An idea for solving the Debt Ceiling Impasse

Frankly, nothing that is currently on the table sounds like a good idea to me.  Here is my idea for solving the Debt Ceiling impasse.  It is a completely different approach than anything currently under discussion.

Step 1 - fix the problem for the current fiscal year.  We actually hit the debt ceiling a couple of months ago.  Treasury has been using work arounds to delay default.  The ceiling needs to be raised enough to undo these work arounds.  I don't know what the amount is but the Treasury Department should.  It should be roughly the amount of the deficit for the last couple of months.  We also need to cover the additional deficit that will be run up in the next two months (August and September) of the current fiscal year.  These two figures should total to a few hundred billion dollars.  We immediately raise the debt ceiling by this total amount.  So we are now covered until the end of September.

Step 2 - fix the next fiscal year.  The debt ceiling would be automatically raised as of October 1, 2011.  The amount would be equal to the projected deficit for the new fiscal year that starts on October 1.  I expect that this figure will be contentious.  It will need to be negotiated between the Democrats, Republicans, and the White House.  Note to deficit hawks:  Don't worry if the agreed on figure is a little high.  See below.  Call this number "X" dollars as we will be using this number in the rest of our calculations.

Step 3 - fix the fiscal year starting October 1, 2012.  On October 1 2012 automatically raise the debt Ceiling again.  Raise it by 90% of "X" dollars.

Step 4 - fix additional fiscal years.  Every year the debt ceiling would be automatically raised.  But each year the amount of the increase would be reduced by 10% of "X".  So on October 1, 2013 the debt ceiling would be raised by 80% of "X".  Repeat this process where every year the debt ceiling gets raised but by 10% of "X" less than the previous year.  This would continue until one year we are raising the debt ceiling by 10% of "X".  In the next and subsequent years the debt ceiling would not be raised.

All of these dates and amounts would be put explicitly into the debt ceiling law.  Changing the debt ceiling on a certain date to a certain amount has been done before, typically to allow for temporary extensions.  So we know how to do this.  Why is this a good idea?  Because it meets the important objectives of all parties.  Specifically:

• It is easily doable in the short time we have left.  It is simple enough that it is easy to analyze and understand.  It should require a bill of only one or two pages in length to implement.  It is simple enough that it should not have any unexpected consequences.  Many proposals currently being discussed are complicated and difficult to understand.  As such, they are likely to have serious unintended consequences.  Since they are complex and rushed they have a large chance of containing serious drafting flaws that we will only find about later.

• It meets President Obama's objective of solving the problem through the 2012 election.  In general, it provides the "certainty and predictability" so desired by many.

• It gets us to a balanced budget in about 10 years.  Getting to a balanced budget is a key demand of the Tea Party.

• It gets us to a balanced budget before the "Ryan Plan" budget would and before the Obama budget forecasts would.

• The time line for achieving a balanced budget is similar to the time line in the House Progressive Caucus budget so progressives should like it.

• It shows fiscal responsibility, a key concern of Wall Street, the business community, the International business/finance community, and others concerned about the long term U.S. fiscal situation.

• It is gradual enough to avoid doing major harm to the recovery, a key concern of Paul Krugman and many others.

• It is a simpler and more effective "trigger mechanism" than any of the proposals I have seen.

• It is undoubtedly constitutional.  As I said, date triggered changes to the debt ceiling have been done before.

• It retains Congressional prerogatives.  If something unexpected and drastic should happen, Congress could amend the law.  But it would change the traditional view of the debt ceiling.  After all this it no longer be viewed as a "routine housekeeping matter".  As such it would become politically much more difficult to raise the debt ceiling in the future.  It also gives Congress and the White House explicit targets for deficits in future years.  But it retains complete flexibility as to the means, how the deficit targets would be met each year.

There are certainly objections that can and will be raised to this idea.  But I think it is politically doable and almost everything currently out there is likely to be vetoed by someone.  It represents a good compromise that gives pretty much everyone almost all of what they want.

If my idea is implemented it would let Congress get back to the business of passing a budget.  We only have two months as it needs to be in place before October 1, 2011.

Debt Ceiling Negotiations

I have argued elsewhere (http://sigma5.blogspot.com/2010/12/president-lets-make-deal.html) that the Obama Administration is not very good at negotiating with the Republicans.  Another group that is none too good at this sort of thing is the media.  High powered "negotiations" have been around in politics for a long time now.  As such, there is a lot that can be said about how things go.  But the media consistently operates like this sort of thing has never happened before.  Why?  More sensational headlines resulting in better ratings.  And rating is what the media cares about most.  So, since I am not concerned with my ratings, what do I think is going to happen?

