Trump, Democrats Reach Agreement To Hold Up Debt Ceiling

Oliver Goodman, Managing Editor, Johns Hopkins University

On September 9th, President Trump broke rank with Senior Republican leaders, cutting a surprise deal with Democrats to extend the debt ceiling through December 8th and provide $15.3 billion in disaster relief for victims of Hurricane Harvey. Despite fervent opposition from House Speaker Paul Ryan and Senate Majority leader Mitch McConnell, the good optics of disaster relief funding and the bill’s 316-90 victory in the House proved convincing enough for Trump to sign it into law.

Many saw this move on Trump’s part as validation of his promise to be the “great negotiator.” Left-leaning pundits were quick to claim he had, after 150 years, finally broken the mold of the party-aligned president. Much of the reaction to this decision is sensationalized. From a strategic standpoint, however, Trump did not seem to gain any significant bargaining power, choosing to spite Republican leaders in favor of his own public appearance, rather than hold firm on party-line negotiations.

Extending the debt ceiling until December 8th avoids the calamitous possibility of a US default on October 2nd. But it is a short-term solution to a problem that has historically invited brinksmanship from both sides of the aisle. Because of the ultimatum the debt ceiling creates, it provides a type of political leverage that is difficult to organically construct, thus allowing politicians to weave their own fiscal agendas, namely budget cuts and entitlement packages, into the bill before it passes.

The general public’s misunderstanding of what the debt ceiling is, or what could’ve happened if we failed to raise it, may exacerbate such brinkmanship. Contrary to popular belief, raising the debt ceiling does not appropriate more money; rather, it authorizes the Treasury to sell bonds that raise the cash necessary to fund financial commitments, which Congress has already made. If the Treasury cannot do this, it must then prioritize commitments or risk defaulting on US loans.

If the United States were to default, a litany of consequences would ensue. Treasury bonds, which are currently seen by foreign lenders as the safest asset in the world, backed by the “full faith and credit” of the largest economy in the world and a historically stable government, would lose their international standing. Foreign lenders, who have enthusiastically purchased these bonds would demand higher interest rates. If interest rates on Treasury bonds increase, the interest rates on nearly every other loan in the US—including mortgage, car and student loans—would increase, as they all use Treasury bonds as a base for their own rate calculation. The combination of higher interest rates and forced austerity measures within the US Treasury would have a catastrophic impact on the United States economy.

That said, Democrats capitalized on the convergence of the impending debt limit and Hurricane Harvey to support a relief bill that only raised the debt ceiling for a short period of time—to give themselves more negotiating leverage later in the year. This tactic also forces Republicans to vote on the debt ceiling again before next year’s midterm elections. Republican leaders, like Paul Ryan as well as Treasury Secretary Steve Mnuchin, have thus clamored for an eighteen-month extension to the ceiling.  Mnuchin has even argued that the debt ceiling should not be a political issue, but rather be automatically raised.

Many pundits were baffled by Trump’s seeming about-face on the matter of collaboration with Democratic leaders, especially with individuals he has expressed vehement public dissent towards, namely Nancy Pelosi and Chuck Schumer. CNN called it a “rebuke[of] Republican leaders.” However, this decision fits into the nexus of shots Trump has called from the oval office. In his time in office, Trump has made decisions by relying on two principles: good optics and transactional benefit. In this case, he was able to achieve optics through both the substance of the bill, which was disaster relief and the prevention of economic collapse, and through the process itself, where he effectively collaborated with Democrats to pass a meaningful bill.

In an interview with the New York Times, Chuck Schumer recounted being called by President Trump after the bill passed and the jubilation that the President expressed over how both “Fox News… and [Schumer’s] networks” had praised him for his diplomatic prowess. This is simply another example of what Trump seeks most from his political actions: media vindication. Even actions that enrage the left wing media, such as his tweeted ban of transgender individuals serving in the military or his travel ban on several predominantly-Muslim countries, serve to provide Trump with good optics among circles of conservative nationalists, many of whom made up his voting base. The more right wing media outlets praise him, the more Trump carries out his personal positive feedback loop.

From a transactional standpoint, Trump believes that he owes nothing to his Speaker and Senate Majority Leader. Trump values loyalty more than party identification, and defines McConnell and Ryan not by the letter after their names, but rather by their helpfulness to him as individuals. Both Ryan and McConnell are coming off policy losses in their respective chambers—McConnell even more so, after his health care reform bill was torpedoed by members of his own party. This creates a dynamic for Trump where neither of his Senior leaders have been of much use in advancing his personal agenda. Ryan has never had a close relationship with Trump, and many speculate that Trump holds the Speaker in low esteem after Ryan tempered his support for Trump in the wake of the Access Hollywood tapes.

Most of the excitement generated over this agreement is sensationalism. The debt ceiling will be raised; even the most radical of sitting politicians will begrudgingly vote to continue business as usual, rather than knowingly self-destruct the world’s largest economy. Those who claim this is a turning point in the Trump administration are also sensationalists; Trump will continue to pursue a (mostly) conservative agenda, and will continue to conduct political diplomacy with a brazen vindictiveness that creates lots of moments like these—lots of dramatic headlines, little substance. For now, the tedious power struggle between the President and his senior leaders will go on.

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