Debt Ceiling Stall Out

Are Democrats bluffing their way through the negotiation process?

Amid intense media speculation, the negotiations over the debt ceiling are continuing to run their course. And while the predictions of where those negotiations may lead are multifarious, an inarguable consensus is emerging: the so-called recovery from the worst recession since the Great Depression is itself the most anemic recovery since the 1930s as well. The most salient aspect of the debt ceiling negotiations? Both Republicans and Democrats seem impossibly mired in a set of incompatible "deal-breakers" that may very well push the impasse well beyond Treasury Secretary Timothy Geithner's August 2 deadline.

Yesterday the president gave a brief news conference in which he demonstrated a far more even-handed tone in contrast to the previous week.  Couching his remarks in the context of being "against a short-term deal" to address the debt ceiling, which he referred to as "kicking the can down the road," he spoke of a "unique opportunity to do something big to tackle our deficit in a way that forces our government to live within our means." Yet he reiterated his position that any debt reduction must include both spending cuts and tax increases. The president then invited members of both parties and both houses of Congress to a meeting at the White House on Thursday, where everyone has to "get out of their comfort zones," even as he expressed the hope that "everyone leaves ultimatums and political rhetoric at the door."{{{*}}}

Thus, we come to the first bit of rhetoric, "tax increases," which are a deal-breaker for Republicans. Senate Minority Leader Mitch McConnell (R-KY) reiterated that position yesterday on the Senate floor, where he chided Democrats for wanting them, noting that “Americans have made enough sacrifices the past few years. It’s time Washington learn to make some sacrifices of its own.” He then revealed that he had invited the president to meet with Republicans "and hear firsthand why we think raising taxes in a weak economy is a bad idea.”

Yet last Wednesday, Sen. Ron Johnson (R-WI) said, "I would like to do away with special tax breaks but not legitimate business deductions," indicating some Republican flexibility. And on Sunday, two Republican Senators, John Cornyn (R-TX) and John McCain (R-AZ), indicated they might be amenable to "raising new government revenue" (Democratic code for "tax hikes") in order to move the budget ceiling process along. “I think it’s clear that the Republicans are opposed to any tax hikes, particularly during a fragile economic recovery,” said Sen. Cornyn on Fox News Sunday. “Now, do we believe tax reform is necessary? I would say absolutely.” He added that such reforms would be "revenue neutral" meaning government would not increase the amount of overall revenue it was taking in.

McCain, speaking on CNN's State of the Union, brought up the results of the 2010 election. “The principle of not raising taxes is something that we campaigned on last November, and the result of the election was that the American people didn’t want their taxes raised and they wanted us to cut spending,” he said. Yet McCain then alluded to "ideas" that fellow Arizonan, Senator John Kyl, brought up, which might also move the process along, even as he avoided mentioning specifics.

In an appearance yesterday on Fox News, Senator Rand Paul (R-KY) also took a nuanced approach. Tax increases may be off the table, Paul noted, but he also indicated a willingness to eliminate tax "breaks" for certain entities. One specific he mentioned was "eliminating government subsidies" for ethanol producers, even as he reiterated the Republican position that overall tax "reforms" are the key to addressing long-term budget problems.

Paul then addressed the other 800-pound gorilla -- the idea that if no deal is reached by August 2nd, America would "default" on its debts. Before Mr. Paul's comments are addressed, some context. It has long been the Democrats' position that any default by the United States on its outstanding obligations would amount to global economic Armageddon. Their modern-day Cassandra on the issue has been Treasury Secretary Timothy Geithner, the only remaining member of the Obama administration's original economic team. "Even a short-term or limited default would have catastrophic economic consequences that would last for decades," Geithner wrote in a letter to U.S. Senate Majority Leader Harry Reid, warning that the country would hit the legal limit on its borrowing ability -- by March 31st.

Geithner has obviously amended his prediction, and the current wisdom, backed up by the U.S. Treasury, is that Aug. 2 is the absolute final date after which the U.S. would be unable to meet its "obligations." Obligations which have only been met for the time being, according to the Obama administration, by using "accounting maneuvers."

Has the United States exhausted all of its "accounting maneuvers?" If Rand Paul is correct, the answer is no. He explained that the government currently takes in $200 billion per month, and that current interest on the debt amounts to $20 billion per month. If he is correct, then "default" would have to be consciously implemented by the Treasury Secretary, as opposed to something that would happen automatically. In other words, Geithner would have to prioritize America's financial obligations.

The reality that this is within the scope of Geithner's capabilities was revealed in a 1985 exchange between then-Senator Bob Packwood, chairman of the Senate Finance Committee, who asked the Government Accountability Office (GAO) whether such prioritization was possible. “It is our conclusion that the Secretary of the Treasury does have the authority to choose the order in which to pay obligations of the United States,” offered the GAO, further noting that the Treasury "is free to liquidate obligations in any order it finds will best serve the interests of the United States.”

There is also the possibility of additional accounting maneuvers which center around America's gold supply. An act of Congress would allow the value of America's gold, currently held at the Fed and set at $42.22 per ounce under the Par Value Modification Act, to be reset at market prices. This would push the value of the Treasury's deposits at the Federal Reserve to nearly a half trillion dollars, which the Treasury could use to settle debts without selling the gold itself.

Sen. Jim DeMint (R-SC) indicated what he thought of the well-publicized hard deadline versus Mr. Geithner's ability to give Congress more time to reach a deal. “Secretary Geithner’s approach to dealing with the looming debt crisis is to take his hands off the wheel and let the car careen over the cliff,” DeMint said in a statement. “He has numerous tools at his disposal to avoid default, but his refusal to explore all options and just play chicken with the federal debt is deeply irresponsible.”

So what is the current reality? There is no question that the overall argument has swung in favor of the Republicans. For the first time in a very long time, Democrats are talking about serious cuts to federal spending. How large those cuts are depends on whether Congress hammers out a long-term deal, which Reuters reports is around $2 trillion in spending cuts, or whether law-makers do indeed "kick the can down the road," forcing more negotiations closer to the 2012 election.

Yet it remains to be seen if Republicans are pushing too hard. Ostensibly conservative New York Times columnist David Brooks contends the Republicans have achieved the deal he called the "mother of all no-brainers" even if they allow some taxes to be raised. Brooks warns that if debt ceiling talks fail, "independents [sic] voters will see that Democrats were willing to compromise but Republicans were not." Perhaps, but it is equally possible that voters, as indicated by the Republican landslide in the 2010 election, have already made up their minds who the more fiscally irresponsible party is.

The bet here is that any deal will come down to two simple realities. First, despite the president's ostensible desire that both parties abandon ultimatums and political rhetoric, members of neither party will accept a deal in which key concessions can be defined as a major "loss" for their side and a "victory" for their opponents. Second, while any "compromise" will undoubtedly engender the wrath of each party's faithful followers, both parties can live with that reality -- if they can convince themselves they have earned the respect of the crucial independent vote heading into the 2012 election.

Arnold Ahlert is a contributing columnist to the conservative website JewishWorldReview.