Debt ceiling, Republican ceiling

Patricio Navia

Buenos Aires Herald, July 5, 2011

 

When you expect to win the presidency, you don’t make it harder for the next president to govern. The tough bargaining position adopted by the Republican congressional leadership on increasing the U.S. government debt ceiling hints at that party’s leadership expectation that Barack Obama will win re-election in 2012. Still, a failure to increase the debt ceiling will bring about enormous complications for the administration and for the entire country, including the Republican leadership.

 

Unless Congress acts at least a week before, the U.S. government debt will hit its authorized ceiling on August 2nd, forcing the treasury department to default on some of its obligations. Credit rating agencies have warned that the U.S. would risk losing its AAA current rating. That would make borrowing more expensive and further increase the already troublesome public sector debt burden. The congressional delay in reaching an agreement to increase the debt ceiling has already triggered a ‘negative outlook’ assessment on the U.S. government’s ability to pay back its debt.

 

Only Congress can authorize new spending. Annually, Congress passes a budget law that sets spending and taxes. In addition, Congress authorizes a debt ceiling for government spending. Thus, after having voted for a budget that forces the government to increase its debt, the Congress might fail to authorize the government to incur in such debt. Since it was first authorize to exceed the 1 trillion dollar mark in 1981, the debt ceiling has been increased repeatedly. Most recently, in February of 2010, it was set at US$ 12.294 trillion. When the debt ceiling approaches its limits, Congress normally increases it.  

 

However, because the deficit has grown so large in recent years—it equals almost 98% of the GDP—many fiscally conservative Republicans do not want to authorize a new increase in the debt ceiling. Instead, they want to use the needed vote as an opportunity to force government spending cuts. Fiscally conservative democrats blame Republicans for their opposition to increasing taxes as the reason why the deficit is getting out of control. As it has become a trademark of his administration, President Obama is trying to forge a middle ground. He wants to repeal the most important components of the Bush tax cuts, those that lowered the tax burden on wealthiest Americans, and has offered some significant tax cuts on government spending, including scaling back on defense spending, an important item on total government spending.

 

As no compromise has been reached, Republicans are threatening with not authorizing an increase in the debt ceiling. Democrats, including the White House, are warning that such a move would irresponsible hurt the entire U.S. economy and might throw the country back into a recession. Though there is obviously a lot of posturing and short-term political gains calculations in the debate, the actual negative effects of failing to raise the debt ceiling will not be minor.

 

True, in the short term, they will be most costly for the Obama administration. Because Obama would be the first U.S. president forced to default on some of the government debt, Republican zealots anticipate that a failure to act before August 2nd will hurt Obama’s re-election chances.  However, if the damage on the U.S. economy is too large, Obama will be able to blame the Republican leadership in the House for hurting the nation to score short-term political points. Just as it happened when Republican forced a government shutdown during the Clinton administration, Obama might use the occasion to rise above partisan politics and cruise to re-election, while Republicans will pay the costs of their obstructionism.

 

However, some Republican leaders might already be anticipating that they stand little chance of winning in 2012. As a result, they might think that they lose little by taking a principled position. If losing an already uphill battle is the cost of forcing a much faster deficit reduction than the Democrats are willing to accept, some Republicans might be willing to pay the price. Thus, it should not be a surprise to see Republicans keeping their tough negotiating position until the end. As some rumors have already indicated, some Republicans are signaling that they would agree to a small increase in the debt ceiling to keep the growing fiscal debt issue alive, as a new vote to yet another debt ceiling increase would have to occur later this year.

 

True, the larger question of whether Republicans are willing to ask for cuts in social security, Medicare or defense remains unanswered. Strong conservative opposition to tax increases will eventually force Republican leaders to choose between social security and defense cuts. Both alternatives are equally unattractive. Yet, if Republicans anticipate that they will lose the 2012 election, cutting social security benefits becomes a less repealing alternative. 

 

The 2012 presidential election might be decided in the next few weeks. The harder the bargaining position adopted by Republicans, the more likely it will be for Obama to win re-election, even if the failure to reach a compromise causes high short-term damage to the president’s popularity.