Monday, April 18, 2011

It's Time To Exploit The Debt Ceiling

Sometime between May and June, our government will breach the federal debt ceiling. We have three choices: raise the debt ceiling, cut spending, or default. The third choice would be a disaster, but I’m thinking that it might be the right time to oppose raising the debt ceiling. Jim DeMint thinks so. Interestingly, the same Democrats who voted against raising the debt ceiling before are now attacking Republicans for toying with the same idea.

Let’s start by explaining why we can’t default. If the US doesn't cut spending or raise the debt ceiling, it will literally (legally) run out of money. That means entitlements won’t be paid, government workers will be sent home (not just the essential ones), government contracts will stop, and repayment on the debt will stop. The biggest of these consequences might be the defaulting on the repayment of our debt. This would tank our credit rating and raise interest rates. Right now we pay approximately $160 billion per year on interest to service the national debt. Much of that has been at incredibly low rates obtained during the financial crisis of 2008. If we default, we could expect our interest rates to double pretty easily. That would mean spending almost as much on payment of interest as we currently spend on Medicare. Moreover, the higher interest rates would hit home mortgages, consumer loans, credit card rates, and crush the stock market. So default would begin a horrible economic spiral that would lead to an economic depression.

This means we must not default. It also means that anyone playing with a possible default better be sure they are right, because the consequences could be very severe and could be fairly easy to explain to every American, as they would be personally hit by this.

But default won’t happen until at least June or more likely July. So at this point, as far as the public is concerned, default is just theoretical. Thus, now is actually the perfect time to use the threat of default to extract goodies from the Democrats. Why? Because it’s too early for the public to get too upset about the idea of the interest on their ARM or their credit cards doubling. But at the same time, anyone worried about the consequences of not raising the debt limit (i.e. Obama and Senate Democrats seeking re-election) will be getting increasingly nervous.

Thus, now would be the time for Tea Party Republicans to make serious demands in exchange for agreeing to raise the debt limit. I say Tea Party Republicans rather than the party leadership because (1) it will be harder for the Democrats to attack Republicans generally if this was seen as just a subset of Republicans, (2) the Democrats think these people are crazy and thus are much more likely to believe this threat than they would if it came from Boehner, (3) Jim DeMint doesn’t have to reveal how much support he has, which will prevent the Democrats from judging how credible the threat is, and (4) this allows Boehner to play the mediator, which is an ideal position for an advocate -- it's essentially the good cop/bad cop routine.

I would also suggest that the demand be substantial and consequential, and it should not be anything that can be characterized as being done in the name of a small group of people like “the rich” or “corporations.” Thus, I would say, don’t ask for a few more billion dollars or tax cuts, but ask for a reformation of Medicare along the lines of that proposed by Paul Ryan, i.e. a de facto privatization. Or demand statutory spending caps fixing the maximum percentage of GNP that can be spent by the federal government.

Finally, start running ads right now pointing out the hypocrisy of the Democrats on this issue. President Obama, House Minority Whip Steny Hoyer and Harry Reid each voted against raising the debt ceiling when Bush was President. They are claiming their prior votes were mistakes. But others aren’t being as "genuine." Sen. “Air” Claire McCaskill claims it would be “profoundly irresponsible” for the Republicans to vote against raising the debt ceiling, without ever mentioning that she did the same thing when Bush was President. To hide the contradictions in their own votes against it under Bush and for it under Obama, John Kerry and Joe Lieberman are trying to blame Bush for each of their votes -- then and now. Nancy Pelosi and Caucus Chairman John Larson are simply refusing to comment on their flip flops. And Assistant Democratic Leader James Clyburn actually said that his vote against raising the debt ceiling (something the Democrats now describe as “profoundly irresponsible”) was just a “protest” of Bush’s tax cuts, i.e. he did something profoundly irresponsible just to register his anger at Bush?

The point here is simple. It will be very hard for the Democrats to defend this issue. Either they were horrifically irresponsible under Bush or they are playing politics now. Either makes for great ads and should help defuse any idea that the Republicans are about to destroy the country. So long as Obama is simultaneously afraid that not getting the ceiling raised will destroy the country (and it would), the Republicans should be able to extract something significant for the public.

Fortunately, this may be in the cards. Even Eric Cantor has said: “Let me give notice to the White House that blindly raising the debt limit without implementing real reforms is irresponsible and will simply burden our children with more debt. We Republicans are not going to go along with it.”

Ok. . . go for it.

23 comments:

LawHawkRFD said...

Andrew: S&P has just downgraded our credit status, seemingly in anticipation of "no deal." It won't affect credit rates yet, but it's a forewarning. So I completely agree that this is the time to push, and push hard. Rather than see the dollar go into a complete tailspin, I would support one last raising of the debt limit. But only with a market-soothing, stability-enhancing and truly serious cut in government spending a la Ryan and company. Otherwise it's just a choice between a slow dollar collapse and a fast dollar collapse. If no major cuts in spending combined with fiscal responsibility, we might just as well rip the bandage off and get it over with.

Iced Matty said...

Leave it to the dems to whine about something they did themselves.

Ed said...

