More Game Playing with the National Debt

Part 6 of a series

With the first face-to-face meetings between President Biden and House Speaker McCarthy this week, the federal debt ceiling "crisis" has finally overtaken runs on banks and inflation as the primary focus of attention by the news media. The Associated Press, the Washington Post and the New York Times are all devoting substantial ink (or, perhaps, pixels) to the story.

In today's post, I'd like to direct your attention to two expert sources to which I've been paying more attention lately. Then I'd like to call out an egregious example of the way the mainstream media is framing this matter.

American Prospect's X-Date Newsletter

The American Prospect, founded in 1989, describes itself as "an independent voice for liberal thought," and as "... devoted to promoting informed discussion on public policy from a progressive perspective." Until this year I was only vaguely aware of this journal/website, perhaps because "liberal" is not a way I've thought of myself since realizing that "the liberals" gave us the Vietnam War. The Prospect's reporting on the debt ceiling, however, has caught my eye, particularly since they've begun a weekday newsletter called "X-Date". In the May 10 feed, "Twelve Years of Being the Most Responsible Guy in the Room", Prospect executive editor David Dayan ties the origin of today's "debt crisis" back to an earlier episode.

"In 2011, for the first time ever, Barack Obama knowingly used the debt ceiling as a way to begin negotiations on a “grand bargain” on deficits and debt."

Dayan notes,

"The sad spectacle ... set a precedent, among policymakers and especially the media, that the debt ceiling in divided government was a time for negotiation and compromise. It legitimized the hostage-taking event. The way the debt ceiling is covered now, chiding Biden’s previous stance of no negotiations as “increasingly untenable,” flows right from the 2011 standard."

Dayan faults the Democrats for their "insatiable desire to look like the reasonable ones" which led them to fail to raise (or even abolish) the debt limit when they had control of both houses of Congress in the late 2022 lame-duck session.

"Once you’ve established threatening the full faith and credit of the U.S. government for ideological ends as a normal political back-and-forth, you cannot go back."

In the May 11 X-Date feed, "Savvy Beltway Reporters’ Debt Ceiling Duplicity", Prospect managing editor Ryan Cooper, also excoriates the Democrats.

"As a rule, the party is gutless and easily cowed, and terrified of negative news coverage. Sure enough, reporting indicates that Biden administration officials are anxiously wringing their hands about using any of the executive branch tools to do an end run around the ceiling, like the platinum coin or declaring it unconstitutional, because there might be negative consequences. (The negative consequence of re-establishing the norm that Republicans can extract poisonous concessions by threatening default, thus guaranteeing they will ask for even more next time, doesn’t seem to bother them as much.)"

Robert Hockett: The Case for the Unconstitutionality of the Debt Limit Law

Robert Hockett is a professor at Cornell Law School and the co-author of the 2020 book, "Money from Nothing: Or, Why We Should Stop Worrying about Debt and Learn to Love the Federal Reserve" which I have reviewed elsewhere. He formerly was an online columnist for Forbes, has recently started a Substack blog, "Capital Futures" and this past week scored his first (to my knowledge) New York Times op-ed column, This Is What Would Happen if Biden Ignores the Debt Ceiling and Calls McCarthy’s Bluff (print edition, May 10 2023, Section A, page 22). If you want to get the lowdown on how the debt ceiling law could be declared unconstitutional, I recommend his May 11 blog post, "The ‘Debt Ceiling’ is Unlawful in At Least Six Ways, and Must Be Declared Null & Void: The Federally Legislated Budget is Its Own Floor & Ceiling".

The Ideology beneath the National Debt Cut Game

In explaining issues in political economy, mainstream media types have a fondness for constructing interactive games that let people express their own value choices about issues. Two months ago, I wrote a post, "Let's Play 'Conventional Wisdom'", which described a visit which the host of public radio program "Marketplace" paid to a subsidiary of the Brookings Institution think-tank to play an online game, "The Fiscal Ship," which "lets players make their own federal budget proposal."

We saw more of this gamesmanship this past week on the Washington Post's website: "Think you can tame the national debt? Play our budget game". The reader is asked, "How would you raise and spend money if you ran the federal government?" The reader is then prompted to flip through a deck of cards, each of which has a proposal which would affect either federal spending or federal tax revenue.

"How would you raise and spend money if you ran the federal government? Would you fund universal preschool? Lower the corporate tax rate? Boost Social Security payments? Extend the 2017 tax cuts?"

The reader is then confronted with the impact of their choices on the accumulated national debt, described as currently being at a $31 trillion level. That's cute as far as it goes, but the most significant sentence in the article is the very first:

"Everyone in Washington seems to think the national debt is too big."

The words, "Everyone is Washington," give away the plot; this is the ruling class's intellectual consensus. This is where "we" start the discussion. If you don't accept this premise, you're not elegible to participate in the discussion. All "solutions" are explicitly premised on the assumption that the national debt is too big regardless of what we're actually spending federal funds on.

But what happens if we conduct a thought experiment in which the national debt is much smaller than currently?

Suppose the accumulated national debt was only five percent of its current size (with interest payments on those debts proportionately smaller), the American economy was as large as it is right now, and everything else about national politics was the same. Democrats in the White House and barely in control in the Senate; Republicans barely in control of the House; MAGA Republicans effectively in control of the House Republican caucus. Same balance in spending between defense, Social Security, Medicare and everything else. Debt ceiling law in force with the Treasury pushing up against that ceiling.

Do you think the Republicans would not be trying to hold the full faith and credit of the United States hostage to their budgetary demands? No, they would be playing the same game as they are right now. It's not the size of the national debt that is the real issue. The real issues are two-fold: (i) spending and taxation policies (which is what Biden and the House Republicans will ultimately be negotiating over); and (ii) the weaponizability of the debt which the debt ceiling law permits.

The Post's phrasing in the first sentence of the article also implicitly assumes that the national debt, regardless of its size, is inherently a bad thing. However, as Stephanie Kelton and other advocates of Modern Monetary Theory (MMT) have pointed out, every debt instrument is a liability on someone's balance sheet and an asset on someone else's balance sheet. The national debt is dollar-for-dollar equal to the net financial assets of the non-federal-government sector of the economy. Reducing the national debt would mean reducing those net financial assets, dollar-for-dollar. Would that be a bad thing? It depends (though probably it would be).

The main point is that once we start out by assuming that the national debt is a bad thing, then the size of the debt becomes weaponizable. That's the game the House Republicans played in 2011 and 2013 and are playing right now. The Democrats could have taken that game off the table, but failed to do so when they had the chance. Though the Republicans' priorities are appalling, they at least understand that a political party must, whatever else it may be, be partisan. The Democrats too often do not.

I welcome your questions and feedback in the Comments section.