No Deal in Sight as Debt Deadline Nears
The debt limit that the United States hit yesterday isn't a big deal yet but, by any reasonable accounting, it could be pretty soon. If Republicans want to avoid a double dip downturn, they should take the news about the ceiling seriously, put at least some things that people might call “tax increases” on the table and work to reach a compromise quickly.
The situation deserves serious attention because, at some point before any official deadline, if bond raters get jittery enough to downgrade the debt this alone could cause a recession. It could be a day before an official deadline or several weeks but, at some point, a debt downgrade—which would sent interest rates soaring and business plummeting--could happen without an actual default if investors begin to think default is likely.
Bond ratings, basically, assess the chances of default and, if a politically caused default is likely, credit will freeze up. Because other countries don’t have debt ceilings--or, for that matter, legislatures that are co-equal branches of government—there’s no exact precedent for a downgrade happening in these circumstances but the logic of bond rating suggests that one would take place and a recession would follow. And Republicans—a few of whom on the party’s fringes seem to relish in the idea of forcing a default—need to be careful of what they wish for: even a debt downgrade would hurt the party terribly.
If default comes close, the White House and Senate Democrats will have a much louder microphone, a more sympathetic media, and plenty of Wall Street donors who won’t much care for the GOP any longer. The result, likely, wouldn’t be just an electoral drubbing but, quite possibly.
Furthermore, if they want to reach a compromise that actually reduces the deficit and stabilizes finances, Republicans have to consider some actions that some might brand as tax increases. By taking an entire category of activity off the table, Republicans tie their own hands. In some cases, like eliminating narrow revenue expenditures, indeed, “tax increases” are a good idea on its own terms. (Small tax-code favors function like spending in economic terms and distort the economy.)
If combined with meaningful entitlement reforms -- particularly benefit cuts for the well off -- payroll tax changes that increased revenue could make sense. But a “no tax increases of any kind, ever” pledge — which, interestingly, not even Grover Norquist’s Americans for Tax Reform demands of federal officials — actually weakens Republicans’ negotiating position by forcing them to consider only absolutely “pure” courses of action.
If Republicans really stick with a total purist position, in fact, they’ll play into the Democrats hands: Democrats could promise all sorts of really attractive tax code reforms that increase revenue by even a little simply to have Republicans reject them. Would anybody really think it a bad idea to, say, limit the value of the mortgage deduction, reduce deductibility of local taxes, and broaden the base of the income tax in return for the economy-super-charging repeal of the capital gains tax? Such a proposal would be great for the Republican Party’s natural base but, under anti-tax orthodoxy, it would need to be revenue neutral or a net tax cut. Indeed, Democrats could insincerely offer such a deal and say “see, we’re pro-business” without actually having to do much of anything.
If they feel they must fight over the debt ceiling, Republicans should stand firm against any proposals for broad based income tax increases or hikes in the capital gains tax. Whatever happens, they should reach a decision quickly to avoid a debt downgrade. And they can’t—and shouldn’t—absolutely rule out everything that someone might consider a tax increase.