Gaming Out the Debt Limit Negotiations

(Because Estabon Ferlingetti VI demanded it)

For a lot of different reasons, it is obviously insane that the House GOP has resorted to extortion by threatening to block an increase in the nation’s debt limit unless its demands for spending cuts are met.  Every person who actually understands the situation agrees that the economic consequences would be disastrous should America end up defaulting on its public debts.  Toby Ziegler explains:

This is why even John Boehner and Mitch McConnell have acknowledged that the nation’s debt limit must be raised before the August 2^nd drop-dead date.  “Must” – not “should.” Toby Ziegler's assessment of what will occur should the United States default of its debt obligations may have been dramatic, but it wasn't far off the mark. <:p>

 The 14^th Amendment makes it unconstitutional to default on the nation’s debt, and the Supreme Court’s decision in Perry v. United States (1935) determined that Congress is constitutionally prohibited from voiding any U.S. debt – which it certainly would be doing if it failed to increase the debt ceiling so that the U.S. could pay back its loans.  These constitutional protections – backed by the world’s largest economy – are what have made the U.S. Treasury bond the rock-ribbed, safe-as-houses, as-close-as-you-can-find-to-a-risk-free investment that the global financial community has come to rely upon.

And that has worked out very well for the U.S. economy.  For one thing, it allows the nation to borrow money when necessary at the absolute lowest rate of interest possible.  Even now, when our economy is in the toilet and unemployment is sky-high, interest rates for 10-year U.S. bonds are at the lowest rates we’ve seen in years:

(h/t Paul Krugman)

Despite all of our substantive economic problems, the rest of the world is still falling over itself to loan us money at low, low rates.

Additionally, being known as the safest place to park one’s money has helped to turn the United States dollar into the world’s reserve currency; other nations have no problem parking their national reserves in U.S. Treasury bonds, in part because they know those bonds will be redeemed.  And this, in turn, allows the United States to post huge trade deficits year after year.  Essentially, Americans are able to purchase more goods from other countries than we can sell to them each year, but only because the other countries are more than happy to make up the difference by buying up our debt.  Whereas most nations have to equalize their international trade by actually manufacturing and selling products, the fact that the United States dollar functions as the world’s reserve currency means that we can balance our international trade essentially by just printing money.

But that all comes into question if America defaults on its debt.  To begin with, default might jeopardize the U.S. dollar’s status as the world’s reserve currency.  More immediately, it will definitely drive up interest rates.  Kevin Drum cites a Washington Post article by Bruce Bartlett indicating that an extremely brief, two-week default in 1979 caused by nothing more than a breakdown of the Treasury machines that print checks “raised interest rates by six-tenths of a percentage point for years afterward.”  As Drum points out:

Six-tenths of a percentage point is a lot of money.  My back-of-the-envelope chicken scratching suggests that if this happens again it would cost the government something like $50-100 billion per year.  In other words, no matter what debt ceiling deal we reach, upwards of half of it could be wiped out by higher interest costs if it comes too late to prevent default on the debt. (emphasis added)

But in a sad kind of way this fact probably provides the greatest leverage for convincing the GOP to do the right thing and raise the debt limit, because when the interest rate on government debt goes up, interest rates on all debt goes up.  This is significant, because bond prices and interest rates are inversely related; as interest rates go up, the value of existing bonds goes down.

(For example, suppose you lent money out and hold a bond from a debtor who has agreed to pay you your money back plus 5% interest.  So long as the market interest rate holds steady at 5%, you can always sell that bond to somebody else for its full face value.  But if the market interest rate for this type of debt suddenly jumps to 8% then you no longer can sell the bond at face value.  You have to sell the bond at a discount, because nobody is going to buy a bond that only pays 5% interest when they can buy a bond that pays 8% interest.)

All of which means that for those already rich enough to belong to the Creditor Class, i.e., those who have lent capital out, the last thing they want to see is a jump in interest rates.  Rising interest rates not only function as a drag on the economy (because it costs more to borrow money), but they also directly reduce the value of the Creditor Class’s bond portfolios.  To put it another way:  rich people start getting poorer.  

