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**JANUARY 25, 2023**

Kuttner on TAP

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**** A Debt Ceiling Strategy Manual

Time to remember Neville Chamberlain

The Republican threat to create a debt default and a government shutdown
could well backfire on Kevin McCarthy and the GOP. But that depends on
whether the Democrats resist the temptation to try to appease the
Republicans with some budget cuts.

Some questions:

Are a default on Treasury bonds and a government shutdown the same
issue? No, and it's crucial for Democrats to keep them separate.

As our colleague David Dayen pointed out yesterday, the Treasury can
keep bondholders whole even if the debt ceiling is technically exceeded,
by prioritizing paying interest on bonds
<[link removed]>.
This avoids the bond market collapse that Republicans hope will force
the Democrats to agree to massive cuts. But using limited money to
protect the bond market will indeed compel a government shutdown because
it will divert money from other outlays.

That onus should be on the Republicans, as vital services are suspended
and Social Security checks don't go out. Eventually, the backlash will
force the Republicans' hand and enough Republicans will vote with
Democrats to increase the debt ceiling and reopen the government. But
hanging tough on this strategy will be hard for many at the White House
because of the sheer messiness of shutting down the government and worry
about who will ultimately take the blame.

Has Biden's view of fiscal appeasement changed since he negotiated
terrible deficit reduction deals while he was VP? Let's hope so. Times
are very different, as is Biden's role.

As the Republicans keep pointing out, Biden has presided over several
trillion dollars of increases in deficits and hence in the national
debt. The crown jewels in Biden's presidency-the Inflation Reduction
Act, the CHIPS and Science Act, and the American Rescue Plan, were all
necessary recovery policies that will reduce deficits over time. Biden
should not be eager to toss these achievements and other valued federal
outlays onto the junk pile in the vain hope of appeasing McCarthy and
the loonies.

Who will counterbalance Jeff Zients's enthusiasm for fiscal cuts? Who
will reinforce it?
As I wrote Monday
<[link removed]>,
Biden's new chief of staff has a long history as a fiscal hawk.

Among White House senior staff with direct access to Biden, John Podesta
is in charge of outlays under the Inflation Reduction Act, is a defender
of large outlays, and a shrewd political strategist. OMB director
Shalanda Young, a Capitol Hill veteran, will back the congressional
strategy of forcing the Republicans to blink first. Jared Bernstein,
formerly Biden's chief economist, now on the Council of Economic
Advisers, has no enthusiasm for budget cuts.

The concern is the political staff, who along with Zients negotiate
directly with Congress. Steve Ricchetti is no progressive. Even worse is
Bruce Reed, who was a notable deficit hawk when he worked for Obama.

But the most potent players on the Democratic side for the hang-tough
strategy are the legislative leadership. Chuck Schumer, like Biden,
wants to retain all of the measures he helped enact. Likewise the House
leadership.

A key figure could be Nancy Pelosi, who has been coyly saying that she
is happy to have passed the torch to younger leaders
<[link removed]>.
But Pelosi is the shrewdest strategist in Washington. If Biden is smart,
he will draft her to play a major role in making sure Democrats make
Republicans blink first.

What about the bond market? Isn't Wall Street counting on Democrats to
make concessions to prevent the market meltdown that default would
cause? Perhaps, but Wall Street has been wrong before.

Chuck Schumer, who used to be ridiculed as the "senator from Wall
Street," is now in a very different place in his career. And Wall Street
can't be too worried; in the days since the financial press has been
filled with apocalyptic scenarios of debt default, financial markets
have been mostly up. Wall Street is more worried about the Fed.

What's the endgame? McCarthy has been talking about demanding massive
cuts as the price of increasing the debt ceiling. My sources point out
that once McCarthy has to specify the cuts he actually wants, there are
not 218 House votes for any conceivable package of Republican cuts.

So Democrats wait Republicans out. Eventually, a small number of sane
Republicans vote with Democrats to reopen the government and increase
the debt ceiling.

The big risk here is that those moderate Republicans, working with
corporate Democrats like Rep. Josh Gottheimer of New Jersey, ask Biden
for some cuts as a token of good faith, and Biden goes along. And that
blurs responsibility for unpopular and needless cuts.

Biden needs to put the famous photo of Neville Chamberlain on his desk
in the Oval Office as a daily reminder that appeasement never works.

~ ROBERT KUTTNER

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A Pitched Battle on Corporate Power
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Biden's expansive executive order seeks to restore competition in the
economy. It's been a long, slow road to get the whole government on
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Puerto Rican Cities Sue Big Oil for Alleged Racketeering
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A novel lawsuit might just obtain damages for decades of oil
companies' lying about climate change. BY RAMENDA CYRUS

Gallego Opposes Progressives on Cutting Pentagon Budget
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In repeated votes, Gallego has sided against amendments from his
Progressive Caucus colleagues that would have reduced the Department of
Defense budget by 10 percent. BY DONALD SHAW

 

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