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The Debt Ceiling Bomb: Defused

After the New Year’s Day deal on the fiscal cliff, conservatives salivated over the prospect of a debt ceiling duel with President Obama. On Jan. 2, I argued [1] they were crazy to think they had the same kind of leverage that Obama did with the expiration of the Bush tax cuts:

In the coming battle, the Republican position is effectively going to be “Give us the cuts that we all would rather avoid—or we shut down the government [2].”

Does that smack of a winning political argument to you?

This gradually became conventional wisdom, on both left [3] and right [4]. By agreeing [5] to a three-month debt-ceiling hike in exchange for a face-saving demand that the Senate pass a budget resolution, the House Republican leadership wisely conceded this reality. The assumption behind the three-month interval is that, later this spring, lawmakers will have worked out a deal with the White House on the delayed budget sequestration cuts and the “continuing resolution” under which the government is currently being funded.

I think the coincidence of these budgetary ingredients actually increases the chances of accommodation. Call it the Cuisinart of Compromise: place the CR and the sequester into the same machine, cut a deal, after which you raise the debt limit for two or more years. As I noted earlier this month, the reemergence of the sequester means that those cuts can be re-framed as “fresh” ones, rather than delayed ones. The problem is, the cuts were designed to inflict maximum pain across the budget. Both sides have incentives to either soften them or space them out differently so as to reduce the negative shock of the cuts. But the White House believes those $1.2 trillion in cuts over 10 years would stabilize our debt-to-GDP ratio—so it’s very likely they’ll be enacted in some form or fashion.

As for additional elements of a deal: Obama is a little bit pregnant, if you will, after having publicly embraced the “Chained CPI” Social Security reform on “Meet the Press.” And Republicans are similarly gravid after having floated the idea of raising new revenue via reducing tax expenditures. It’s a deal that’s half-made already. But with “grand bargain” talks suspended—likely for the rest of Obama’s presidency—any such deal will have to be made in the open, through the “regular order” of House and Senate business. This is a good thing—for Congress and the country. House GOP leaders will give their caucus a chance to vote on optimal-seeming tax and entitlement reforms; before now, “grand bargain” talks were held in secret, and the hardliners never got a chance to symbolically voice a preference for red meat. And when it becomes clear that it’s DOA, the 25 or 50 fiscal conservative hardliners might let at least modest compromises proceed.

At the news of a temporary debt-ceiling thaw, Business Insider’s Joe Weisenthal declared [6] that we’re thisclose to “exiting the age of crisis.”

Of course I hope he’s right.

Optimistically, I think he is right.

Follow @scottgalupo [7]

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Comments Disabled To "The Debt Ceiling Bomb: Defused"

#1 Comment By Dakarian On January 18, 2013 @ 9:17 pm

I like that situation and can see it happen.

That’s a problem. No plan that I think could happen ever actually occurs. I really should start saying, “I wish the country would fall apart. I can even see how it happens.” That would probably keep us strong for the rest of my life.

The fear comes two fold, one one each side:

1. Will the tax deal sour hardline conservatives from doing ANYTHING close to a compromise? The glances I make of the Right outside of areas like this place show that they still believe voting down plan B was a good idea and that they should’ve voted down the deal, letting the country just take the full blow of the cliff. It’s also the source of the ‘let the ceiling happen’ as well.

2. Will democrats get eager and start making crazy demands. Try to get the 250-400k into the tax increases. Try to bump up the capital gains rate. Force the assault weapons ban in there just because.

Aka, will both sides see the deal as less a reason to get compromising and more of a reason to get silly all over again?

(well, I WAS ok with Sequestration until all of the tax and other items got lumped in there for no reason. Guess I can go back to that mindset as well. Just let gridlock force the cuts and call it a day)

#2 Comment By William Leach On January 18, 2013 @ 11:29 pm

I think the best part of this, well I guess its a deal, is that it takes away some ammo from Obamas favorite weapon as of late; painting Republicans as inherently unreasonable and unwilling to compromise. Or maybe Im missing something, or lots of things, rather than clarifying things for me the last few weeks I admit the media has made me more confused about the debt ceiling. Lets just do this when we pass budgets… Oh wait, if that happens then THAT would be the best part of this deal.

#3 Comment By Brendan Doran On January 19, 2013 @ 7:17 am

[8]

Truth in advertising.

#4 Comment By TomB On January 19, 2013 @ 9:57 am

Does anyone really believe that anything *either* side is doing right now amounts to anything more than a sham/re-arranging of the deck chairs/doing virtually nothing whatsoever to confront the real looming big-picture economic catastrophe?

And does anyone doubt that the longer that looming catastrophe is handled in this ultra short-term, game-playing manner the deeper and longer that catastrophe is going to be?

#5 Comment By Dan DiFabio On January 19, 2013 @ 1:40 pm

Congress is actually functional as opposed to dysfunctional.
That is nice for a change! Spending cuts will take place whether tax and spend politicans like it or not. Reality will set in. We can no longer afford to have military bases in more than 100 countries. The debt ceiling needs to be raised periodically,but there will be accompanying spending cuts.

#6 Comment By Cliff On January 19, 2013 @ 1:49 pm

Plan B, mark II. The Ds won’t go for the three-month limit, so for this to even pass the House, it will need just about every R vote. Can it get them?

Even if it does pass the House on a party-line vote, the Senate will amend it, on another party-line vote, to remove the three-month limit. It then goes back to the House, where the amended bill will pass with a minority of the Rs voting for it. Just like last month.

If it somehow passes both houses of Congress, Obama has pledged to veto it.

#7 Comment By Luke Daxon On January 19, 2013 @ 2:30 pm

With the greatest respect, this is only a postponement of Ragnarok, at the very best. I am nobody’s idea of an economist, but I don’t think one needs to be to recognise the irresistible momentum of the modern state, which remains quite unaffected by questions of who is up and who is down in Washington. The state cannot be stopped. It cannot be slowed down. Its onward motion cannot be changed.

In mid-2002, the federal debt was just over $6 trillion. Little more than a decade later, it is beyond $16 trillion. Whatever the current shenanigans in the Beltway, there is no serious evidence that its further growth will stop – too many people have too much at stake for Leviathan to be put on the Atkins Diet.

#8 Comment By Richard Parker On January 19, 2013 @ 7:19 pm

“The assumption behind the three-month interval is that, later this spring, lawmakers will have worked out a deal…”

With the Left, a deal is never a deal.