes.  So, the debt ceiling weapon is available to both parties, but only one uses it.

 Return to "Regular Order"

         Regular order is the systematic assembling of information prior to legislative action. During regular order congressional committees gather supporting documentation and hold hearings compiling expert testimony from specialist members of Congress, experts within the federal agencies, and from think tanks and universities.  During regular order, each bill that is considered has a fiscal note or scorecard provided by the Congressional Budget Office so Congress knows the price of what they are proposing and how it will be financed.

          The ability to impose a debt ceiling enables members of Congress with far less expertise on any given subject to nullify the more rigorous procedures of regular order. The debt-ceiling law enables less qualified members to sabotage the work of those who participate in regular order.   

         To paraphrase Henry the Second, " Will No One Rid Us of this Meddlesome Law?"        


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