Shadow Government

A front-row seat to the Republicans' debate over foreign policy, including their critique of the Biden administration.

The nutters’ side of the story

The domestic incredulity over U.S. debt ceiling battles has gone global. Chinese officials have expressed concern over the prospects for their substantial bond holdings: "We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors," Hong Lei, a foreign ministry spokesman, said at a news conference late last week. ...

Alex Wong/Getty Images
Alex Wong/Getty Images
Alex Wong/Getty Images

The domestic incredulity over U.S. debt ceiling battles has gone global. Chinese officials have expressed concern over the prospects for their substantial bond holdings:

"We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors," Hong Lei, a foreign ministry spokesman, said at a news conference late last week.

A less measured statement of concern came from the voluble Vincent Cable, Britain's business secretary. He offered his analysis yesterday:

The domestic incredulity over U.S. debt ceiling battles has gone global. Chinese officials have expressed concern over the prospects for their substantial bond holdings:

"We hope that the U.S. government adopts responsible policies and measures to guarantee the interests of investors," Hong Lei, a foreign ministry spokesman, said at a news conference late last week.

A less measured statement of concern came from the voluble Vincent Cable, Britain’s business secretary. He offered his analysis yesterday:

The irony of the situation at the moment, with markets opening tomorrow morning, is that the biggest threat to the world financial system comes from a few right-wing nutters in the American congress rather than the euro zone," he told BBC television.

It is more than passing strange to have a British government that has made credible austerity its central focus turn around and denounce the lunacy of seeking credible austerity. Perhaps something was lost in translation.

The U.S. debt ceiling must certainly be raised. In all likelihood, it will be lifted sometime before the critical hour. But at home and abroad, there is disbelief that such an easy problem cannot be dispensed with more quickly. The festering nature of the impasse is taken as a sure sign of something deeply amiss in our political sphere. Herewith, some central misperceptions about the debt ceiling debate:

1. Just raise the ceiling, already! Problem solved.

The presumption is that there is an easy fix that is being blocked solely by partisan maneuvering for political advantage. What would such an easy fix look like? Two major candidates:

  • A simple, long-term hike in the debt ceiling, unencumbered by controversial tax or spending provisions. This is the solution beloved by those who favor the credit card analogy: The time to address spending problems is when you whip out your credit card to buy something, not when the bill arrives in the mail. The implication is that one should just pay the bill now and deal later with the profligacy issue.
  • The problem with this approach is that debt-rating agencies have rejected it. They have expressed concern about the trajectory of U.S. borrowing and have threatened a ratings downgrade if a debt ceiling hike is not coupled with credible plans for sustainable borrowing.
  • A short-term hike to buy time. If a simple, "clean" debt-ceiling increase will not satisfy markets (as represented by S&P and Moody’s), then some very difficult discussions about taxes, spending, and the size of government are looming. Why not buy time for those discussions with a debt ceiling increase that would allow for another six months of talks?
  • There is ample precedent for short-term extensions. The problem with this approach is that the president has rejected it. A short-term extension would mandate a difficult political discussion right in the midst of an election. A democracy purist might suggest that elections are the ideal forum to decide difficult political questions, but this administration has consistently favored budget fixes that carry just past the polling date. The president’s deficit commission, which was meant to reassure everyone that the national borrowing problem was under control, followed the plan and reported in December 2010, one month past the latest congressional elections.
  • If these two simple options are off the table, the problem no longer looks like an easy one. That’s not to say it’s intractable, but it should be no surprise that the negotiations are difficult.

2. Republicans won’t take yes for an answer.

Vincent Cable may be suffering from having read David Brooks, who wrote earlier in the month that Republicans were

… being offered the deal of the century: trillions of dollars in spending cuts in exchange for a few hundred billion dollars of revenue increases. A normal Republican Party would seize the opportunity to put a long-term limit on the growth of government. It would seize the opportunity to put the country on a sound fiscal footing. It would seize the opportunity to do these things without putting any real crimp in economic growth.

How could any party in its right mind (intended) fail to accept such a deal?

To which Republicans responded: What deal? There is a difference between vague leaked suggestions of compromise and a firm offer. There is no evidence the latter was ever put forward by the White House. When Republicans, represented by House Speaker John Boehner (R-OH), were tempted by White House terms, those terms then shifted.

The demand for detail stems from a fundamental distrust between Republicans and Democrats. Some of this can be traced back to the president’s contentious health-care legislation, which claimed to reduce deficits. Those claims were based on cost underestimates and on promises of future spending cuts that were always unlikely to materialize.

Without trust, Republicans are unwilling to accept a plan that raises taxes now but promises future earnest efforts to cut spending. This skepticism hardly makes them unique. Democrats were equally indignant when it looked like an agreement might put spending cuts first and only promise future earnest efforts to raise tax revenue.

3. If we would just raise taxes, there wouldn’t be a problem.

Like no other facet of this debate, obstinacy on taxes seems to draw contempt from commentators. It is taken as conclusive proof of irrationality and irresponsibility. How can Republicans fail to see the need to raise revenues?

Two flaws in this critique: First, Republicans have agreed to raise revenues. Members of the Bowles-Simpson deficit reduction commission signed on to the idea. Members of the Senate Gang of Six signed on to the idea. Speaker Boehner has reportedly been discussing the idea in talks with the White House.

Given deep doubts about the administration’s bona fides on spending cuts, however, Republicans are loath to concede on revenue increases in the absence of concrete proposals for restraint on entitlements and other spending drivers.

Second problem: There is little evidence that a tax hike could solve the U.S. budget problem unless accompanied by serious spending restraint. The invaluable Keith Hennessey runs the numbers. In a nutshell, federal tax revenues have steadfastly remained at or below 20 percent of GDP for decades, through periods of high marginal tax rates and low. This is not an immutable economic law, but it suggests that boosting revenue will not be easy.

At the same time, spending is now 24 percent of GDP. In the absence of serious reform, it is projected to grow to almost 34 percent of GDP by 2035.

4. This demonstrates a failure of the democratic process.

Secretary of State Hillary Clinton addressed this well today in Hong Kong, where she said: "The ‘political wrangling’ is part of democratic problem-solving."

From first principles, suppose a U.S. citizen strongly believes that government spending is on an unsustainable path and needs to be restrained. How should she translate this belief into policy? She could work to elect a representative who shared those beliefs. That representative would then be expected to go to Washington and insist on spending restraint.

So far, everything has been proceeding according to textbook. That text does not necessarily mandate dangerous brinkmanship, but the current predicament stems less from democratic failure than from process failure. The president was supposed to put forward a budget that would address these issues and serve as the basis for a reasoned debate. That has not happened. His latest budget did not propose viable fiscal solutions and was defeated 97-0 in the Senate. An alternative approach was a bipartisan commission, which the president first endorsed, but then abandoned after the commission reached a surprising degree of consensus.

No democratic process will be immune to such neglect. Although the present dire straits may be misunderstood, they are still troubling. It may be small consolation to worried observers around the world that our problems are really more intractable than they seem, but at least there is the comfort of knowing that we’re doing the wrong thing for the right reasons.

Phil Levy is the chief economist at Flexport and a former senior economist for trade on the Council of Economic Advisers in the George W. Bush administration. Twitter: @philipilevy

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