Debt Ceiling Agonistes: Do Something, You Schmucks

Last Updated Jul 25, 2011 5:14 PM EDT

You weren't really expecting Congress to agree on a debt-ceiling deal this weekend, were you? I mean, we still have 180 hours or so before all hell breaks loose on August 2.

Failure to reach a bipartisan accord left Republicans and Democrats free to do what they do best. For House Speaker John Boehner, that means pandering to party wing-nuts ideologues hard-liners while placating another key constituency, the business community, which wisely fears the impact of a U.S. debt default.

After abandoning talks with President Obama on Friday, the Ohio Republican came up with a plan calling for a roughly $1 trillion increase in the government's borrowing limit, but only for a few months, coupled with an immediate $1.2 trillion in spending cuts.

Kick the can
Under that plan, lawmakers would boot the can into 2012 for further discussion over reducing the deficit and boosting the debt limit. Sound fun? Most important, Boehner's proposal contains no tax revenues. That's a sop to the large contingent of House Republicans who see tax hikes of any kind, including on billionaires, as Socialist "redistribution" and who view the danger of a default as liberal scare-mongering. What is Boehner thinking? Here's Jon Chait's take at The New Republic:
Basically, Boehner doesn't really have the votes for anything. He doesn't even have the votes for "Cut, Cap and Balance," because that requires a supermajority in each house to pass a Constitutional amendment.
So he's reduced to the lowest common denominator. That's a plan that only temporarily lifts the debt ceiling, pleasing the faction that opposes lifting the ceiling, avoids any tax increases, pleasing the anti-tax absolutists, and provokes a confrontation with Obama, pleasing the political hardball faction. It also positions the party as having voted to lift the debt ceiling past August 2nd, thus providing the party with an argument for laying the blame on Obama if and when dire consequences occur.
For their part, Democrats are charging ahead by sprinting to the rear. With no deal in sight, Sen. Majority leader Harry Reid, D-Nev., is pushing a rival plan that would lift the debt ceiling by $2.4 trillion through 2012 and cut spending by $2.7 trillion.

Although details are sketchy, it appears none of those savings would come from chopping major entitlement programs, which many Democratic lawmakers oppose. Instead, cuts would likely come from unspecified reductions in discretionary spending and from ending the wars in Afghanistan and Iraq.

The latter is a kind of fiscal parlor trick, since those savings stem from already announced plans for the government to wind down military operations. On the other hand, Rep. Paul Ryan, R-Wis., used the same maneuver in his proposal to slash the budget earlier this year, so Reid is simply borrowing from the Republican playbook.

What color is your parachute?
So what's the problem? Reid is buckling to rabid Republican antipathy to tax hikes by forgoing any revenue growth. That's something polls show the American public opposes and, if it even matters anymore, that is also likely to harm the already fragile economy. Notes the WaPo's Ezra Klein:
If you take the Republicans' goals as avoiding a deal in which they have to vote for tax increases and denying Obama a political victory, it looks like they have succeeded. That success has come with costs -- they've done themselves political damage, are risking a crisis that could do the economy tremendous harm, and have left the Bush tax cuts unresolved... but it's still been a success.
Here's where all of this leaves us -- two days closer to smacking our heads on the debt ceiling. For now, financial markets have yet to go into panic mode and still seem to be counting on a deal. But the short time frame to complete a deal is quickly narrowing the range of a possible solutions. The economy's main parachute -- a pact that lifts the borrowing limit, postpones major cuts until growth is stronger and provides for at least some measure of stimulus -- has failed to deploy. Now Congress is frantically trying to open the reserve chutes in hopes of not going splat.

My guess is a deal still gets done, if only because Democrats are in the habit of caving, while big business understands what is at stake. Still, with both sides jockeying for political advantage, it looks like this will go down to the wire. Brace for impact.

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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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