Democrats Take a Big Step Toward Protecting the Markets from Trump
(Bloomberg Businessweek) -- With a new session of Congress comes a new set of congressional rules. One in particular, on its way to being implemented in the House, should cheer investors exhausted by market chaos and leery of President Trump’s unpredictability: Democrats are reimposing an arcane measure called the “Gephardt Rule,” which reduces the likelihood that debt-ceiling brinkmanship will tank markets, as it did in 2011 and 2013, when Republican threatened to force a default to extract policy concessions.
Trump’s norm-busting style and recent trashing of Federal Reserve chairman Jerome Powell have already raised fears that he might engineer his own debt-ceiling drama. As a Goldman Sachs note released in the early days of the current government shutdown pointed out: “The confusion and disorder surrounding this week’s spending debate suggest fiscal deadlines in 2019—including the debt limit deadline—could be more disruptive than they have been since the 2011-2013 period.”
The fact that this is even possible owes to the strange two-step process by which the United States, and no other country, goes about budgeting and spending money. First, Congress passes a budget resolution that determines how much money will be spent. Think of this step as ordering from a dinner menu. Next, lawmakers raise the debt limit to allow for that spending to happen—they pay the check. In the past, both parties, but especially Republicans, have exploited this disjointed process by balking at the second step, essentially refusing to pay the bill for the dinner they already ordered.
The GOP won some spending concessions in 2011, when President Obama blinked. But this came at a steep cost: financial markets melted down over fears of default and Standard & Poor’s downgraded the U.S. credit rating for the first time in history, adding billions to borrowing costs. A dangerous precedent was set, as some Republicans convinced themselves that the U.S. could actually pick and choose which debts to pay without causing a global financial meltdown.
Raising the debt ceiling has been a problem for decades. President Kennedy’s Treasury Secretary, Douglas Dillon, once griped, “[L]et no one labor under the delusion that the debt ceiling is either a sane or an effective instrument for the control of federal expenditures.” But for a while at least, the problem was fixed: back in 1979, when Democratic Rep. Richard Gephardt of Missouri, sick of arm-twisting colleagues for debt ceiling votes, devised an elegant workaround. “Every time it came up I had to go to every member and seek their vote,” Gephardt told me several years ago. “It was painful and difficult and, I thought, unnecessary. I’d say, ‘Did you vote for the appropriations bill? The defense bill? The highway bill?’ They’d all say yes. And I’d say, ‘Well, then you gotta pay the bill.’ ”
Gephardt’s solution was simple: when Congress adopted a budget resolution (step one) it was automatically “deemed to have passed” a commensurate increase in the debt limit (step two). The Gephardt Rule functioned as intended until 1995, when Republicans took over the House and split up the process to once again force the politically uncomfortable second vote—with near disastrous effects in 2011 and 2013.
All that happened before Trump ever factored into the picture. With markets already in the midst of a punishing “Trump Slump,” a debt-ceiling breach could do incalculable damage. Democrats’ decision to reimpose the Gephardt Rule doesn’t eliminate the possibility entirely—the Senate also must raise or suspend the debt limit, though it’s much less volatile than the House—but it’s a step toward common sense at a time when there haven’t been many of them.
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