Time is Running Out
Yesterday evening and last night something important in the debt ceiling discussion happened: many members of both the House and Senate moved from “worried” to “scared.”
This is good news, of a sort.
It further confirms our judgment that the United States will not default on its sovereign debt obligations in August. It increases the odds to much better than 50-50 that some form of short-term extension of the debt ceiling occurs before August 3. It accommodates the possibility that during the next several months, some comprehensive plan like that produced by the Senate Gang of Seven may gain critical mass in both Chambers. It means that the “catastrophic” consequences of not raising the ceiling, to quote Fed Chairman Ben Bernanke, will have been put off for another day and another battle.
And, that’s the bad news.
Time is running out on two fronts: the political and the legislative.
Senate Majority Whip Dick Durbin said Thursday that it seemed impossible to properly write, score, and pass the Gang of Seven proposal and we concur with that judgment. That is the legislative reality. Our view, based on similar challenges in the 1980s and 1990s, is that at least two to three months of hard work will have to go into turning the Gang of Seven concepts into solid legislative language fit for House and Senate floor action.
Politically, time is running out on both Democrats and Republicans who still insist “my way or the highway.” Our sense is that fewer and fewer members still hew to that line. Republicans see their approval ratings drop steadily and President Obama garnering more approval for his handling of the debt ceiling question than his Republican adversaries. As Members begin to learn the impact of failure to raise the debt ceiling in their home districts, the politics will be crystal clear to most of them.
As we have written before, then, only two real alternatives exist. Either the Congress will pass, and the President will sign, a short-term extension. Or, some form of the McConnell-Reid “cascading” debt ceilings will pass. McConnell-Reid has the huge advantage of giving predictability to citizens and markets and would seem the better of the two choices. However, pure logic rarely wins political battles, so passage of a relatively-clean short-term debt ceiling seems most likely.
Left unaddressed is the big political and fiscal question—how and when will the United States begin to get its fiscal house in order. Waiting for true bankruptcy of Social Security or Medicare would require harsh, economically destructive action within a short time frame. That would be the worst of all worlds, although it would fit within the historical behavior of the federal government. Three to five years from now, reform choices that seem relatively tame right now, would become fearsome. Huge tax increases or just as large benefit cuts to then-current beneficiaries would be the binary decision. Both are very bad ideas.
So, while the world of Washington concentrates on how to get by the debt ceiling impasse for another few months, the growing insolvency of the federal government continues.
We can only hope that something like the Gang of Seven plan becomes a consensus plan during the almost-assured short-term debt ceiling extension.
