September marks the 26th anniversary of the introduction of the Gramm-Rudman-Hollings Act, the much- maligned deficit reduction process that budget historians and analysts generally consider to have failed miserably. What few people remember about that law is that it wasn’t stand-alone legislation; it was an amendment offered to what was considered at the time to be an unrelated bill the Senate was debating — an increase in the debt ceiling.
That’s right. In 1985, increasing the debt ceiling and reducing the budget deficit were not thought to be inextricably connected. That was in spite of the soaring federal debt — the deficit in fiscal 1985 and the projected deficit for fiscal 1986 were the highest as a percentage of the gross domestic product since World War II.
Gramm-Rudman-Hollings was added to the debt ceiling bill in the Senate for three reasons. First, it was the idea of the three Senators for which the process was named — Republicans Phil Gramm (Texas) and Warren Rudman (N.H.) and Democrat Fritz Hollings (S.C.). Second, the Senate doesn’t have the same germaneness restrictions as the House, so offering an amendment that was considered outside the scope of the bill was more acceptable.
The third reason was that the debt ceiling in 1985 was considered to be “must-pass” legislation. It was one of the few bills most Representatives and Senators from both political parties thought absolutely had to be enacted when it was needed or the government would turn into a fiscal pumpkin at midnight when the existing ceiling expired. As a result, there were frequently attempts to add unrelated amendments to debt ceiling bills on the assumption that the perceived need for the legislation at some point would overwhelm opposition to individual provisions.
In 1985, increasing the debt ceiling was considered to be a largely technical means-of-financing question, while deficit reduction was always a highly charged policy. As hard as it is to imagine today — and even though government borrowing is obviously related to whether there is an annual deficit — the two issues were treated separately back then, and the borrowing limit was almost an afterthought.
The must-pass notion began to change a decade later when the debt ceiling became a big part of the tug-of-war over tax cuts between the Clinton administration and Congressional Republicans and after Treasury Secretary Bob Rubin funded the government for a short time with cash-management techniques that few others knew existed. Rubin’s actions frustrated Republicans who suddenly found that what they had always been told about the must-pass nature of the debt ceiling wasn’t exactly (or at least immediately) true and didn’t provide them with the leverage they had been assuming would force the White House to do what they wanted.
The popular linking of the debt ceiling with deficit reduction is something that’s really occurred only since the 2010 elections. That’s when the tea party wing of the Republican Party made not voting to raise the government’s borrowing limit one of its most basic tenets. For the tea partyers, it’s as much a test for Republican lawmakers as the pledge not to raise taxes.
The situation in 2011 is a direct result of what’s happened since Gramm-Rudman-Hollings became law in 1985. The two issues — reducing the deficit and increasing the debt ceiling — might not be linked forever, but they clearly are connected at the budget hip right now.
But the more interesting change is how the current GOP strategy is based on both denying and relying on the must-pass nature of the debt ceiling. On the one hand, many Congressional Republicans are insisting that they don’t have to vote for an increase in the debt ceiling because the presumed dire consequences of not acting won’t be that bad. On the other hand, they’re also insisting that not raising the debt ceiling will indeed be harmful and, therefore, the White House had better agree to do what they want.
There’s a far wider understanding now that the true deadline for increasing the debt ceiling is not the precise moment it’s reached. As Rubin demonstrated 15 years ago, the government has other ways to finance its operations that delay the day of reckoning for a period of time.
The one thing these changes don’t take into account is that the market for Treasury debt is now very different in a number of important ways. Not only is the amount of debt far greater and the percentage of foreign-owned debt the highest in recent history, but the reporting on the bond market and federal finances is now much greater, faster and opinionated than it was when Gramm, Rudman and Hollings were devising their plan and when Republicans and the White House were battling in the mid-1990s. As a result, developments in Washington typically have a bigger and more immediate effect on the markets.
This is why the current situation is fraught with so much uncertainty and danger. The Congressional Republican strategy of using the debt ceiling to force the White House to make changes is clearly based on the lessons learned over the past two and a half decades, but it seems not to take into account market changes that could render those lessons useless. That means that, as has happened each time in the past when it’s been tried, the results of the debt ceiling fight are likely to be seen as not worth the effort.