Hostage Crisis: An Update on the US Debt Ceiling Debate

By popular demand, I’m writing another article on the Debt Ceiling Crisis currently facing the United States as we head into the last few critical weeks before default. Please note the change in title from “Hostage Situation” to “Hostage Crisis”. My next entry, depending on the outcome of current negotiations, be “Tango Down: US Debt Ceiling Crisis Averted” or “Grab Your Ankles: US Defaults on National Debt”.

For those that didn’t read my previous article, here’s a quick summary of the situation.

The United States Government has, for most of the last thirty years, run at a deficit. In order to pay these bills, the Treasury is authorized to borrow up to a certain amount, called the debt ceiling. The debt ceiling is voted on by Congress and signed by the President, as is the rest of our legislation. Traditionally, the debt ceiling has been raised without a whole lot of fuss. The party out of power votes against it on principle, and the party in power passes it. It’s never been a huge deal, until now.

The important thing to remember about the debt ceiling is that it is not the same as a credit card, in that when you hit your limit you can’t charge anymore. The debt is comprised of money already spent. The debt ceiling represents obligations to US Government creditors that must be repaid to maintain the credit rating of the United States.

In 1985, an anti-tax activist named Grover Norquist began demanding that Republican congressmen sign an anti-tax pledge that stated that they would never, under any circumstances, raise taxes. To date, the vast majority of GOP politicians at all levels have signed it. George H. W. Bush’s 1992 Presidential campaign loss to Bill Clinton was partially attributed to anti-tax activists slamming him for raising taxes, something which he famously declared he would not do.

In the 2010 midterm elections, the American people voted in a large number of candidates adhering to the “Tea Party” platform. The Tea Party, for those of you unfamiliar with it, is a conservative anti-tax/anti-government movement. One of the primary planks of the Tea Party platform is that, under no circumstances, should the debt ceiling be raised.

The problem with this is that economists estimate the fallout from failing to raise the debt ceiling, which the United States will hit on or around August 2nd, to be somewhere between “catastrophic” and “apocalyptic”. Strictly speaking, no one knows for sure, because in the 200-odd year history of the United States, it’s never happened. By virtue of the fact that the United States has been the world’s major economic engine for most of the 20th and 21st centuries, the world economy is incredibly tied in to the overall health of our economy. The phrase “the full faith and credit of the United States” has become the new gold standard for world finance. Consequently, whatever happens here has massive repercussions for the rest of the world.

Over the past several weeks, Vice President Joe Biden has been negotiating with Senate Democrats and House Republicans, attempting to reach a compromise, until House Majority Leader Eric Cantor (R-Virginia) and Senator Jon Kyl (R-Arizona) walked out of negotiations. The deal he walked away from was somewhere in the neighborhood of $4 trillion in spending cuts, with $1.7 trillion in new revenues, drawn from closing tax loopholes and raising taxes on the top 1% (those making more than $250,000 annually).

Following Cantor’s walk out, President Obama stepped in and began negotiating with Speaker of the House John Boehner (pronounced “Bay-ner”, not “Boner”) (R-Ohio). The President has repeatedly stated his request for a long term deal, funding the government for another 12-18 months, rather than a series of short term deals. The reasoning behind this is that a short term deal would likely expire in the middle of next year’s Presidential elections, creating an even more hyper-partisan environment, rather than expiring after the elections.

Negotiations have, to say the least, not been productive. Speaker Boehner has taken a backseat to Rep. Cantor, who earlier today was chastised by the President for being entirely unproductive. To give you an idea of what’s been floated so far, for those of you that are Monty Python fans the House GOP has asked for a shrubbery, which the President delivered, and now they’re asking him to cut down the mightiest tree in the forest with a herring.

As any good hostage taker will tell you, Rule #1 in Hostage Taking is that you have to be willing to kill the hostage, and the other side must believe you are willing to kill the hostage.

There are 242 Republicans and 193 Democrats in the 112th Congress House of Representatives.

