Politics

The US and its debt ceiling of doom

By J Brooks Spector 14 July 2011

The gigantic bunfight over the US debt ceiling has begun to look like James Dean’s classic movie “Rebel Without A Cause”. To outside observers, knowing well how serious it all is, it has become so obtuse as to seem more like two neighbours bickering over where a tree’s leaves fall – two rebels without a pause. By J BROOKS SPECTOR.

Remember that scene: Jim Stark and Buzz Gunderson are about to dice with death in a classic game of chicken in stolen cars. Natalie Wood’s character, Judy, gives them the starting signal and the two race towards the abyss. The first to jump from his car loses. At the last moment, Jim jumps while Buzz’s jacket sleeve is caught on the door handle and he pitches to his death over the cliff.

That famous moment in “Rebel Without a Cause” is looking more and more like the Republican and Democratic parties in Washington as they taunt each other over America’s national debt ceiling limit. The Tea Party caucus inside the Republican Party is adamant it will not support an extension of the debt ceiling if the resulting budget deal includes any sort of tax increase. Cut the budget and strip out “waste, fraud and mismanagement” as well as major chunks of the social safety net and a wide range of federal programmes in areas like education, they demand. Meanwhile, the Democrats warily prepare to strike a deal with the Republicans, but only with tax increases – mostly on the rich and corporations – in tandem with those dreaded budget cuts. The latest daily meeting at the White House on Wednesday ended when President Barack Obama reportedly abruptly stalked out.

The fiscal abyss is set to occur in about three weeks – 2 August say federal budget officials in the treasury department. Then the government will have reached its credit limit and will be legally unable to issue more bonds to cover the spending-over-revenue deficit. In an effort to raise the stakes in this form of chicken, Obama said the other day if this doesn’t get sorted out soon, more than $20 billion in social security cheques could be delayed. Or, as Obama put it: “I can’t guarantee that the cheques will go out on 3 August. There may simply not be the money in the coffers to do it.” Big ouch there.

From a distance, this fight over the debt ceiling might seem to be an abstract, even arcane, bit of political wrangling, except for the fact that without an increase, the US government stands poised to look like one of those Central American banana republics that defaulted on its debts to foreign creditors and got sorted out by the Marines and the US customs service. No one knows precisely what will happen to US creditors, foreign and domestic, as well as currency, stock and futures markets and pretty much everything else. That’s what makes it a game of chicken.

Watch: The chicken game scene in Rebel Without a Cause

By mid-July, various negotiations had come to grief in the partisan jousting and proposals have come and gone. At one point, vice president Joe Biden came close – or so it seemed – to agreement with the Republicans on a $2 trillion deal that would have cut some spending and raised a few miscellaneous taxes just a tiny bit, until some Republicans rebelled and walked away from the deal.

Upping the stakes, Obama then proposed Congress settle on a deal in the $4 trillion range and would reach forward a decade in advance – including efforts to make some important changes in social security and Medicare – two of the supposed key third rails (the killer, electrified kind) of the American political subway network. But Republican House of Representatives majority leader Eric Cantor wouldn’t close on that one either.

Now, if the US were a parliamentary democracy or some sort of more rigorous dictatorship, this would never have been an issue in the first place – the majority party would determine the budget, listen indifferently to the opinions of opposition parties and then pass the budget it wanted and that would be that. The US, however, has that system of separate as well as shared powers, and a governmental system that also exists in conjunction with a two-party system where one party often holds sway in only one of the branches of government – legislative or executive – while the other party controls the other branch.

And the effect, as The Economist explained: “America’s debt is supposedly the world’s safest, backed by trustworthy courts and an unrivalled capacity to raise taxes and print money. Yet thanks to a quirk of law, talk of default is not confined to the European side of the Atlantic [like Greece, for example].

“Unlike most countries America requires two legal steps to run a deficit: one to pass budget bills, the other to borrow the money. Congress sets a ceiling on how much the country may borrow. In the past it has always raised the ceiling before the Treasury ran out of cash, doing so on 16 occasions since 1993 alone. But it often attaches conditions, and this year Republicans who control the House of Representatives are insisting on particularly onerous terms. With the debt and the deficit at their highest in 60 years, they want to see at least $2 trillion in spending cuts over ten years and no tax increases.

