Saturday, July 2, 2011

Debt Ceiling End Game

The Washington Republicans have taken our economy hostage, threatened to kill it if their demands are not met, and walked away from the negotiations. How should the President and the Democrats respond to this? The clock is ticking towards disaster. How is the standoff going to end?

The GOP seem to think that since the President cares about his country, and would prefer not to see an economic cataclysm, that the he will give into their demands. The debt ceiling vote is the only chip they are willing to put on table. They think it should be worth several trillion dollars in spending cuts.

As chips go, the value of the debt ceiling increase has to have a value of precisely nothing. Regardless of who gets the blame, a US debt default and sudden federal contraction will be devastating to futures and fortunes to Americans regardless of party. The Republicans have made a threat they can’t possibly follow through on.

This doesn’t mean the deficit reduction talks can’t be productive or that they shouldn’t resume. But it needs to be a negotiation and not a hostage situation.

There are a few ways this can play out. In order of desirability they are:

1. Congress and the President reach an agreement on long-term debt reduction. They also vote to increase the debt ceiling.

2. The debt ceiling is simply raised without any any other agreements.

3. There’s no agreement on anything. Obama claims the debt ceiling is unconstitutional and resumes borrowing. The US does not default on its debts. There is no sudden economic collapse. The US political system is demonstrated to be deeply dysfunctional.

4. The Democrats give in the GOP’s economic extortion and just given them whatever they want in exchange for an debt ceiling increase. The terrorists win.

5. There’s no agreement. There’s no debt limit increase. Obama accepts this. The US defaults on its debt. The federal budget is immediately slashed by 44%. The economy collapses. Again.

What will really happen?

Despite the current impasse. I’m going to bet on #1. There will be a negotiated solution.

The administration has already agreed substantial spending cuts. And they should. We’re in our third year of trillion dollar deficits. We need a path towards a sustainable budget and we’ll need spending cuts to get there. We’ll also need revenue increases. The President to right to insist on those. The GOP is being childish to assert revenue can’t be part of debt reduction solution. It has to be.  But a long term deficit agreement this summer can be lopsided in favor of cuts over revenue. The major Bush/Obama tax cuts are expiring after 2012. This affords us time to reconsider long term tax policy. If no agreement is forged the outcome is higher taxes and lower deficits.

The other likely outcome is #3. The GOP has painted itself into a corner with it’s own rhetoric. It’s not clear that House majority can, or will, consider a negotiated solution to the crisis they have created. They may steer the country towards deliberate bankruptcy. If that happens then President Obama must ignore the debt ceiling legislation and assert his authority to insure the nation does not enter insolvency.

This outcome has certain advantages for Washington Republicans. They avoid a vote on the debt ceiling. They don’t have to vote to increase revenue or to close tax loopholes for oil companies or jet owners. The GOP and it’s enablers will howl that the President’s actions are illegal. It will require considerable chutzpah to demand national disaster. But I’m confident the right-wing propaganda machine is up to the task.

There are downsides to the GOP for an Obama-averted default. Deficits would continue to rise. This outcome would be the ultimate abdication of legislative responsibility in the service of rigid ideology.

Will the GOP choose it anyhow? We shall see...

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