Countdown to the Debt Ceiling Deadline – Who Will Blink First?
This debate has become personal and heated
The country is riveted by the spectacle of President Obama and the Republican leadership participating in difficult talks to raise the debt ceiling before the August 2nd date set by Tim Geithner, the Treasury Secretary.
The talks have become contentious, even bitterly so, with both Democratic and Republican politicians going on the airwaves to accuse the other party of unseriousness and inflexibility.
Earlier discussions led by Vice President Biden and later including the President focused on cuts of about $2.5 trillion, with the Democratic side seeking to close corporate tax loopholes e.g., for oil companies, and letting the Bush tax cuts expire in 2013 for the wealthy.
The Republican side, influenced (some would would say, hamstrung) by the large Tea Party freshman contingent, has remained adamant about levying no new taxes.
The President upped the stakes a few days ago by seeking even deeper cuts of up to $4 trillion as part of a “grand bargain”
McConnell, Cantor, and Boehner: in lockstep or divided?
that would also see taxes raised on the richest Americans, and many corporate loopholes axed. Some examples touted included the tax-free status of corporate jet purchases.
This was met with the same response by the Republican side, which continues to insist that their position on no new taxes is non-negotiable.
The Democratic leaders in the Senate and House – Harry Reid and Nancy Pelosi have also added their voices to the fray, declaring that the would not allow the sacrifice of poor and middle class entitlements e.g., Social Security, Medicare and Medicaid to a debt ceiling agreement.
To make it more interesting, a major ratings agency – Standard and Poor today declared the US credit rating to be under review for a possible downgrade in view of the political impasse and increased likelihood of default.
Bachmann and the Politics of the Right
Enter Michelle Bachmann and a few others in the Republican camp who say that default will have no effect on the U.S. economy. This position is repudiated by practically all serious economists including Ben Bernanke, Chairman of the Federal Reserve.
Interestingly, most of the Republican presidential candidates have signed a pledge to vote against raising taxes of any kind…ever.
This pledge, created by Grover Norquist, president and founder of Americans for Tax Reform, reads:
“I _____ pledge to the taxpayers of the state of _____ and all the people of this state, that I will oppose and vote against all efforts to increase taxes.”
What will Happen
I have to admit that among our staff here, we are almost evenly split regarding what might happen in regard to the debt ceiling talks.
The reality is that anyone claims to know with absolute certainty what will happen is simply making an educated (or uneducated) guess. Here are reasons why we might default.
- Both parties have publicly locked themselves into opposing positions. They have also done it publicly, making it harder for them to climbdown.
- On the Republican side, there is an absolutist position against taxes, just as Democrats have a strong position of a “balanced position” and “shared sacrifice” – code for the rich and corporations carrying what they see as a more equitable load.
- Personalities are getting in the way, with reports of particularly fractious encounters between Eric Cantor – the Republican majority leader – and the President.
- Too many on the Republican side believe – without evidence, that there will be no negative consequences of default. We here believe otherwise.
- The more serious and reflective politicians on both sides recognize that credit default is unthinkable and will most likely lead to another recession.
- The credit ratings agencies will not only raise the alert before August 2 (as Standard and Poor just did), but may actually lower the US credit rating before August 2nd, if agreement seems unlikely. This may help to concentrate minds.
- The stock market will likely suffer heavy losses in the days before August 2nd, which again, may convey reality to the negotiators.
- Public disgust and fear (especially if there is a stock market crash) may drive the parties involved to agreement.
Currently, a new plan has been introduced by Senate Minority Leader Mitch McConnell to allow the debt ceiling to be raised without a deal.
The proposal would allow the president to raise the limit by $2.5 trillion in increments over the next year, allowing Congress the chance to stop them only through protest votes that would have to survive a presidential veto.
His objective is to leave the President holding the bag for any tax increases and failures to cut the deficit. However, it is not clear whether this new plan has the support of enough Republicans and several have lashed out against it.
The reality is that the deficit should be handled and if it is not done now, when there is a hard deadline, it will likely not be done afterwards.
Republicans and Democrats should sit down and work out a fair agreement without the pressure of lobbyists, who only complicate matters. They should realize that entitlements have to be cut, along with defense spending – that other “untouchable”. They must also realize that the disastrous Bush tax cuts have to be scaled back for the very rich and the tax laws that industries like the oil industry “wrote” for themselves must be repealed.
They must do this all for the sake of the country they claim to love.
More From blreditor
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