A Republican Train Wreck Jude Wanniski September 8, 1995

By all accounts, the House Republican leadership appears determined to use the debt ceiling as leverage on the Democrats to force President Clinton to accept the GOP version of budget reconciliation. They have collected the signatures of 160 members to back up that threat and Gingrich vows: “I don’t intend to schedule the debt limit until their goals are met.” This is the second of two train wreck scenarios that are emerging on the near horizon. The first is a “toy train wreck” or a “train without passengers” that is scheduled for October 1, the beginning of the new fiscal year. This issue involves money that has not yet been appropriated by the Congress to finance the continuing discretionary operations of the government, for the most part paychecks to federal bureaucrats. Because the Congress is not asked to appropriate money in non-discretionary entitlement programs, the government will continue to send out checks to those who are entitled -- all pension, health and welfare recipients. This toy train wreck will involve only those agencies affected by one or more of the 15 appropriation bills the President will veto, on the grounds that the GOP is being too stingy. This would last a few days, until the President agreed to sign short-term continuing resolutions permitting agencies to function for an extended period -- days, weeks, or months, as prescribed by the GOP leaders. 

The Republicans are in an extremely powerful position here. It will become obvious to the public that no vital services are being threatened, no poor widows and orphans are being thrown to the wolves, and that it is the President and the Democrats who are being unreasonable in refusing to accept the spending levels set by the 104th Congress. The President will find himself signing the short-term continuing resolutions, which the House Republicans will time to coincide with the second train wreck. It is this real wreck, complete with widows and orphans as passengers, that the GOP will have to accept responsibility for. The political consequences are such that it strikes us as unlikely that House Speaker Newt Gingrich and House Majority Leader Dick Armey will allow it to happen. Gingrich’s favorite pollster, Frank Luntz, has been running all over Capitol Hill this week with his findings, that 70% of the people would support the first train wreck, but only 20% would support the second. 

The most fanatical budget balancers in the GOP are shouting “Damn the torpedoes, full speed ahead,” almost as if they prefer a major train wreck to demonstrate their political courage. My reading, after two days in Washington this week, is that Gingrich and Armey have so much on their plates that they don’t appreciate the political consequences of the debt-limit option. Quoted in Paul Gigot’s Wall Street Journal column this morning, Gingrich clearly thinks he can use the debt ceiling to decide what the government can spend money on and what it cannot. Apparently nobody has informed him, or Gigot, that Treasury cannot pay interest on existing debt after the ceiling is hit. It will not have the cash to make a major payment on Nov. 15, which would mean the United States for the first time in our history would default on its debt. The convulsions in the market would begin two or three weeks in advance, as Treasury would not even be able to schedule auctions, as it normally would in October, to permit the markets time to assemble resources. In the past, when President Reagan used the debt-limit option as leverage against a Democratic House of Representatives, Treasury was able to get some head room to fund existing debt, by borrowing from the Social Security Trust Fund. With that loophole subsequently closed, Treasury will have no room to maneuver and will simply run out of cash for widows, orphans, and creditors at the same time. 

It is hard to imagine a scenario in which the electorate blames the President for allowing this to happen. If only prospective spending was involved, the country might divide blame. But only the President would be on solid ground in arguing that the 104th Congress is responsible for not paying obligations undertaken by previous Congresses. It is, after all, the Congress that has the power of the purse. All the financial convulsions that would attend to the train wreck, plus the pain and suffering of widows and orphans, would wind up on the laps of Messrs. Gingrich and Armey. It should be noted that the Senate Republicans are more or less innocent bystanders here; the House controls the strategy by virtue of its initiation of legislation on the debt ceiling. The best Gingrich & Co. could manage by way of argument to the American people would be lame. They would say that if only the President would agree to their demands -- which may wind up including welfare reform as well as Medicare and tax cuts -- they would not have to cause convulsions in the financial markets and the disruption of vital services. We are forced to hurt you because the President will not do our bidding.

My surmise is that the White House and Treasury Secretary Bob Rubin, both having formally and respectfully requested a raising of the debt ceiling forthwith, have a much better grasp of the political disaster that would befall the Republican Party if they do not comply. We certainly must assume that at some point in the train wreck scenario Gingrich & Co. would reverse course, lift the debt ceiling, and come to terms with the President on the appropriation bills. The Republicans would no longer be in a strong position to manage the appropriation bills in a way that might deliver a budget reconciliation that the President would feel obliged to sign. Tax cuts would go down the drain for 1995, including the retroactivity on capital gains. The financial markets, which we expect would take a severe beating during the debt crisis, would remain in a slump. An inventory recession would be underway in time for Christmas. The President would not lose any opportunity to point out that the irresponsible Republicans had wrought this damage. It would play into the hands of the President’s re-election strategy, which he even now is planning to initiate with saturation TV spots during the crisis period. If Treasury misses one little interest payment, the Democrats will blame Republicans for years to come for causing interest rates to be higher because of the default, and they would be right.

As we have been pointing out in recent weeks in mulling this matter, the House Republicans believe they are acting with political courage, will and determination. They are instead acting like the minority party of the past 40 years. It is not only that they do not realize their governing responsibilities, but also that they do not realize their strength. They have the power of the purse, the power to call the tune on the budget, as long as they give the President his due. It would be a simple enough matter to end the sophomoric threat of the debt ceiling and manipulate the appropriation bills in a way that forces the President into a corner on budget reconciliation. As long as the President refuses a reasonable bargain on budget reconciliation, trading off Medicare adjustments and taxes, the Congress can write continuing resolutions to the stingiest of specifications and the tightest of time frames. Once the GOP announces this intent, the chess moves available to the President would be so limited that it would be clear he would have to come to terms across the board.

At some point, perhaps as the first train wreck occurs, Gingrich & Armey will be forced to spend a few minutes getting briefed by Treasury experts, who will inform them of their misconceptions about the debt limit. The 160 House Republicans who have threatened to vote against a higher debt ceiling unless their demands are met should also be required to sit down in a quiet place to understand the consequences of their actions. Senate Majority Leader Bob Dole, who wants to be President, might ask Chairman Al D’Amato of Senate Banking to assess the consequences of a default on the U.S. debt, perhaps with a suggestion that Federal Reserve Chairman Alan Greenspan have a word with Newt. It seems reasonable that with all these smart people in Washington, someone will figure this out in time to throw the switch that prevents collision. Isn’t it?