Of those 242 Republicans, approximately 50 will not vote for a debt ceiling increase under any circumstances. These people cannot be reasoned or negotiated with, and will vote no no matter what. Essentially, no matter what you offer them, they will shoot the hostage.

There are 100-150 Representatives that will vote for a debt ceiling increase, but only under the most absurd circumstances. For example, a sample package that could pass this group would be the $4 trillion in cuts, no additional revenues, defense spending would remain untouched (defense spending is the largest discretionary spending the government has, and the second largest total expenditure behind Social Security and ahead of Medicare and Medicaid), and a Balanced Budget Amendment to the US Constitution must be ratified by all 50 states. The Balanced Budget Amendment, for the record, was referred to by the Washington Post’s Ezra Klein as “The worst idea in Washington”. Continuing our hostage-taker analogy, this group are the hostage takers that are willing to let the hostage go, but only if you provide them with a fully fueled 747, a billion dollars, and safe passage to a non-extradition treaty country, all in the next 30 minutes.

Finally, that brings us to the brave 50-100 GOP Representatives that would be A) willing to vote for a debt ceiling increase and B) would do so without having truly absurd circumstances attached to it. These brave souls are only asking for a pizza, a small private jet, safe passage to a non-extradition treaty country, a million dollars, and they’ll give you a few hours as long as they get the pizza in 30 minutes or less.

From a political standpoint, the GOP has painted itself into an extreme corner. Half to two thirds of the House Republican caucus either won’t vote for a debt ceiling increase at all or will only do so under terms that are either impossible to meet or would surely destroy the American economy. The remaining quarter to a third would be willing to vote for it, but would almost assuredly face primary challenges from outraged Tea Party and anti-tax activists in the 2012 elections.

Speaker Boehner himself is in an incredibly difficult position. His #2, Rep. Cantor, could easily play a compromise on the debt ceiling issue into a challenge for the Speakership in the 113th Congress. He could also face a primary challenge from a Tea Party backed candidate. Although unseating him would be unlikely, it would be an unwelcome distraction.

Senate Minority Leader Mitch McConnell (R-Kentucky) floated a piece of legislation earlier this week that would “solve” the debt ceiling crisis. This legislation would allow President Obama to deliver three resolutions to Congress raising the debt ceiling every three months or so, as long as he included non-binding suggestions for equivalent spending cuts. If Congress failed to override these resolutions, the debt ceiling would be raised. For those unfamiliar with American politics or the Constitution, this policy is both nakedly political, in that it would force the President to “own” raising the debt ceiling three times before facing reelection, and would transfer the “power of the purse” from the Legislative to the Executive branch, which is pretty much the exact opposite of what the Founding Fathers had in mind when they created the three branches of government. Mitch McConnell even admitted it was a bad deal, saying that he was committed to making the President a one-term President and that he would not be helping his reelection campaign.

There are a few options going forward on how to solve this crisis.

Option #1) The White House and Congress negotiate a deal with majority Democrat support (70/30 or 80/20), with enough Republican votes to pass the House and Senate. This would almost assuredly lead to Speaker Boehner being challenged in the 113th Congress for his Speakership.

Option #2) Lobbyists from the business community put the screws to House and Senate Republicans, and a deal is made with 50/50 or 60/40 Democrat and Republican votes.

Option #3) Congress fails to pass a deal, and President Obama invokes the 14th Amendment, abolishing the debt ceiling as unconstitutional. This would lead to impeachment hearings in the House, and could be ruled unconstitutional by the Supreme Court.

Option #4) The United States Government defaults on it’s debt for the first time in history. A global economic panic kicks off, plunging the industrialized world into a second Great Depression. World markets collapse. Credit evaporates. Basically all the worst parts of the Bible.

The deal hinges on whether House and Senate Republicans are willing to do the right thing for the country and face potentially terrible political consequences, or whether they will only do the right thing politically, and allow the United States to plunge itself and the world into a second Great Depression.

I’m not a gambling man, but if I were you I’d stock up on Chinese Renminbi, canned goods, and ammunition.

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