Kicking the deficit-cutting can down the road to Election Day

Business Times - 19 Jul 2011

Kicking the deficit-cutting can down the road to Election Day

Both US parties need to find a way to square the debt-ceiling circle through some legislative trick and political gimmicks


US President Barack 'No-Drama' Obama tends to refrain from employing hyperbolic language in discussing policy issues. But last Friday, he was close to sounding apocalyptic. 'Let's avert Armageddon', was the way he addressed the American people during another press conference on the debt-ceiling negotiations.

Unless Republican and Democratic lawmakers raise the current debt limit of US$14.29 trillion by Aug 2, America would plunge towards what could be described as 'Debtmageddon'. The federal government would not be able to pay back its loans or gain access to new ones, leading to soaring interest rates, igniting a financial meltdown and bringing to a halt the fragile economic recovery.

Two major plans to avert this kind of crisis have been dominating the negotiations in Washington in recent weeks. First, there is the so-called grand bargain proposed by Mr Obama which could lead to a broad deficit reduction in the amount of US$4 trillion within 10 to 12 years. That would not only make it possible to raise the debt limit next month but could also serve as a basis for a long-term strategy aimed at placing the US fiscal house in order.

Then there is the more modest contingency plan that would allow for a US$2.4 trillion increase to the debt limit that is needed in order to get the government through November 2012 coupled with offsetting cuts in next year's federal budget.

'I am still pushing for us to achieve a big deal,' Mr Obama said on Friday. 'We still have time to do a big deal.' But Washington was 'running out of time', he warned, conceding that continuing opposition from Republican lawmakers has all but made it impossible to agree on a grand compromise before Aug 2.

In many ways, it is not difficult to imagine that the same kind of grand bargain to deal with America's debt problem being promoted by the White House would have been introduced by a Republican president John McCain if he had won the race for the White House in 2007.

After all, much of the debate between the Republicans and the Democrats has been focused on whether to cut the federal deficit by raising taxes, which is the Democrats' preference, or by cutting spending, which is the Republicans' favourite. And if anything, the compromise offered by Mr Obama was tilted towards the Republican direction: about US$3 trillion in spending cuts and only US$1 trillion in tax increases.

And, indeed, there were some indications that the Republican Congressional leaders, including the Speaker of the House of Representatives, John Boehner, and Senate Minority Leader Mitch McConnell, were interested in pursuing the grand bargain which included a plan to reduce government financial support for the healthcare insurance programme for the elderly (Medicare) as well as for the national insurance system (Social Security).

Accepting such a plan would have amounted to a historic move on the part of the Democrats and their constituencies who regard these social-economic programmes as central to the operation of a viable welfare state and close to being ideologically sacrosanct. In return, the Republicans would have had to accept eliminating tax cuts and tax loopholes for the top-income earners.

'You can envision a situation where for somebody in my position - me having to pay a little bit more - would be appropriate,' Mr Obama explained. 'Millionaires and billionaires can afford to do a little bit more,' he stressed.

Not only are these 'revenues raisers' necessary in order to balance the federal budget; cutting spending and raising taxes is only politically viable policy mix that could win the support of all Americans. 'Poll after poll, many done by your organisation, show that it's not just Democrats who think we need to take a balanced approach. It's Republicans as well,' Mr Obama said.

The problem is that for the large majority of the Republicans in the House of Representatives, including members of the Tea Party, balancing the budget by cutting spending has been the first and only choice they are willing to accept. They are committed to an ideological dogma that asserts that raising taxes on the poor and the rich, on millionaires and billionaires, as well as on small businesses and large corporations, retards economic progress, and that lowering taxes on all the above always brings about more economic growth. In fact, most Republican lawmakers and those Republicans who are running for the presidency have signed a pledge not to raise taxes at any time and under no condition.

And on one level, both Republicans and Democrats, including the White House, are trying to spin their positions in the debt-ceiling debate and to frame their views on fiscal policy in a way that would help them advance their arguments during the 2012 election campaign, especially as they try to win the support of independent voters.

Mr Obama and the Democrats are portraying themselves as the defenders of the middle class, insisting that they would not agree to any major cuts in the critical social-economic programmes while allowing the Republicans to continue to protect special tax breaks for executives in oil companies and managers of hedge funds.

Republican Congressional leaders and some of the more centrist presidential candidates, on the other hand, have a problem. If they violate their no-new-taxes pledge, they are bound to antagonise their political base, including members of the Tea Party, who would then punish them by staying home on Election Day next year. But by refusing to eliminate tax loopholes for the rich while calling for cutting spending on healthcare programmes for the elderly, the Republicans are going to alienate the independent voters whose support they need in order to win control of the White House and Congress in 2012.

From that perspective, Mr Obama could allow the Republicans to hang themselves by rejecting any compromise and allow the government to default on its debt after Aug 2. But that kind of financial Armageddon would create the conditions for Great Recession II and would mean that the current White House occupant would end up presiding over the collapse of US economy while destroying whatever is left to accomplish on his economic agenda.

Mirror-imaging the White House's concerns is the hope among some Republicans that an economic mess following a fiscal default would be blamed on Mr Obama and assure his defeat in November 2012. Yet other Republicans recall that Republican opposition to approving a budget plan resulted in the government shutdown in 1995 and created a political backlash against them and played into the hands of then-Democratic president Bill Clinton.

Hence it has become necessary for both sides to avert a fiscal default even if they cannot come to an agreement on either a grand bargain or a contingency plan because of their deep-rooted political and ideological differences on how to cut the deficit. In short, they need to find now a way to square the debt-ceiling circle through some innovative legislative tricks and political gimmicks, like the one offered by Senator McConnell.

Assuming that Congress and the White House cannot reach a deal on raising the debt ceiling in the coming days, Congress, according to the McConnell plan, will allow Mr Obama to raise the debt limit without actually the lawmakers themselves having to approve it. Mr Obama could submit an increase in the debt ceiling that includes budget cuts in an amount greater than the debt ceiling increase. The debt ceiling will be raised if two-thirds of Congress does not vote against it.

Some version of this very complex legislative formula may end up being embraced by the White House and Congress. But while that could allow the politicians to settle the current political impasse, it is not going to help resolve the nation's fiscal crisis.

Indeed, the Standard & Poor's rating agency warned last week that it could cut the US credit rating even if the debt ceiling is raised. The message was that the agency could downgrade the United States from its Triple-A rating unless the politicians can come to terms on a credible deficit reduction plan.

But that is probably not going to happen - if at all - until after the 2012 election when voters will provide either party with enough electoral power to implement its version of fiscal policy. At least, that is the hope of Democrats and Republicans who have basically decided for now to kick the deficit-cutting can down the road.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.


Popular posts from this blog

When will Israel attack Iran?

my new op-ed in Haaretz