Politicians Playing Costly Game of Chicken With the Debt Ceiling

Last Updated Jun 29, 2011 2:50 PM EDT


The wrangling between Republicans and Democrats over the $14.3 trillion debt ceiling continued Wednesday as President Obama held a press conference in which he criticized Republicans for refusing to budge from their opposition to tax increases for the wealthy and for oil companies.

In baseball parlance, we're now past the seventh inning stretch in the deficit reduction negotiations that are the linchpin to any agreement to raise the debt ceiling. With barely a month left before the August 2nd date when we are expected to reach the debt limit that will hamstring the government's ability to meet its financial obligations, Vice President Joe Biden has handed the negotiating ball over to President Obama. So far, there's been no progress. The President met with Republican leaders on Monday and is set to have a sit-down with Democratic leaders today.

Meanwhile, a new analysis from a bipartisan think tank warns that all Americans are going to pay a very steep price if we don't get a deal done before the debt-ceiling deadline and the limit is raised.

A Costly Game of Chicken
The Bipartisan Policy Center says that in the event there's no deal in time, the government would have to slash spending by 44 percent in the month of August just to be able to stay current on its debt payments. And you don't get to 44 percent by nipping and tucking foreign aid or some obscure program. "If you are going to be cutting 44 percent of the budget overnight, you are going to be cutting many popular programs -- there is no way to avoid it," the BPC's Jay Powell explained.

That's just the beginning of the bad news. Mark Zandi, chief economist for Moody's Analytics added on Tuesday that if there's no deal to raise the debt limit, his expectation for stronger economic growth later this year will be "blown out of the water." If that plays out, the economy is going to be pulled down into a double dip. "Even if Congress and the Administration reverses themselves days later, I think the damage will have been serious and we'll probably be thrown into a recession," Zandi told a gathering of reporters.

Moreover, if there's no move to raise the debt ceiling before it maxes out, the odds increase that the United States' stellar debt-rating could be taken down a notch. A new report from a research arm of Standard & Poor's estimates that if that happens, the hit to Treasury prices could be $100 billion. That's just for the Treasury market. You'd also have to steel yourself for fallout across all markets, as well as prepping for higher lending rates, on everything from credit cards to car loans. And then there's the potential hit to the dollar and the impossible-to-overestimate importance of global optics if the rest of the world wavers in how it judges our financial stability.


What's Holding up a Deal on the Debt Ceiling?
With so much at stake, it's clear we all need a deal to get done. And soon. Zandi surmised that if there's not an agreement to raise the debt ceiling by the second or third week of July, the markets are going to have a hard time continuing to shrug this off as simply Washington being Washington before it makes an inevitable 11th hour deal (see the December tax compromise). And if the markets start to worry, watch out below. So what's holding up a deal?

In a word, taxes.

When the bipartisan talks Biden was spearheading broke down, the two sides had reportedly agreed on a general plan to reduce the federal deficit by $2.4 trillion over 10 years, a move that would make it tenable for Congressional Republicans to agree to raising the debt limit. What wasn't agreed to was exactly how to come up with that $2.4 trillion. Republicans want it all to come from reductions in spending. Democrats are looking for increased tax revenue to be part of the mix. Reportedly, Democrats were looking for about $400 billion in the deficit reduction to come from collecting more taxes; that works out to less than 20 percent of the $2.4 trillion goal. But that's when the talks stalled late last week and the big guns were called in.

And that's pretty much where we're at right now. House Majority leader Mitch McConnell says the Republicans are not open to any deal that includes tax increases, while the Democrats insist taxes must be on the table. What is not on the table right now is any discussion of raising income tax rates. The President has instead been pushing for scaling back a handful of tax breaks for both corporations and wealthy individuals. One of the ideas reportedly backed by some Democrats is to limit tax deductions for households making more than $500,000 to 10 percent of income. That move alone could generate as much as $210 billion over 10 years, or nearly 10 percent of the deficit reduction both sides are aiming for.

Stay tuned. And prepare yourself. The longer this drags on, the higher the odds that we won't get a long-term deal, but rather some sort of temporary stop gap that forces us all to wind up and go through this all again sometime soon. But even that would preferable to letting the deadline come without any move to raise the debt ceiling. That's inaction we can't afford.

Photo courtesy Wikimedia Commons

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