So you would think that at some point prior to now the Big Money Boyz would have called their cat’s paws in the GOP onto the carpet and explained the facts of life to them.  Nobody likes to lose money, but if there is one thing we all should have learned after watching Wall Street whine and moan and beg for government welfare when they blew up the financial markets, the Big Money Boyz really don’t like to lose money.  This is why so many people – myself included – thought that talks about raising the debt limit would have been concluded weeks ago; Wall Street doesn’t want to blow up the global economy, Wall Street doesn’t even want to entertain the possibility that might happen.

So . . . what went wrong?

* * *

Well, part of the answer may be that a large part of the Republican party has found itself captured by the very Tea Baggers whose anger the GOP thought it was harnessing for its own purposes.  As Nate Silver’s recent New York Times post showed, the GOP’s landslide midterm victory last year makes it clear that many Republicans –  perhaps especially freshmen Republicans – are entirely dependent on the most conservative members of their party (read:  Tea Baggers) for their position in Congress.  And as I’ve pointed out elsewhere most people are incapable of conceiving causal relationships more complex than 1 cause = 1 result.  So it may just be that there is a large swath of Congressional Republicans who are incapable of comprehending that crashing the economy would be much, much worse for them personally than would be disappointing the lobotomized supporters to whom they owe their Congressional positions.

It also appears to be the case that a not inconsiderate number of these yahoos actually believe that failing to raise the debt limit and defaulting, for a little while at least, on the nation’s debts wouldn’t be that big a deal.  Jim DeMint, self-appointed chair of the Tea Bagger caucus in the Senate, penned an op-ed arguing that advocates for raising the debt limit are lying to the public when they claim that fiscal catastrophe would result if the limit weren’t increased.  Eric Cantor, Pat Toomey, and House Budget Committee Chairman Paul Ryan have all suggested that “the U.S. could weather three or four days of missed interest payments” so long as the debt limit were quickly raised thereafter and a debt reduction plan were signed into law.

Not a one of those men appears to be at all bright, but they all (well, maybe not Toomey) carry some outsized importance within the Republican party.  If they actually don’t believe that defaulting on America’s debts is that big a deal then one naturally would expect them to be a lot less willing to raise the debt limit.

So, given that a good chunk of Republican Congresscritters have to answer to an unhinged pack of voters that seems to believe unrestrained federal debt – and not, y’know, the blowing up of the world’s financial markets by irresponsible Masters of the Universe operating on Wall Street – is what crashed the economy, and that another, somewhat overlapping chunk of Republicans don’t or can’t comprehend exactly how high are the stakes for which they are playing, it perhaps shouldn’t be too surprising that the Big Money Boyz haven’t been able to rein in their pets as readily as we have come to expect.  

* * *

So how does this all play out?  Well, anyone's guess is as good as mine, but here's a brief sketch of how it looks to me.

The Republicans

I won’t shed any tears over John Boehner and his eventual political fate – the man is an ass – but he does seem to be in a tough spot.  Every report I’ve read about Boehner, whether by the mainstream media or Matt Taibbi, always has portrayed Boehner as an old school hack politician more interested in cutting deals and moving forward than fixated on ideology, and I certainly have been given no reason to doubt this characterization.   My sense is that Boehner would like nothing more than to cut a quick agreement to raise the debt limit – just like we have done ten times since 2001 – soothe his Big Money Boyz backers, and get back to his golf game.  My guess is that all he really wants out of any kind of debt limit negotiation is to walk away with something that he can spin into a putative “win” over Obama.

Unfortunately, he is hampered by those same ignorant damned Tea Baggers who gave the Republicans 63 seats in the House instead of only 27.  It also doesn’t help that he is saddled in these talks with Eric Cantor, the man who doesn’t think it is a big deal if the United States government defaults on its debts and who – coincidentally – will reap a windfall if it does.  Cantor famously walked out of the debt limit talks on June 23^rd just when it looked like the parties could reach an agreement on spending cuts and the issue of increased revenue was about to be put on the table.

