Business Times - 08 Jul 2011
US debt limit: Republicans playing a risky game
By LEON HADAR
THERE is a general agreement in Washington and Wall Street that the US is in real risk of defaulting on its debt if Congress fails to approve legislation that permits the federal government to exceed the current national borrowing ceiling of US$14.3 trillion by the beginning of next month.
In fact, Obama Administration officials insist that Republican and Democratic lawmakers need to agree on a deal by July 22 in order to allow for enacting the necessary legislation before the Aug 2 deadline.
In the aftermath of the Great Recession and at a time when the recovery of the US economy remains in very slow motion and the global economy is threatened by ongoing political and economic crises in the eurozone and in the Middle East, you would assume that US legislators would put in place a deal to ensure the US can meet its financial obligations - and as soon as possible. It should be a no-brainer.
But unfortunately, the political brain of Washington is not working. Last week, the Republicans leader of the House of Representatives walked out of the talks aimed at arriving at a deal on the debt ceiling that have been led by Vice-President Joe Biden. And even if the Republicans are only pursuing a strategy of political brinkmanship - hoping to extract more concessions from the White House and the House Democrats before the end of the month - they are still engaging in a very dangerous game. Indeed, by raising the spectre of federal bankruptcy and ensuing financial chaos, the Republicans are not only demonstrating disregard for the economic plight of US consumers and businesses, they are also endangering their party's political future by creating the impression it has been taken over by the most extremist elements in the Tea Party.
Almost every politician and pundit in Washington is convinced that the current US$1.5 trillion annual budget deficit is not sustainable. It poses a long-term threat to American economic interests. And it also made some political and economic sense for the Republicans to demand that President Barack Obama and the Democrats make a clear commitment to balance the budget in exchange for a Republican agreement to raise the debt limit this year.
Indeed, the talks headed by Vice- President Biden have forced the Democrats to agree to support more than US$1 trillion in spending cuts, including in critical government-backed social and economic programmes. That agreement reflects the Democrats' recognition that federal spending needs to be slashed in order to move in the direction of getting the US fiscal house in order. And that has clearly also been one of the main recommendations by all the various bipartisan commissions and study groups that have been given the task of coming up with plans to balance the federal budget.
But what about the second important recommendation - the need to raise more revenues as part of a strategy to cut the deficit - that these commissions have been advancing?
As President Obama has pointed out in his recent press conference, the economic pain of controlling America's soaring deficit should be shared by all Americans. If Congress decides to make major cuts in government spending on social and healthcare programmes that assist the poor, including the growing class of the unemployed, in order to fix the deficit, lawmakers should also consider raising taxes on wealthy Americans and eliminate the many tax loopholes that benefit US corporations and their executives.
But the Republican Speaker of the House John Boehner, House Majority Leader Eric Cantor, a Republican from Virginia, the leading Republican negotiators in the debt talks, have rejected White House proposals for scaling back tax breaks that benefit wealthy individuals, including low income tax rates for hedge fund managers, benefits for corporate jet owners and subsidies for energy companies. The Republican leaders are continuing to demand more cuts in spending without agreeing to new revenue in exchange for approving a rise in the debt ceiling. This no-taxes battle cry is in keeping with the pledge made by members of the Tea Party who were elected to Congress last November is what was seen as a reflection of the American public's dissatisfaction with the Obama Administration's economic policies.
On another level, the opposition to increasing taxes - in addition to slashing spending - as part of a grand deficit-cutting strategy remains a cherished conservative dogma shared by Republican activists and voters. But that dogma is not shared by independent voters - those who determine the outcome of Congressional and presidential elections. Hence, it is doubtful that they are going to support Republican candidates who threaten to make dramatic cuts in the healthcare programme for elderly Americans while preserving the tax loopholes for private jet owners - and allow the federal government to go bankrupt.
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