Bob Woodward’s The Price of Politics is a blow-by-blow description of the struggles between President Obama and congressional Republicans in the debt ceiling negotiations in the summer of 2011. If a book about debt ceiling negotiations sounds boring to you – it isn’t. Woodward’s narrative style will keep you on the edge of your seat. In researching and writing this book, Woodward relied on his extensive contacts as a longtime Washington insider.
The ramifications of a default on its debt by the U.S. government are frightening. Woodward explains why the failure to reach an agreement to raise the debt ceiling would be catastrophic. Failure would advertise that the U.S. government could no longer pay its bills. In that event world markets would dump U.S. Treasuries. U.S. Treasury securities, however, are the one risk-free asset upon which the entire world depends.
Woodward explains that a U.S. default on its debt would destroy the safe haven that Treasury bills provide. In that event the world economy would collapse. He anticipates that such a collapse would cause a worldwide economic depression much worse than the 1930s and which could last for generations. Worse, it could still happen.
Besides negotiating the debt limit with Republicans, the president had to reassure nervous financial markets in the U.S. and throughout the world. In addition, Obama had to contend with his own party. Democrats wanted to return to Clinton-era tax rates on wealthy taxpayers to reduce the deficit. And Democrats were suspicious of any compromise that involved reducing or privatizing Social Security or Medicare.
Republicans considered any return to Clinton tax rates on the wealthy as a tax increase – strictly violative of Republican principles. In addition, Republicans were unwilling to support reductions in defense spending. Spending for defense was one of the chief causes of the deficit. From 2001 through 2006 Republicans had control of the White House, House and – with a brief interlude of a few months – the Senate. During those years defense spending had increased 80 percent over the Clinton era.
There were Republicans, Speaker John Boehner in particular, who shared Obama’s concern about the failure to raise the debt ceiling. Republicans generally, however, and Senate Minority Leader Mitch McConnell, R-Ky., in particular, viewed the debt ceiling negotiations as leverage to push their agenda. Their agenda was to protect defense spending and the Bush tax cuts while securing reductions in entitlements – chiefly Medicare. Many House Republicans, the tea party in particular, viewed a failure to extend the debt ceiling as advantageous to Republicans politically and an opportunity to defeat Obama for re-election. There were many tea party members who naively believed that a default caused by a failure to lift the debt ceiling would actually be a good thing. Their theory was that the economic destruction this would cause could be creative. Their ideological fervor, hatred for Obama personally, and disdain for the federal government blinded them to the cataclysmic economic effects of a government default on its debt.
These attitudes greatly impaired the principal negotiators – Obama and Vice President Biden, Boehner and House Majority Whip Eric Cantor, R-Va., and Senate Majority Leader Harry Reid, D-Nev., and McConnell – from negotiating a compromise. Neither side was confident that it could secure enough votes to pass a compromise that would allow the debt ceiling to be raised.
After weeks of discussions and with the Aug. 2 deadline looming, Obama and Boehner finally came close to the loose framework of a deal. This involved capping general spending over 10 years, cuts in federal agricultural subsidies and education, certain Medicare cuts, altering the eligibility age for Medicare and Social Security, and reducing cost of living increases. While Republicans couched their contribution to deficit reduction in accounting alchemy, they did offer $800 billion in new revenue over 10 years. However, they were unwilling to do this by raising taxes on the wealthy. Their proposal required that any revenue be accomplished through various tax reforms. Democratic members of Congress and the Democratic base complained loudly that the negotiations involved all give by the Democrats on important programs but no serious increase in revenue by increasing tax rates on the wealthy. When Obama suggested that Boehner add an additional $400 billion in revenue, the speaker momentarily terminated the negotiations.
At this point Woodward is uncharacteristically vague about whether Boehner ever had enough Republican votes to support the proposed deal.
With the country verging on default, the president and congressional leaders were under pressure from Wall Street to do a deal and extend the debt limit. Finally, the parties compromised. The Budget Control Act of 2011 effectively guaranteed that the president would get the $2.4 trillion needed to extend the debt ceiling immediately. A total of $1.2 trillion in spending cuts would be made. As a further condition, an additional $1.2 trillion in spending would be cut over 10 years beginning in 2013. A 12-member congressional supercommittee would have until Nov. 23 to find that additional $1.2 trillion. If the supercommittee failed to reach an agreement, that would trigger sequestration of the additional $1.2 trillion in cuts over two years.
