The Accidental Meltdown: Are Republicans About to Cause a Global Economic Crisis They Never Intended?

by Sheri Rivlin and Allan Rivlin on July 28, 2011

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As the debt ceiling battles have unfolded the Democrats seem to be winning the debate but Republicans seem to be winning the negotiations.  Recent polling shows the public clearly on the Democrats side of the policy specifics, but Republicans believe that Democrats have no stomach for a US credit default and the economic chaos it would cause heading into the 2012 election, so they have been determined to press for every advantage they can get in the negotiations.  So far, they have been right and Democrats keep re-writing their offer to make further concessions.

Democrats seem now to be offering just what Republicans asked for in their initial terms: trillions of dollars in spending cuts and no revenue increases.  (even if many of the details of Senate Majority Leader Harry Reid’s plan favor the Democrats’ position) but Republicans are running out of time to pass any deal at all.  If the schedule, the complexity of the task, and the naivety of some of the freshmen Republican members conspire against any deal at all by the deadline, the damage to the American economy, and to Republicans, could be just as bad as advertised.

The question becomes one of whether the rank and file Republican voters, and the rank and file freshmen “Tea Party” Republican members’ resolve that has been the source of the Republicans’ strength will now be the cause of their own, and the nations, undoing? — or to carry the analogy to the 1950 automotive game of Chicken — have Republicans shown enough resolve to get the Democrats to capitulate, only to find that they no longer have the distance to stop themselves before their momentum takes them over the cliff (along with the national or perhaps global economy)? 

A 100% Manufactured Crisis:  Raising the nation’s debt ceiling which has heretofore been a routine task [which the party in power usually tries to complete as quietly as possible while the opposition takes cheap shots] has turned into one where the Republicans have chosen to put America’s credit worthy status at risk as the White House warns of financial calamity.  Current opinion polling suggests both political parties, and the American public, are coming out the worse for this episode of political theater.  

Even as President Barack Obama and House Speaker John Boehner held dueling national addresses on Monday night, many Americans were just beginning to tune into the debate.  Just half (50%) in a Pew Research Center poll taken just before the speeches said they had heard a lot about the issue that is roiling Washington political circles.  This leaves just as many (48%) who have heard little or nothing about the issue.

The financial markets are also less engaged than might be expected.  Even if business and financial leaders have expressed concerns about a potential US default, the bottom has not, at the time of this writing, yet fallen out of global markets that may be holding out hope that a deal will somehow be reached especially if the August 2 deadline turns out to be somewhat flexible.   This undercuts the credibility of Treasury Secretary Timothy Geitner’s dire warnings and the Democrats’ bargaining position, making the White House seem more anxious than anyone else to strike a deal. 

The Public is Looking for Flexibility:  The President and Democrats in Congress have been gaining the upper hand in public opinion polls.  By strong margins, the public wants compromise and sees Obama as more flexible and willing to strike a deal. The most recent CNN poll finds two-to-one majorities calling on both Democrats (68% to 32%) and Republicans (66% to 33%) to compromise to reach a deal.  This includes 78% of independent voters and a 50% – 50% split among Democrats on whether Obama should compromise or stand up for his beliefs, and an overwhelming 73% to 27% of independents who would like to see Republicans compromise as well. 

The problem for everyone is Republicans who by 63% to 37% margin say their party should not yield in negotiations.   This source of strength for Republicans could be the cause of their undoing if it blocks elected leaders from making a deal to avert disaster.  After the 2010 elections, Republican elected officials worry at least as much about a primary challenge from their right as they do about facing a Democratic challenger so they fear any position that is not endorsed by their most radical elements.

Democrats Leading on Substance:  In the most recent Washington Post ABC News poll 62% favor a combination of spending cuts and tax increases to address the nation’s budget deficit while just 32% would cut spending alone.  The same poll finds 72% in favor of tax increases on the wealthy, 59% saying tax oil and gas companies and 64% hedge fund managers more, and 66% favoring higher Social Security taxes on upper-income earners.  At the same time the public rejects cuts in Medicaid (72%) and raising the eligibility age for Medicare (54%).

Republican Intransigence may be Working (Or Is it?):  So if the public is siding with Democrats, why do Democrats keep changing their position until it is now indistinguishable from the Republican’s opening position?  Simply put, Republicans believe the Democrats have no stomach for this battle and will accept whatever deal they can get to avoid a default.  Despite Obama’s Freudian slip of a warning, Republicans have been calling his “bluff.”  [Real poker players might say, “Don’t call me, I’m not bluffing” rather than identifying their position as a “bluff.”]

But Mephistopheles lives in the messy details and the Republican plan to take the country to the brink of disaster could prove disastrous if they are at the wheel when the car actually goes off the cliff.  There is now more than a very real possibility that at this hour there exists in Washington neither a leader nor a plan that has the potential to get both houses of Congress and the president to agree on a solution to this manufactured crisis.

Many Republicans Are Not Taking Reid’s “Yes” for an Answer:  Senate Majority Leader Harry Reid has introduced a plan that seems, on its face, to offer the Republicans everything they have been asking for: deep spending cuts and no tax increases, but looks can be deceiving.  After Obama and Boehner inked a deal on the federal budget in April, Congress’s official scorekeeper, the non-partisan Congressional Budget Office, crunched the numbers and Republicans were stunned to learn just how little spending was actually cut; just $352 million (with an m) in what then remained of fiscal year 2011.  With these memories fresh in the minds of Republican freshmen, Boehner is having trouble passing his own plan through his own House – and now as history repeats itself with a low CBO score forcing Boehner to postpone the vote from Wednesday to Thursday so he can rewrite his legislation to include even more cuts. 

As each moment ticks by, negotiators may be running out of asphalt.  The confidence of the financial markets that an 11th hour, 59th minute deal will be reached could be misplaced if time runs out with no deal passed through the House as well as Reid’s Senate.   Despite what seems like capitulation in the headlines, the specifics of Reid’s plan are indeed cut on Democratic terms, with cuts in military spending but none in Social Security or Medicare.   Even if the August 2 deadline slides a little, there is not much time left for CBO to score a whole lot of other plans to win skeptical Republican votes in the House. 

There may be a deal to be had here, but so far, no one has produced a plan with proven support in either Capital chamber.  Even if Obama, Boehner, Reid, Pelosi and McConnell all shook hands on a deal and then held hands and danced around in a circle together, the Congressional votes may not add up and the possibility of a failure to get a deal done cannot be ruled out. 

If, as expected, this causes a real market tumble and the real economy goes from bad to worse, it’s hard to see how this helps President Obama and the Democrats.  But it is even harder to see how it helps the Republicans who manufactured the crisis in the first place.  Certainly the public, facing ever fewer job prospects, would take notice that they are the true losers in this completely unnecessary charade. 

 

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