British Prime Minister Neville Chamberlain displays the resolution following the Munich Agreement that he said represented “peace for our time,” September 30, 1938.
The Republican threat to create a debt default and a government shutdown could well backfire on Kevin McCarthy and the GOP. But that depends on whether the Democrats resist the temptation to try to appease the Republicans with some budget cuts.
Some questions:
Are a default on Treasury bonds and a government shutdown the same issue? No, and it’s crucial for Democrats to keep them separate.
As our colleague David Dayen pointed out yesterday, the Treasury can keep bondholders whole even if the debt ceiling is technically exceeded, by prioritizing paying interest on bonds. This avoids the bond market collapse that Republicans hope will force the Democrats to agree to massive cuts. But using limited money to protect the bond market will indeed compel a government shutdown because it will divert money from other outlays.
That onus should be on the Republicans, as vital services are suspended and Social Security checks don’t go out. Eventually, the backlash will force the Republicans’ hand and enough Republicans will vote with Democrats to increase the debt ceiling and reopen the government. But hanging tough on this strategy will be hard for many at the White House because of the sheer messiness of shutting down the government and worry about who will ultimately take the blame.
Has Biden’s view of fiscal appeasement changed since he negotiated terrible deficit reduction deals while he was VP? Let’s hope so. Times are very different, as is Biden’s role.
As the Republicans keep pointing out, Biden has presided over several trillion dollars of increases in deficits and hence in the national debt. The crown jewels in Biden’s presidency—the Inflation Reduction Act, the CHIPS and Science Act, and the American Rescue Plan, were all necessary recovery policies that will reduce deficits over time. Biden should not be eager to toss these achievements and other valued federal outlays onto the junk pile in the vain hope of appeasing McCarthy and the loonies.
Who will counterbalance Jeff Zients’s enthusiasm for fiscal cuts? Who will reinforce it?
As I wrote Monday, Biden’s new chief of staff has a long history as a fiscal hawk.
Among White House senior staff with direct access to Biden, John Podesta is in charge of outlays under the Inflation Reduction Act, is a defender of large outlays, and a shrewd political strategist. OMB director Shalanda Young, a Capitol Hill veteran, will back the congressional strategy of forcing the Republicans to blink first. Jared Bernstein, formerly Biden’s chief economist, now on the Council of Economic Advisers, has no enthusiasm for budget cuts.
The concern is the political staff, who along with Zients negotiate directly with Congress. Steve Ricchetti is no progressive. Even worse is Bruce Reed, who was a notable deficit hawk when he worked for Obama.
But the most potent players on the Democratic side for the hang-tough strategy are the legislative leadership. Chuck Schumer, like Biden, wants to retain all of the measures he helped enact. Likewise the House leadership.
A key figure could be Nancy Pelosi, who has been coyly saying that she is happy to have passed the torch to younger leaders. But Pelosi is the shrewdest strategist in Washington. If Biden is smart, he will draft her to play a major role in making sure Democrats make Republicans blink first.
What about the bond market? Isn’t Wall Street counting on Democrats to make concessions to prevent the market meltdown that default would cause? Perhaps, but Wall Street has been wrong before.
Chuck Schumer, who used to be ridiculed as the “senator from Wall Street,” is now in a very different place in his career. And Wall Street can’t be too worried; in the days since the financial press has been filled with apocalyptic scenarios of debt default, financial markets have been mostly up. Wall Street is more worried about the Fed.
What’s the endgame? McCarthy has been talking about demanding massive cuts as the price of increasing the debt ceiling. My sources point out that once McCarthy has to specify the cuts he actually wants, there are not 218 House votes for any conceivable package of Republican cuts.
So Democrats wait Republicans out. Eventually, a small number of sane Republicans vote with Democrats to reopen the government and increase the debt ceiling.
The big risk here is that those moderate Republicans, working with corporate Democrats like Rep. Josh Gottheimer of New Jersey, ask Biden for some cuts as a token of good faith, and Biden goes along. And that blurs responsibility for unpopular and needless cuts.
Biden needs to put the famous photo of Neville Chamberlain on his desk in the Oval Office as a daily reminder that appeasement never works.