This looked to me, as it did to a lot of people, like Cantor was trying to arrange things so that a deal ultimately would be reached but without his fingerprints on it.  I think Cantor figured the parties were close enough that Boehner and the White House would be able to come to an agreement, but that this necessarily would involve increasing tax revenue – something anathema to the Tea Baggers – and Cantor wanted some plausible deniability as to his part in it.

(It should be noted that Cantor’s action is just a personalized form of what always has been the Republicans' game plan.  Way back in April Senate Minority Leader Mitch McConnell was advising his fellow Republicans that when the time came to vote on increasing the debt limit – which McConnell recognized even then as inevitable – they should not attempt to filibuster the bill because that would require that at least some Republicans vote in favor of the bill proceeding to an up or down vote.  Much better, McConnell explained, to try and just get the damned thing passed with only Democratic votes  – presumably so that Republicans could thereafter run against Democrats as “the party of debt.”)

The Democrats

Until recently, press reports have downplayed any role the House Democrats may have had in these negotiations.  Most reports have mentioned Biden (and later, of course, Obama), Harry Reid and John Boehner as the chief principals in these talks.  I suppose the feeling was that the Republicans controlled the House and the Democrats controlled the Senate so really only Boehner and Reid, each chamber's respective majority leaders, were necessary to reach some sort of deal.

But I haven’t seen a lot of focus on Reid in the press, which feels about right.  My sense always has been that Reid will play “good Democrat” and follow along with whatever Obama, the leader of his party, tells him to do.  That sense is underscored by the fact Reid recently won re-election and so does not have to worry about facing the voters for another five years.  It is easy to imagine him playing “good Democrat” for his president and then using his own leverage and that of the White House to muscle other Senate Dems into accepting a debt deal they might not personally like.

Which is why I was heartened to see Nancy Pelosi recently start taking a more prominent part in these talks.  Pelosi is the only Democratic leader who can really claim a spine of steel.  After Scott Brown won in Massachusetts and everyone believed health care reform was dead, it was Pelosi who saved the President’s signature issue by urging him to ignore his Chief of Staff and let her and the rest of the Democrats muster the Affordable Care Act through Congress before it was too late.  Pelosi is also the national leader who reacted so violently to the “very serious” Ryan plan and – when asked what the Democrats' alternative proposal was – replied firmly,  “We have a plan:   it’s called Medicare.”  And Pelosi is the one who has spelled it out for other Democrats too dim and feckless not to see the writing on the wall (even after Kathy Hochul won the special election in NY-26):  the Dems have an opportunity to win back the House next year if they run consistently as the party protecting Medicare from Republican efforts to kill it.

So I figure recent reports about how Medicare, Medicaid and Social Security cuts might be on the table rendered Pelosi hopping mad, and that is why her name suddenly in being linked more and more to these negotiations.

The White House

Obama is, as always, something of a cipher.  Although I volunteered in his campaign and still support him, I have come to believe that one of the reasons he proved so great at campaigning is his ability to act as a canvas upon which others can project whatever they want.  For Liberals, this meant believing him to be the Left’s answer to Ronald Reagan – a man who might fundamentally change American politics and the way we view government for a generation.  For Conservatives, this means believing him to be a marxist/socialist/Kenyan usurper intent on destroying America, capitalism, and all that we hold dear.  Personally, I mostly now just evaluate Obama in light of the stimulus plan that he pushed through Congress two years ago. 

Back then Obama had just swept into office on a tidal wave of votes for hope and change.  Obama had the country’s backing and was at the high point of what the Villagers call “political capital.”  Had Obama actually been the Left’s version of Ronald Reagan – or even of George W. Bush – he could have used that capital to push forcefully for the kind of truly sweeping economic stimulus plan that many economists believed the country needed.  But instead Obama seemed to interpret his mandate not as one invoking substantive policy shifts, but as one that called for him to “bring the nation together.”  And, to be sure, that was a large part of what he had campaigned on.  But it quickly became evident in his efforts to cobble together a stimulus package that insisting on efforts to get GOP buy-in on his initiatives would inevitably render them watered-down, only partially effective, and turned into something Republicans could use against him politically.