Andrew, I don't think Cantor has the nerve, but I know that Jim DeMint has. Let's hope they get something big out of this. I like the idea of holding out for the Medicare reform. That would be a huge change and it would be hard to say that wasn't done to save the budget. Of course, seniors might be upset if the PR isn't done right.

Ed said...

Andrew, If they don't go for the Medicare change, what else do you think would be worth it? How about a 10% across the board cut in the budget?

AndrewPrice said...

Lawhawk, I agree. If we don't get serious cuts then we're just slowing the inevitable, not fixing it.

And you're right about the S&P downgrade -- talk about timely! They must have known my article was coming. LOL!

That should be a wake up call to people that they need to get serious about cutting. If they do that, then I could agree to one more debt ceiling rise as well. But if they don't put serious cuts or reforms on the table, then there's no point in it.

AndrewPrice said...

Matty, Hypocrisy is a Democrats trait. In this case, I think we could use it well as cover for forcing them to agree to reforms because it will be hard for them to argue that we're playing games with the nation's economic and fiscal health when they've done the same thing themselves.

AndrewPrice said...

Ed, I am not a Cantor fan either, which is why his statement that he's willing to hold out for some cuts is pretty significant -- because I would never have suspected it from him.

In terms of Medicare, there is a risk that seniors will freak out. But (1) that's where we need to dive in an explain that we are saving the system, (2) we are getting them access to doctors who won't see them anymore, and (3) these changes won't throw anyone off of Medicare.

We could hold out for other things, but I think that would be the one reform we could use to show that we are serious about changing the government. That change alone could result in a trillion dollars in savings in ten years.

AndrewPrice said...

Ed, The problem with the 10% across the board is that while it sounds great, it's impossible to include entitlements in that because that's not discretionary spending. So unless we get entitlement reform, you just can't get anything out of that. And since that's 88% of the budget, a 10% "across the board" cut really only equals a 10% cut of 12% or a 1.2% cut.

AndrewPrice said...

By the way, the S&P downgrade really blasted Obama's PR campaign where he's trying to convince the public that his spending cuts are for real. Even Politico realized that one: LINK

T_Rav said...

LawHawk, you know what this means, don't you? S&P are racists who want to kill homeless old women and children. That's what it means.

AndrewPrice said...

T_Rav, Good point. Clearly they are racists, ageist monsters!

In all seriousness, that's not going to help Obama sell the idea that he's got a serious debt reduction plan when the first day he starts selling the plan, the S&P downgrades the country for lack of a serious deficit cutting plan. Whoops.

DUQ said...

I want to see the Republicans stand up on this one. I guess it's not smart to see them actually vote no, but I want to see them play up the threat.

AndrewPrice said...

DUQ, I think it's important that they don't actually default. But beyond that, they should play this for every penny it's worth. The Democrats sound pretty desperate right now to avoid the problems this could cause, so now is the time to strike.

CrispyRice said...

Andrew, I also hope they use this to force the Democrats to agree to more conservative policies.

AndrewPrice said...

CrispyRice, Me too. I guess we'll see. :-)

Ed said...

Andrew, That's interesting. I didn't realize a 10% across the board cut wouldn't get the whole budget, but that makes sense.

BTW, nice attack on the troll in Gary's column today! Lol!

AndrewPrice said...

Ed, Theoretically, you could demand a 10% cut in the entitles too, but you would just end up causing problems -- not enough money for what they are trying to do. That's why reform is so important, to make this stuff cheaper.

Thanks, it wasn't much of a troll. And it was good to see Gary writing again. Slow day over there though. Wow!

CrispyRice said...

Good run down of what happens if the government runs out of money too. That makes it pretty clear that we need to be careful private individuals don't get hurt by this or they won't support us.

AndrewPrice said...

Crispy, Thanks. The truth is that it would be a very bad thing to default. That's why this really should be only a threat. But as long as the Democrats believe the threat it will be highly effective -- that's why having the Tea Party people make the threat is most effective, because the Democrats see them as the boogeyman by now.

Tennessee Jed said...

Not much to add other than I agree. Like you, Andrew, I have had some good vibes about many of the H.R. Republicans. This could be a golden opportunity to get more accomplished before 2012. It could be a golden opportunity for a potential POTUS candidate to separate from the pack. As you say, though, we'll just have to see how it plays out. My word for tonight, oops--this morning is RESOLUTE!

StanH said...

Now we understand what Trent Lott meant when he said to paraphrase, “what will we do with a bunch of Jim DeMint’s running around?” And we now know why they didn’t allow any Tea Party people in leadership. Eric Cantor is about as threatening as a Smurf, we really need someone a bit more menacing, or like Jed said, “resolute.”

Sorry I haven’t been around much, been dealing with a family emergency.

AndrewPrice said...

Jed, Nice word! And yeah, this could be a golden opportunity both to get something done before 2012 and for a candidate to stand out from the crowd -- though they all seem averse to that for some reason.

I really would like the see the Republicans pick something like the Medicare issue and show they can do this. I'm afraid they'll just get a few more cuts. But we'll see. I'm pretty sure they'll get something because even Obama is talking about the need to get cuts as part of this deal.

AndrewPrice said...

Stan, Could you image a Senate of Jim DeMints? LOL! That would change the world.

No problem on not being around, we don't take attendance. We're just happy you're back and hopefully everything is going well?

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