“If a deal cannot be reached before August 2nd, the Treasury says it will be forced to default. It has not specified on what: it could choose to stop paying pensioners and soldiers before it stopped paying interest on its debt. But outright default cannot be entirely ruled out. What happens if the world’s most trustworthy borrower reneges on its debt?”

Watch Tim Geithner talk about Debt Showdown and tough choices (AP) :

To break the deadlock Republican senator Mitch McConnell offered a long-shot proposal to give Obama unprecedented authority to muscle through an increase in the government’s debt limit without the approval of a bitterly divided Congress. McConnell’s plan would essentially guarantee any Obama requests for new government borrowing unless Congress musters veto-proof majorities (two-thirds) to deny him this authority. McConnell felt he was forced to offer the plan because he didn’t believe there would be any agreement as long as Democrats insisted on some kind of tax increase.

Faintly holding its liberal nose while encouraging him along carefully at arm’s-length, The New York Times editorialised about McConnell’s plan that: “Political gain, not economic sense or sound policy, has always been at the core of Republican strategy on the debt-ceiling talks – a cynical ploy to appear serious about cutting spending while actually holding hostage the nation’s strong credit rating. Now that the real risks to their strategy are becoming apparent, including the possibility of cutting off Social Security (cheques), the more experienced members of the party are beginning to rethink their plans.”

The specifics of the McConnell plan mean Obama could request, and most likely get, increases of up to $2.5 trillion in the government’s borrowing authority in three separate instalments over the coming year, but only if he also proposed bigger spending cuts. The debt limit increases would then take effect unless Congress blocked them via special rules that would require speedy action – and Obama could still exercise his veto over any such legislation. But the president’s spending proposals (ie, a nice chunk of the budget) would have no guarantee of receiving a vote, up or down, in Congress.

But the stinger in McConnell’s idea – actually there are two joined together – was Obama would have to take full ownership of any increase in the debt and Republicans would all have to acquiesce in a kind of tacit agreement to let Obama make these big decisions by himself. Neither of these outcomes is going to sit very well with the Tea Partiers and their friends who have become increasingly insistent they will not support any form of tax increase nor agree to keep spending levels up either.

In effect, keeping the government ticking over is now being held hostage by a cadre of thoroughly conservative Republicans, and to some degree a caucus of more liberal Democrats reluctant to sign on to the tough spending cuts. Meanwhile, congressional delegations marched back to the White House on Wednesday to engage in their fourth successive negotiating session – Obama has insisted these daily meetings will continue until a deal is reached.

For his part, McConnell said his proposal was a “last resort if the president continues to shirk his duties to do something about our dire fiscal situation. Make the president show in black and white the specific cuts he claims to support. If he refuses, he’ll have to raise the debt ceiling on his own. But he’s not going to get Republicans to go along with that.”

But McConnell’s idea was almost immediately opposed by Tea Party conservatives in his own party, and analysts now say his proposal almost certainly wouldn’t pass in the Republican-controlled House of Representatives.

Watch: US debt default would trigger global ‘crisis’ – Bernanke (AFP)

But seeking some way forward and maybe a bit of common sense, neither the White House nor Republican Speaker of the House John Boehner dismissed McConnell’s idea totally. As Boehner told the Fox News TV Channel on Tuesday, “I think everybody agrees there needs to be a back-up plan if we can’t come to an agreement. And frankly, I think Mitch has done good work.”

But Tea party favourite Senator Jim DeMint of South Carolina told a different TV news show: “Republicans weren’t elected last November to make it easier to spend and borrow and add to our debt.” And the irrepressible Newt Gingrich tweeted that: “McConnell’s plan is an irresponsible surrender to big government, big deficits and continued overspending.”

Moreover, McConnell’s proposal may have received the kiss of death from his ostensible opponents. Both House minority leader, Democrat Nancy Pelosi and Democratic Senate majority leader Harry M Reid called it a step in the right direction. And Federal Reserve chairman (not a partisan politician, but obviously a concerned party) Ben Bernanke added his warning of fiscal catastrophe if the government couldn’t reach agreement.