For example, after meeting many times with Republicans, after inviting them to the White House for drinks to discuss the matter in a casual setting, when it came time for Congressional Republicans to sign off on Obama’s stimulus program they all dug in their heels and refused to co-operate.  (Obama probably was unaware of it, but Mitch McConnell began meeting with the rest of the GOP immediately upon Obama's inauguration and urging them to oppose Obama's policies just for the political sake of opposing him personally).

In the end, for his efforts, Obama was only able to get through an economic stimulus plan of about $787 billion and, of that figure, nearly $300 billion came in the form of tax cuts so beloved by the GOP.  Despite bending over backward for the Republicans and watering down his own bill in an effort to gain their support not a single House Republican voted for the bill, and only 3 Senate Republicans did.

I can easily imagine something similar playing out with the debt limit negotiations.

* * *

How This is Likely to Game Out

Despite the fact we are getting closer and closer to the wire, I think it is amazingly likely that some deal will be reached whereby Congress will vote to raise the debt limit. Despite all the know-nothings in Congress who were elected by the know-even-less Tea Baggers who can't abide either (i) raising taxes/closing tax loopholes, or (ii) raising the debt limit at all, the consequences of Congress's failure to do so would just be too dire. I think that - when push comes to shove - the Big Money Boyz still have enough clout to get the GOP to do what is necessary to protect the Big Money Boyz's bond portfolios, even if doing so makes the Teabillies howl.

Which leaves two questions: (i) what will that deal look like? and (ii) what will be the political ramifications of the deal? My answer to both these questions is to assume the past is prologue and that what is going to happen with the debt limit is the same thing that happened with the stimulus bill.

(1) What Will the Deal Look Like? It will look very much like what the Republicans originally identified as their "best case scenario" for striking a deal. After all, that is what Obama has done before.

As he explained in an interview, in 2009 President Obama's advisers provided him with a range of numbers for how big the stimulus package would have to be in order to get the nation's economy moving again: $800 billion to $1.3 trillion. But, of course, the GOP immediately started its well-worn mantra of "tax-and-spend liberals," and "we need to think about the deficit." (As I've written elsewhere, focusing on the deficit in order to block Democrats' domestic agendas has become SOP for the GOP.) So Obama "compromised" by eventually getting through a stimulus plan that was less than the minimum amount his advisers had told him was necessary. And - as previously noted - about 40% of that "stimulus plan" consisted of tax cuts that do not have stimulative effect but that are beloved by the GOP.

It is very clear that something nearly identical is playing out here -- in fact, it already has played out. Only a few months ago the Republicans released a statement explaining that their goal for a deficit-reduction plan -- without which they would refuse to raise the debt limit -- calls for 85% of that reduction in the form of spending cuts, and 15% of that reduction in the form of increased revenue. As many others have noted, America never has enacted a deficit reduction plan so heavily skewed; it is even skewed in comparison to the austerity measures currently being pursued to such disastrous effect in Great Britain.

Nevertheless, just a week or so ago the White House offered a $2.4 trillion deficit reduction bill, only $400 billion of which would consist of revenue increases. In other words, the White House offered a plan that was skewed 83% spending decreases, 17% additional revenue -- pretty much exactly what the GOP had identified as its best case scenario. It was then that Eric Cantor walked out on the talks in order to avoid leaving his fingerprints on the deal.

And now, the latest we are hearing about these talks is that over the weekend Obama pitched some new "Grand Bargain" that would have reduced the deficit by about $4 trillion dollars and included benefit cuts to entitlement programs, but that the GOP balked at this bargain because it also included too much by the way of tax increases. And so now we are once again hearing that the final plan is going to be somewhere in the $2 trillion range.

Given this, my sense is that the parties eventually will settle somewhere close to a $2 to $2.4 trillion reduction plan, and that the ratio of spending cuts to revenue will be almost exactly what the Republicans asked for when they began these hostage negotiations. After all, it is the easiest way to reach agreement: all the Republicans have to do is take 'yes' for an answer, and then they can boast that they got everything that they always said they could ever reasonably expect to get.

