Over the decades fights over extending the debt ceiling — the absolute statutory cap on how many treasury securities can be outstanding at any one time — have become more and more important to our fiscal politics. Since the beginning of the 1980s we’ve seen recurring government shutdowns which have largely had immediate negative effects on government employees. This has made these confrontations more dramatic and important. Seven years ago, these showdowns took a new more important and frightening stage when congress built into their negotiations 100s of billions of dollars in spending cuts and tax increases. These would take effect if Republicans and Democrats didn’t come to a deal over the debt ceiling. This became known as “the fiscal cliff”, and tipped the scales in favor of austerity in the ultimate deal.
This precarious arrangement had benefits for both Democrats and Republicans. Republicans got to cause economic damage during a Democratic presidency, while Democrats got to put forward a narrative emphasizing their own responsibility relative to “dangerous Republicans”. One way you can see how the Obama administration saw the politics of this is in the speed at which the Obama administration dismissed options for avoiding the debt ceiling, and thus the fiscal cliff.
Republicans essentially reused this technology when it came to the CARES act. I criticized the CARES act early on for having specific dollar amounts and arbitrary time limitations, rather than standardized criteria for indefinite mandatory funding of the most essential programs. It has become clear since then that this structure has many benefits to a Republican party ready to shed President Donald Trump, and saddle a Democratic administration with a deep depression. As David Dayen reiterated today in his excellent Coronavirus newsletter, Democrats had maximum leverage over Republicans when Corporate America was on the precipice.
The trouble is, Corporate America doesn’t need all that much to survive in the short term. Over a period of years it needs big budget deficits in recessions to ensure large aggregate profits are available. But it doesn’t need direct fiscal aid on the timescale of months, or days. The economic coordination rights concentrated in large corporations means that as long as the Federal Reserve ensures that financial markets are functioning, corporations can survive big revenue losses for sustained periods. Corporate America is not especially fragile, and can easily out wait the chaos the US state causes itself through semi-regular shutdowns.
None of this means that stabilizing financial markets wasn’t important, it just means that the Democrats failed to use their moment of maximum leverage to secure ongoing fiscal support to state and local governments on the frontlines of fighting Coronavirus. It also time-limited the dysfunctional rollout of direct cash payments to households (both direct checks and expanded unemployment insurance). The best way to avoid this would have been an automatic trigger tied to the unemployment rate (as I discussed in detail here), but until recently Pelosi opposed this because of the “bad” Congressional Budget Office score it would have received. (I’ll be writing about the recent controversy over automatic triggers later this week). Now expanded unemployment benefits have expired without another deal in sight, and weeks of IT issues to contend with even if they do get to a deal. In other words, we’ve passed the CARES Act’s “Fiscal Cliff”.
While this is disastrous for the country at large, the political incentives each party faces are going to lead to intensifying fiscal cliffs for the foreseeable future. Congressional Republican incumbents benefit from instability among lower and middle income households. Voting is deeply tied to residency and housing, which is obviously disrupted by mass evictions. Meanwhile, Democrats can correctly point to Republican obstructionism to drive turnout from their preferred voters — affluent suburbanites.
I normally don’t wade into partisan politics like this, but it is important to get a handle on these dynamics to understand the future of economic policy for the next few years. It was easy to get lulled into a false sense of security by the bipartisanship in the CARES Act — but that was a rare exception. The stars aligned to give both parties an unusual incentive to accomplish an overarching deal quickly. That is now over.
Without major and extreme change to our politics, we’re much more likely to see half-hearted and inadequate short-term extensions to the most minimal support to households and businesses, for as long as legislation requires inter-party cooperation. All of this continues while the virus rages on. In other words, we’re going to be facing a deepening depression and economic crisis from now on.