Well, some of it has already happened.  In high powered negotiations the most important thing is that each side be perceived by its supporters as having gotten the best deal they could.  Many times a side could have gotten a better deal if they had behaved differently early in the process.  But most people don't pay attention until the last minute.  So what matters most is what happened in the end stages of the process.  And the effectiveness of the sides in measured most by how close to the last minute they get and how much they give away at the last minute.  So all canny negotiators take things to the last minute and frequently beyond.  You don't have a clue as to what's going to happen and when until you know what the deadlines are.

And deadlines turn out to be a much more fluid concept than you would think.  We have already passed one deadline.  The government ran out of money on May 16.  Everybody agrees on that.  So why didn't Armageddon begin on the 17th?  Because deadlines are more fluid than you think.  The government really did run out of money on the 16th.  But that just meant that government officials started using a bunch of gimmicks to get around this.  As a result of these gimmicks the new "hard and fast" deadline is August 2.  So if things run true to form nothing of substance will happen until about the first of August.

The White House has tried to get itself some wiggle room by suggesting that the real deadline is July 22.  The idea is that it will take some time to implement the "deal", whatever it is, so we are in real trouble if the debt ceiling is not extended by July 22.  This is a good idea in the real world.  But we don't exist in the real world.  So the Republicans are unlikely to pay any attention to this.  It would be nice if the media paid attention to the results of this kinds of Republican bad behavior but they won't.  So the Republicans will get away with this.

It is important to understand that Republicans have had a lot of success by behaving irresponsibly.  That's because the media give Republicans a free pass on bad behavior.  The Republicans pretend that they are the party of fiscal responsibility, for instance.  The fiscally responsible thing to do is to raise the debt ceiling.  The fiscally irresponsible thing to do is to play games with the process and to force the circus that is currently under way to precede a raising of the debt ceiling.  The Republicans have learned that they can get away with this kind of bad behavior and pay no penalty.  This results in them having a reputation for being tough negotiators and getting what they want.  And, of course whatever they want is good for the country, if you ask them.  And more importantly the stunts, they would argue, have not actually caused any harm.  Neither of these contentions are true but bad reporting by the media has allowed them to pass unchallenged.  Democrats and especially the current White House also bear some responsibility by not effectively responding.  But the media contributes substantially to Democratic ineffectiveness by failing to cover Democratic challenges to the same degree they cover Republican nonsense.

So we can expect with 100% confidence that the Republicans will play hardball on this.  They will make sure there is not a deal until the last minute at the soonest.  Remember that the Republicans have employed the "move the goalposts" strategy effectively on many occasions.  If the Democrats and the White House cave immediately on the entire list of current Republican demands they will just add more demands.  Why not?  It has worked on other times in the past.

Republicans also believe that a government shutdown, the expected result of not extending the Debt Ceiling, is something they can weather.  There are already a number of Republican elected officials saying "shut her down".  They are receiving exactly no push back from "moderate" Republicans.  Those Republicans might be expected to do so.  But they too have seen "move the goalposts" and other hardball strategies work successfully many times in the past.  The Republicans behaved irresponsibly for two years straight between the 2008 and 2010 elections.  The result was large gains for Republicans in 2010.  Why shouldn't they expect similar results for additional bad behavior now?  And at this point it doesn't matter if they are wrong.  They believe that experience tells them that hardball negotiations and bad behavior will work this time too.  And that entirely reasonable belief will drive their actions.

So we are in circus time.  It's all a show.  The mainstream media should know this.  But there are papers to be sold and viewers to be attracted by pretending that what is happening now is important.  So that's what the media will continue to do.  The Republicans will continue to be irresponsible and act contrary to their "beliefs".  And the media will give them a free pass.  President Obama made a few modest and temperate remarks pointing this out recently.  Mark Halperin, a media heavyweight and a so called "nonpartisan expert", called the President a "dick" for doing this.  President Bush frequently had far worse things to say about Democrats in his eight years in office than President Obama has said about Republicans on his worst day.  Yet President Obama is a "dick" and president Bush is not.  And its not just Halperin.  It's the whole DC media establishment.

