The emerging debt-ceiling showdown.

The Emerging Debt-Ceiling Showdown

The Emerging Debt-Ceiling Showdown

Moneybox
A blog about business and economics.
May 16 2012 8:13 AM

The Emerging Debt-Ceiling Showdown

An idea so obvious that it's frankly baffling it's taken this long to become popular is graining adherents in senior Democratic Party circles. The idea is that if Obama is re-elected, he should forget about engaging in a drawn-out bargaining process with Republicans over the expiration of tax cuts. If they don't want to do what he wants, just let them all expire and then allow the month of February to be dominated by a debate over the "Obama tax-cut package" that will be targeted at middle class relief and corporate R&D while leaving high income folks facing higher rates. The White House doesn't seem to have seriously pursued this in the winter of 2010 and Democrats on the Hill didn't love the idea, but it's attracting more and more chatter this time around.

Brian Beutler reports that the latest round of debt ceiling hijinks is in part a response to the potency of these tactics:

All of the cuts are scheduled to expire at the end of the year, and if President Obama wins in November, he'll have a lot of leverage to demand that the Republicans own up to the results and allow the cuts for high-income earners to expire. Or Obama could let them all expire and then introduce the "Obama tax cuts" on day one of his second administration ... unless the GOP had an ace up its sleeve. If the debt limit needs to be raised in December, the GOP could take it hostage and demand that Democrats renew all the Bush tax cuts, and defuse automatic spending cuts (the so-called "sequester") with cuts to other domestic programs. It's an almost unfathomable threat, but trying, if Obama wins, might be their only hope.
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One question to ask about this is whether the hostage tactic still works if Treasury can use various gimmicks to push the deadline out to February. There's an inherent amount of uncertainty around this issue, but officials tell me their current thinking is that the real deadline is in early 2013 rather than December 2012. I also know that senior people are at least discussing the idea that this time around the administration needs to simply refuse to negotiate, which I think is correct, but that's far from a universal view inside the administration to say nothing of among the people the administration would be counting on in congress. But in some ways that discussion among Democrats, rather than the one among Republicans, is the key. If Democrats firmly insist on a "clean" debt ceiling bill and sell it firmly as a matter of principle and a question of the long-term good of the country, then they actually have a pretty strong hand. But last time around the showdown was actually welcomed in some quarters as a forcing mechanism to get "grand bargain" talks going. If the President is willing to put a stop to that impossible dream then we're in a very different scenario from one in which default showdowns become routinized.