Summing up these latest movements, the ultimate Washington insider’s newsletter, Politico, commented: “GOP leaders continue to work at cross-purposes with one another. Senate Minority Leader Mitch McConnell set the day’s tone early with a blast aimed at the president but implicitly undercutting House Majority Leader Eric Cantor’s efforts to craft a $2 trillion deficit-reduction package with the administration…. McConnell got his own thumping from House Republicans, who quickly dissed his suggested back-up plan that would allow the debt ceiling to increase this month, subject only to a resolution of disapproval from Congress. ‘As long as this president is in the Oval Office, a real solution is probably unattainable,’ McConnell said grimly. … McConnell and Senate Majority Leader Harry Reid have reached the conclusion that a Plan B will be needed soon without an agreement. ‘We’re certainly not going to send a signal to the markets and to the American people that default is an option,’ McConnell told reporters.”

Unless what is going on in Washington is already doing that very thing.

Just to make things a bit more exciting, conservative House Republicans then accused Obama of using “scare tactics”. House majority leader Eric Cantor said, “Currently, there is not a single debt limit proposal that can pass the House of Representatives,” just before the respective congressional delegations were filing into the White House for their newest session of political arm wrestling.

But it is now about more than just the debt ceiling and the related fight over taxes and spending. The Republicans remain eager to achieve the symbolic balanced budget amendment that would theoretically require Washington to balance its books. McConnell says politicians in Washington have shown they can’t get the job done and, “If the president won’t do something about the debt we’ll go around him and take it to the American people.” The balanced budget amendment has a symbolic potency, because it makes it easy for politicians to claim that a government must stay within its means, just like Joe Soap supposedly has to do at home.

For the most part, Republicans remain insistent on gaining $2 trillion-plus in budget cuts as the price for an increase in the government’s ability to continue to borrow. But their continued refusal to consider gaining any new revenue to reduce the deficit from closing tax loopholes –  like those enjoyed by oil and gas companies – has now egged on Democrats to withhold offering any further spending cuts beyond the handful they tentatively agreed to support in the earlier talks led by Biden last month. And that’s where the stalemate is right now.

And so we return to where we began, watching “Rebel Without a Cause”, only the question now is whether the kid still stuck in the car that is hurtling over the cliff is one of America’s two political parties or a much larger collection of unwilling passengers – pensioners, consumers of every government service, investors, bond markets, currency markets, stock markets – and America’s AAA+ bond rating, as well as the country’s reputation of never having defaulted on any of its debt. DM


Read more:

  • Moody’s moves step closer to downgrading US over debt-ceiling stalemate in the Washington Post;
  • Top Republicans clash over debt-limit plan in the Washington Post;
  • Debate heats up between Obama, lawmakers over debt limit in the Washington Post;
  • Top Democrats laud GOP debt-limit move; Fed chief warns of ‘calamity’ if US defaults in the Washington Post;
  • Political Playbook Top Story in Politico;
  • Debt talks grind on, clock ticks toward default on AP;
  • A Pathway out of the debt crisis, a New York Times editorial;
  • McConnell outlines new proposal on debt ceiling in The Washington Post;
  • Debt talk mired, leader for GOP proposes option in the New York Times;
  • Obama grasping centrist banner in debt impasse in the New York Times;
  • Obama: US debt talks failure ‘could restart recession’ on the BBC;
  • Eric Cantor, the GOP’s hard-line lieutenant, sways debt talks in Time;
  • In debt ceiling fight, Obama has the edge in the New York Times;
  • Partisan divide on debt talks growing deeper; Obama says he won’t accept stopgap plan in the Washington Post;
  • America’s debt ceiling: The mother of all tail risks: A US technical default would convulse markets. Nothing else is certain in the Economist;
  • Time is of the essence, any US budget deal will do (by Larry Summers) in the Financial Times;
  • Obama, Republicans trapped by inflexible rhetoric on AP;
  • Constraints on leadership in Washington on the Brookings Institution website
  • The global outlook for government debt over the next 25 years: Implications for the economy and public policy at the Peterson Institute for International Economics;
  • What would you cut? from the Heritage Institute
  • What the debt ceiling really means at the Cato Institute; and
  • The debt limit: history and recent increases, a Congressional Research Services report.

Main photo: Reuters

Gallery

"A long habit of not thinking a thing wrong gives it a superficial appearance of being right and raises at first a formidable outcry in defence of custom. But the tumult soon subsides. Time makes more converts than reason." ~ Thomas Paine

0