In short, I think the past few weeks have been a lot of sound and fury signifying nothing but political posturing, and that the only question remaining is who has postured better going into the 2012 election year.

Unfortunately, I think it is the Republicans.

(2) What Will Be the Political Ramifications of the Deal? Once again, I think Mitch McConnell -- the man who recently reaffirmed that his single most important goal is to deny President Obama a second term -- already has telegraphed how the Republicans will spin this deal politically. They will saddle Obama and the Democrats with it, because it is going to be grossly unpopular and because exactly this political tactic worked so well for them in the past.

Just as was the case with the stimulus plan, Obama is desperate to put something in place that he can call a "win" and he needs for it to be bipartisan. This is why he seems willing, once again, to craft a plan that is straight out of the Republican playbook. My sense is that Obama thinks that if he can pull this off the American people will give him credit for being "fiscally responsible" and "bipartisan" -- the same way he thought he'd get credit from the stimulus plan by being willing to work with Republicans. Now, don't get me wrong . . . Obama is a smart guy, certainly smarter than me, but that doesn't mean that he is right about this.

Americans will tell you, if you ask, that they favor the parties working together -- but what they value more is the parties actually doing something that is going to make their lives better. And Americans will tell you, if you ask, that they worry about the federal deficit -- but only because most Americans have been (wrongly) convinced that the deficit is why the economy is in the tank. Just this weekend I heard Sam Seder expressing outrage on The Majority Report about a poll indicating that a majority of Americans believe cutting government spending will somehow stimulate the economy. Of course, the truth is that when you are in a recession (or even a "jobless recovery") and you can borrow money for almost nothing (as America can do now) then you need to increase government spending, not cut it.

So this plan, which is going to be heavily skewed toward spending cuts, may very well do something about the deficit but it is also likely to have a negative effect on our already sputtering economy. That won't help the American people. And if the employment situation in America doesn't improve over the next 16 months the American people are not going to remember that Obama was "fiscally responsible" or "serious about getting the deficit under control." They are simply going to know that they are still in pain and their first instinct -- just as it was in 2010 -- is going to be to lash out at whoever they think is in charge.

This is almost exactly what happened in 2009. In order to show how "post-partisan" he was, Obama produced a stimulus plan that was in many ways a Republican wish list even though his own advisers had told him it was insufficient to get the job done. And now, of course, the only thing we hear is that "the stimulus didn't work." (This is wrong, of course, but it feels right to too many Americans, and as Stephen Colbert keeps telling us something only has to feel right for us to believe it.)

And, just as with the economic stimulus, be prepared for as few Republicans voting for the deficit reduction plan as is necessary to ensure that it passes. As noted above, Mitch McConnell already has advised the Senate Republicans not to filibuster the plan because he doesn't want to have any Republican fingerprints on it. Of course some Republicans will need to vote in favor of the plan in order for it to pass the House, but you can bet that they will be as few in number as possible. The GOP is going to make sure that this plan is the Democrats' baby all the way -- precisely so they can attack the Democrats for passing it.

They will do so in at least three ways. First, for the Teabillies, they will simply argue that those dastardly Democrats are raising the debt limit yet again, borrowing money and mortgaging the children's future because, y'know, that's just what Democrats do.

Second, for the Teabillies but also for all "fiscally conservative" Republicans, Independents and, yes, even a few Democrats, they will point to the fact that the "Democrats' plan" raised taxes by $400 billion (or whatever the final number turns out to be) because, y'know, raising taxes is just what Democrats do.

And finally, for the elderly and for the moderate and liberal independents who don't pay much attention to politics, the Republicans are going to point to reports from this weekend that not only did Obama want to raise taxes, but that he also suggested cutting Medicare benefits -- which, if you recall, is what the GOP argued in 2010 is just what Democrats do.