Will nothing of substance happen between now and August 2?  It's possible.  But what is more likely is that Obama and the Democrats will make unilateral concessions.  In other words, they will make things worse.  Other than that, nothing of substance will happen.  That's my prediction.  Now it is possible that I will turn out to be wrong.  Here's how.

Most politicians are in bed with large corporations.  It is almost impossible to be successful and not be.  So many Democrats are beholden to large corporations.  But not to the extent that Republicans are.  And what do large corporations want?  They want the debt ceiling raised quickly and quietly.  "Business likes certainty and predictability".  That's a slogan the Republicans have been beating us over the head with as they justify tax breaks to their friends (corporations and rich people).  So what's the certain and predictable thing that corporations need desperately?  To have the debt ceiling raised quickly and quietly.  How do Republicans skirt around this apparent contradiction?  They say "we are just doing brinkmanship, which has worked so well in the past".  And they are no doubt promising that the winners in whatever emerges as the "deal" will protect rich people and corporations.

Rich people and corporations are also not hurt by a short government shutdown (days to weeks).  It is government employees, people who depend on government services, and small companies who depend on prompt and consistent payment that will hurt.  Big corporations can afford to wait to be paid.  They also have the clout to wangle "penalties" and other extra payments out of the government.  So some of them may end up directly benefiting from a shutdown.  And, if past is prologue, Republicans will make sure that the cuts they extract from the final "deal" will fall on the middle class and the poor so the rich will do just fine in the end too.

So rich people and corporations may put enough leverage on Republicans for them to do a deal before August 2.  But I see that as unlikely.  More likely they will exert their influence to make sure that the ultimate "deal", whenever it is made, has the shape they want it to have.  But wait, there's more.

The official final date is August 2.  But is it really?  Past history says "no".  The Treasury says "that's it".  But "hard and fast" deadlines have turned out in the past to have some wiggle room.  It doesn't matter if there is or is not any wiggle room in the August 2 deadline.  If a significant number of the players think so, then they will act accordingly.  This kind of thinking could push things past August 2.  It would be nice if the media would look into this but that would require them to actually go out and do some reporting rather than rewriting what is fed to them.  So I don't expect that to happen.

With all this in mind I expect the government to be shut down on August 2.  The Obama Administration should be conspicuously making preparations now.  They should also be making preparations to cause pain to interests that are near and dear to Republicans.  As I have written before (http://sigma5.blogspot.com/2010/12/negotiation-101.html), real pain has to be inflicted before people believe in it.  In a shutdown it turns out that this is easier to do than you would think.  Generally speaking, blue states get less money and red states get more money from the federal government.  So I would make sure that programs that pay out to red states are hit the earliest and the hardest when the cash stops flowing.  Of course this is "hardball" and the Republicans are as adept at hardball as the Democrats are inept so I will be surprised if this happens.

Unfortunately, this White House has a track record as a bad negotiator.  This means that even if they do the right thing people will not believe they are serious.  If this were not so then they could bring in business and say "do you really want this to continue?  If not, then light a fire under your Republican buddies".  Given the poor position they are in it is still a good idea to do this.  They should also get out a consistent message bashing the Republicans.  And, as I said, they should be conspicuously planning for a shutdown.  And that planning should signal that they are going to be hardest on Republican constituencies.  If there is a way, and there should be, they should start picking on Republican constituencies immediately rather than waiting for August 2.  They could hold up on payments to defense and other contractors that are doing business in red states because "of the need to hoard cash to cushion the shutdown".  Some things might be illegal.  But it takes time for things to wind through the court system, probably enough time so that the case will not be decided until after August 2.

There is also some talk about the 14th Amendment.  I think it will turn out to be nothing.  But talking about it puts a small amount of pressure on Republicans.  So I am all in favor of more talk.  The general strategy that is needed is to play hardball back at the Republicans.  Obama now has a track record spanning more than two years of playing anti-hardball.  And, even if they do, it will take until after August 2 for the message to be received and believed.  So I think we are locked into an August 2 shutdown.  I expect nothing significant to happen until a couple of days before August 2, unless the White House decides to cave on some issues beforehand.  I expect lots of activity in the few days before August 2.  It is possible that a last minute settlement will be achieved at the "11th hour".  But the probability of that is less than 50%.  If we get too close the Republicans will move the goalposts.   That's my official prediction.  We will know how accurate I am in about a month.