The scariest part of the debt ceiling impasse: Washington isn’t scared

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In the past week, I have been told by a prominent economist, the CEO of a major bank and two Democratic members of Congress not to worry about breaching the debt limit. Congress always ends up raising the debt limit, they said when I asked each of them about it during the World Economic Forum in Davos, Switzerland – even if it takes a bumpy road to get there.

So why am I not reassured?

Partly it’s because I remember hearing people say that housing prices only ever go up or that Donald Trump would never be president. But it’s also because the case for complacency underestimates the distance between the parties.

Republicans in Washington think Democrats will keep saying that they will never negotiate over a debt ceiling bill right up until the end, when they will make a deal – just as President Barack Obama agreed to spending cuts in exchange for raising the ceiling in 2011, the last time the parties had this kind of a knockdown over the issue.

Democrats think Obama set a dangerous precedent and want to set a new one: You don’t negotiate with hostage-takers.

In their view, Congress has a responsibility to pass a “clean” increase in the debt ceiling with no spending cuts attached. Besides, they see no point in negotiating with this particular crew of hostage-takers, who are unlikely to reach agreement among themselves about what they want. Some Republicans want major changes to the programs for senior citizens that are driving the increasing federal debt, while others would be willing to settle for a commission that looked into budget reforms. Whether a House with a tiny majority can stick together behind any plan is questionable.

Even the left-most Republicans in the House consider the demand that they vote for a stand-alone increase in the debt ceiling absurd. Some Democrats, too, say there should be negotiations. Debt-limit increases have often been tied to other policies, and each of the past two Democratic presidents voted against increases when they were in the Senate.

While Republicans think they can use debt limit legislation to get policy concessions from Democrats, the Democrats think they can use it to make political gains. White House Chief of Staff Ron Klain reportedly told a top congressional Democrat that the fight could result in what The Washington Post described as “substantial political benefits” for his party.

The Democratic strategy requires that Republicans get nothing, not even something face-saving, in return for raising the debt ceiling, and assumes that voters will blame Republicans for any suffering that the hostage economy endures.

The Republican strategy assumes to the contrary that Democrats, as the party in power and the party more supportive of government spending, have a stronger political incentive to get the ceiling raised.

Both sides can’t be right. They’re going to be slow to learn who’s wrong. Each side will discount any strong rhetoric from the other as a bluff. It will see any sign of a pending default, and any sign that default will lead to an economic catastrophe, as evidence that its strategy is on the verge of working.

In the past, stock markets have jolted Congress into acting. During the financial crisis of 2008, Congress initially rejected a bailout. Markets plunged, and Congress passed one. Today, though, markets appear to believe a deal will be made. That confidence could prove self-subverting. We might actually have to breach the debt ceiling and go into default for markets to get scared.

Not many members of Congress deny the debt limit should increase: Nobody has a plan to bring the deficit to zero immediately, and no such plan would be plausible.

But each party wants it increased on its own terms. They don’t agree on budget priorities. Or the morality of using the debt limit as a means to limit the debt. Or what a realistic outcome of negotiations would be. Or what the political consequences of breaching the limit would be.

Despite all this, the prevailing theory of the moment is that our political class will manage to come extremely close to a default without actually falling into one. Unlucky is the country that needs this much luck.