Sunday, 17 July 2011

The debt ceiling talks

Congress and Obama are currently in talks over raising the debt ceiling. Without an agreement being reached, Obama will either have to concede to Republican spending cuts, or the USA will have to default on its debt interest payments. The debt ceiling does not need to be raised; the USA has enough money to pay its debt interest, but to do so it would need to cut spending in other areas sharpish.
Firstly I need to briefly explain the problem for those who aren't sad enough to read American political news. The US has been running a large deficit for some time; it's now got to the point that it doesn't have enough money to pay its debt interest AND continue spending as much as it currently does on other government expenditures. Some claim that if a deal is not reached, the USA will default on its debt. That would be an absolute disaster - lenders would stop lending to the US, resulting in massive and fast cuts in public spending, a severe domestic and then worldwide recession, potentially causing massive domestic social unrest. Fortunately, this won't happen. Despite what some news outlets suggest, there is almost no chance that a default will occur. Even if a deal is not reached, Obama will simply agree to cut spending to avoid defaulting. If Congress doesn't allow him to borrow more, he will just have to work with the funds he's got. Next month's revenues will be enough to pay the debt interest plus mandatory spending (social security, Medicare, etc. Beyond that, large cuts need to be found if the ceiling is not raised.

The first thing to note is that Republicans in Congress are caught between a rock and a hard place. They're just not sure what to do because they're being pulled in different directions. The moderate position would be to seek a deal which forces more spending cuts but is also open to taxation rises of some sort. However, this would alienate and disillusion the Tea Party movement and fiscal conservatives. The Republicans fought the 2010 midterms on the Pledge to America, which sought tax cuts and less regulation. To agree to tax rises would be hypocritical and potentially a George H.W. Bush moment - who pledged in the election "Read my lips, no new taxes", later sparking sealing his fate by agreeing to tax rises. However, the prospect of a deal which President Obama, the Republicans in Congress, and the Democrats in Congress will agree to is looking less and less likely, as they burrow into their respective corners. Obama is stuck in the middle, attempting to get Republicans to agree to tax and smaller spending cuts, whilst simultaneously battling against some ultra-liberal Democrats who oppose most cuts for fear of upsetting their constituents.

There is an option for Republicans that Mark Levin - the extraordinary host of the Mark Levin radio talk show - points out. (If your definition of talk show is Levin talking for 3 hours about how Obama is a Marxist and occasionally taking sycophantic calls). He tells Republicans in Congress to do nothing at all if they can't get very good deal. Simply refuse to raise the debt ceiling unless Obama concedes to everything they lay on the table. Levin suggests that this would leave Obama in the hot-seat; he'd be responsible for cutting federal government spending, and would therefore receive the blame for cuts made, not Republicans. However, the risk here is Republicans will appear to be obstinate and unwilling to compromise, losing a degree of support from all but the committed party supporters and the Tea Party spectrum. Similarly, Republicans preventing a deal would give Obama a nice purse of political capital: he can say that he didn't want to make these cuts, but he has to in order to avoid defaulting on the debt and sending the country down the pan, adding that if only the Republicans had been willing to agree a moderate tax rise on the rich, this would all be much easier and less painful for the average American. Levin goes on to suggest that Obama would deliberately cut frontline spending - funding for schools, prisons, soldiers, etc - if forced to make cuts, thereby turning public opinion against cuts and building support for federal government spending and Democrat plans by showing how important it is.

Going back to the potential deal, what kind of things could Republicans be pushing for? The talks on the deal are currently taking place in secret, so we don't know, but we can hazard guesses and make recommendations. I suspect reforming social security might be on the agenda. It's important to remember that there are two types of federal government spending in the USA: discretionary and non-discretionary. The majority of federal government spending is non-discretionary. This means compulsory. It cannot be cut without reforming the services which the money is spent on - it's things like social security, Medicare, and Medicaid. Observe (video from January 2010):

I suspect that Republicans might be seeking some form of support form Obama and Democrats on reforming entitlements, particularly as Paul Ryan recently unveiled planned reforms to Medicare and Medicaid. Democrats in the past blocked George W. Bush's attempt at reforming social security to make it more affordable, so the issue was kicked into the long grass again. It can't stay there forever, because in its current form it is no longer affordable without much increased revenues. However, I suspect that as discussions are fraught with disagreement, the chance of Republicans being able to get concessions on these types of reforms are very slim. Whilst I believe there is room for some tax increases, I strongly doubt that Republicans will cave on the issue, particularly with recent poor employment figures and a still-fragile economy. Tax rises could risk further job losses and slower growth. However, I suspect there could be a strong backlash from middle class and blue collar families if welfare and entitlements are being cut with no changes to the Bush tax cuts, which Republicans will be mindful of and they will therefore refuse to give into any middle class tax rises. Something such Republicans as Rand Paul (our hero's son) are calling for the beginning the process of a Constitutional amendment which requires balanced federal budgets, meaning that the federal government's income must match or exceed expenditure, thereby preventing it running deficits and building up debt.

The strong stance taken by Republicans on the deficit and debt is portrayed as somewhat hypocritical, though. George W. Bush ran a consistent deficit, and there was very little in the way of criticism from Republicans in Congress at the time. Bush turned Clinton's surplus into a deficit, and continued to run one throughout his time in office. A large cause of of this was the tax cuts he implemented, so this gives a way for the Republicans to set themselves apart from the Democrats, who it can be claimed have a history of deficits through over-spending. Republicans can also point out that the deficit was in decline from 2005 onwards. The sharp shot upwards came as a result of the banking crisis and subsequent recession. Whilst the bailout occured on Bush's watch, the deficit rose to its giddy heights of 10% under Obama, partly due to his Keynesian economic policies - borrowing more money to invest in the economy, otherwise known as the stimulus package. Whilst it's not a black-and-white issue of Obama being to blame, it's quite easy to point out that the highest deficit under Bush was 3.19%, and the highest under Obama is likely to be this year, projected at 10.91%. Republicans can highlight poor employment figures and unsatisfactory growth to show that tax rises aren't the answer, backing this up with a two-pronged attack on Obama: it can be claimed that not only is business regulation, the healthcare reforms, and energy policy increasing the deficit, but they're also hurting the economy and putting people out of their jobs.

Further attacks can be made in that Obama has now stupidly dug himself into a pit from which he cannot climb out of. He's pledged not to accept a short-term, temporary raising of the debt ceiling, only one which remains at the heightened level, going as far as saying he would veto any short-term ceiling rise. He's sending out all the wrong messages; whilst lambasting Congress for refusing to budge, he's drawn up his own red line. Furthermore, refusing a temporary increase in the ceiling sends the clear message that he has little intention of cutting spending quickly, and wishes to continue his ineffectual stimulus package. In a time when the majority of the public are increasingly concerned about the deficit and debt, Obama's obstinacy on refusing a short-term deal may not go down well.

Whilst the public may be getting mightily fed up of partisan politics and the refusal of politicians to compromise, from far across the Atlantic, it's a very interesting and - dare I say it - exciting state of affairs to keep an eye on. This is why American politics is so interesting. In few other democracies would the head of state be so powerless during talks on such an important issue. This is what makes the USA's political system so fantastic - power truly is split between branches; it's a stark contrast to the growth of Prime Ministerial power in the UK over the previous few decades.

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