The supercommittee failed to reach agreement on the additional $1.2 trillion. This caused the trigger to be set off in January 2013. The trigger would require a sequestration of another $1.2 trillion in cuts, including defense cuts. Since the Bush tax cuts were also set to expire in 2013, the sequestration would effectively hurt both parties’ agendas. The debt ceiling passed, but the government was now holding a ticking time bomb involving vast spending cuts and tax increases which would occur in January 2013 absent further compromise.
This trigger is viewed by Democrats as anti-stimulus and counterproductive to continued economic recovery. And, as we have seen, January 2013 will be a time when the economy might most need continued stimulus. For their part, Republicans dread the impending automatic cuts to defense that sequestration would trigger and the end of the Bush tax cuts that would also occur in the absence of a compromise. Thus, the parties’ failure to reach a big deal compromise in August 2011 effectively meant that the issue of compromise would be postponed to the present.
Before the trigger deadline in January, there will be, no doubt, a flurry of negotiations in an attempt to achieve a consensus that will avoid an economic slowdown. Democrats again will seek to protect the social insurance system. Republicans will want to reduce that social insurance system and protect defense expenditures and tax cuts for the wealthiest.
The political debate regarding where and what to cut continues. Woodward adopts a pox on both your houses approach in blaming both parties for the impasse. This is understandable. Woodward is a reporter. He’s written a fascinating work describing the debt ceiling negotiations in great detail. To continue to write such books, he has to maintain his sources. To do that he has to be perceived as objective. This is accomplished by criticizing both parties equally. This can lead to cynicism and a frustration on the part of the reader seeking some direction as to which set of competing policies actually works. And, if Woodward’s book fails in any respect, it is in the failure to place the great debt ceiling debate within a historical context. Readers who are themselves taxpayers and voters seek answers to the questions: Where do we go from here? What works?
A brief review of history will answer that question. While the countless political ads and punditry may be confusing, there are basic facts that cannot be ignored. In 1993 President Bill Clinton passed his Budget Reconciliation Act with Democratic majorities in the House and Senate. That act required an increase in the tax rate on the wealthiest Americans to 39.6 percent, decreased defense expenditures substantially, reduced cost-of-living increases in our social insurance system, provided tax credits for small businesses for the purchase of technical and capital improvements and reduced income taxes for the 14 million Americans with the lowest income. Not one Republican voted for Clinton’s plan. In fact, Republicans predicted it would cause the then recession to worsen. Within weeks of Clinton’s plan passing the 30-year mortgage rate dropped from more than 11 percent to 7 percent. The Dow Jones industrial average began a gradual rise from 3,200 to reach the unprecedented height of 11,000 by the end of the Clinton administration. Unemployment declined significantly from 7.4 percent to reach a 30-year low of 4 percent. The economy added 23 million jobs. Most significantly, by the end of the Clinton presidency the United States was in surplus and had four years in a row of balanced budgets, Social Security was projected to remain fiscally sound for 35 years, Medicare for 17 years and the Congressional Budget Office projected an annual budget surplus by 2012 of $1.2 trillion.
The record also shows that with Republicans largely controlling the federal government from 2001 through 2008, two tax cuts in 2001 and 2003 reduced the rate of tax paid by the wealthiest Americans from 39.6 percent to 35 percent. Defense spending was increased over that of the Clinton era by 80 percent. The result? An anemic economy that added only 3 million jobs in eight years. When Bush left office, the Dow Jones was to 6,900. At the same time the deficit had reappeared and was running at $1 trillion a year when overseas contingency spending on Iraq and Afghanistan was included.
In the early 2000s, in a series of guest and in-house editorials, The Journal Gazette, almost alone among its media peers, sounded a warning regarding spending profligacy and excessive tax cuts. A May 19, 2002 guest editorial I wrote expressly warned that the excessive spending and the excessive tax cuts of the post-Clinton era would create bigger government, bigger deficits and an anemic economy and market. Partisan critics roundly criticized the newspaper for its trouble.
Historians like to say that we can’t know where we’re going until we first know and study where we’ve been. Well, we know from experience whose policies work and whose policies don’t. Woodward may be constrained in reminding us of this, but we know the facts for ourselves. All we have to do now is act on them.