(I've seen a lot of happy talk in the blogosphere from people excited about how canny Obama was to outbluff the Republicans by proposing a huge $4 trillion deficit reduction plan and getting Boehner to blink and walk away, thereby proving that the GOP is not serious about deficit reduction. Maybe I'm missing something, but I don't understand this at all. My sense is that the American people always say they care about the deficit when asked because they have learned that it is something they are supposed to care about, but they don't really understand what it is or how it affects them. If they did, they would have been raising Holy Hell during W's Reign of Error. But everybody knows and likes Medicare and it seems to me that even if Obama really was shrewdly bluffing and playing 11th-Dimensional chess, the GOP can now claim once again that the Dems don't really support that insanely popular program but that Republicans do. And I'd bet pretty good money that if you asked the American people whether they care more about preserving Medicare or eliminating the deficit, supporting Medicare is going to win every time.)

* * *

Nobody should get me wrong -- I'm still an Obama fan. But for slightly different reasons. Like a lot of people on the Left in 2008, I thought Obama was going to try to fundamentally alter the nation's political discussion in much the same way Reagan did; when some Lefties were giving him flak for saying nice things about Reagan, I thought that is what he meant. And, for all I know, maybe it was.

But after two and a half years of an Obama administration, I think it is clear Obama is not that kind of president. Obama is much more a technocrat, a serious and sober man who believes that permanent change comes by the accumulation of small incremental steps. And these are all good qualities in a president, and in fact I think he is largely correct. Huge changes imposed more or less by fiat often are more easily reversed than are those achieved by a large series of small corrections having a high buy-in from everyone involved.

Unfortunately, I think Obama's willingness to generate as much buy-in as possible sometimes grants too much power to his political opponents, who are not playing to advance real policy solutions but instead are playing to advance their own power and that of the elite interests whom they serve -- and who play much more shamelessly than does Obama. And I think they use this power most effectively by largely setting the terms of the debate.

When an economic stimulus was being discussed, the GOP dictated how large the stimulus would be and how much had to consist of tax cuts. Now that a deficit reduction plan is being discussed, the GOP is dictating how large that plan can be and how much will consist of tax cuts. And even when their demands are met, they only demand more.

But more scandalous than the fact the nation is arguing over the proper ratio of spending cuts to tax revenues is the fact that a deficit reduction plan is being discussed at all. I cannot for the life of me understand why the White House ever thought that now is the proper time to address the deficit instead of, say, unemployment. And I really cannot understand why the White House went along with the Republicans when they decided to hold the global economy hostage by threatening to default on America's debts. We have seen too many instances where Wall Street's absolute control of Washington, DC has been made clear, and Obama's biggest campaign contributors three years ago all came from Wall Street. Surely he still has their phone numbers? Surely he could have called them up and told them to tell the GOP to stop playing grabass and get serious because he was not going to negotiate on raising the debt limit? But he didn't do that; instead, he elected to play the Republicans' game.

A lot of commentators -- Digby chief among them -- have made the basic point that Obama is doing a deficit reduction deal with the GOP because he wants to; that he could have demanded and received a clean vote raising the debt limit, but he decided to play along because he too wants to address the deficit. I think that is probably correct, the man is too smart to be drawn into this game if he doesn't want to play. But it still doesn't explain why he wants to play this game.

Paul Krugman recently suggested that Obama's seeming abandonmment of Keynesian economic policy may not be opaque at all. Perhaps Obama really does believe what he says: that belt-tightening and fiscal austerity is the way to lift the country's economic malaise. I don't know if that is true, I suspect only Obama's closest advisors know for sure. But I remember reading an article during the 2008 campaign that was intended to bolster Obama's "seriousness" on economic policy by describing his routine discussions with University of Chicago economics professors when Obama taught law school there. Of course, anybody who's read Naomi Klein's The Shock Doctrine can imagine just how scary I found that revelation.

In any event, it is what it is and we are where we are. Some sort of deal will be put together in the next few days and then we will all pore over that and attempt to figure out what it means. And we will watch how the deal gets spun for the American people and how it plays politically as November 2012 draws ever nearer.

I look forward to reading in the comments what I missed, what I got wrong, and how far up my own ass is my head.

Cross-posted at The Daily Kos.