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Friday, January 18, 2013

Tom Block: Debt ceiling is a ‘trap’ that diverts attention from stronger negotiating positions

With the tax portion of the fiscal cliff resolved, attention now focuses on the spending side with three big deadlines looming. First is the need to raise the national debt ceiling, second is the Congressionally mandated, 10-year, $1.2 trillion cut in spending called sequester, and third is the need to deal with the federal budet for the fiscal year that began on Oct. 1, 2012. This final issue was created when Congress was unable to meet the Oct. 1 deadline for a new budget for the U.S. government and passed a resolution just keeping everything in place until March 27. I hope they aren’t overly surprised that coming this spring will be March 27.

In looking at the resolution of the tax issue, I think the Republicans sell themselves short with the success they achieved while holding very bad cards. While most Congressional Democrats had opposed the Bush tax rates in 2001 and 2003, this time led by the re-elected President Obama they made permanent the Bush rates for 99 percent of all taxpayers – pretty good in my book. Even wealthy taxpayers got the benefits of a 20 percent rate for dividends, again a significant victory. And taking taxes off the table really put them in a stronger position to negotiate over the spending issues tied to the sequestration and federal budget.

However, it did not put them in a stronger postion to negotiate on the debt ceiling. Having worked for over 20 years for one of the nation’s largest banks, it is my view that the debt ceiling is not the issue on which to confront the president. The U.S> government is viewed among the best investments in the world, and hence today borrows at a rate very near zero. This super low rate is because of the high confidence the U.S. government will be able to pay, and pay on time. Interest rates are established by risk, the higher the risk, the higher the rate. I think the scary thing is that the Republicans really don’t have a strategy at this point to get them past the debt ceiling trap they are building for themselves. While some members know they are going down a dangerous road, they continue to talk about prioritizing payments and try to convince themselves that toughing out the debt ceiling is a viable policy.

More thoughtful members believe that the sequestration and continuing resolution are much better pressure points to act on. In fact I am beginning to believe that the chances are moving north of 50/50 that the sequestration cuts will at least kick in and then serious negotiations will begin. There are serious Republicans who think that the Department of Defense can manage for some time on the lower budget, and that the sharp domestic cuts are the only way the president will face the music for spending. For left-of-center Democrats, it is the same conclusion for the exact opposite reasons. Only through sequestration can serious cuts be placed on Department of Defense.

Politically, I think that after the cuts start to kick in there will be efforts to negotiate a broader plan, that could come closer to a Bowles/Simpson deal to reverse part of the sequestration. There are some Ds from red states that will need to seen as supporting defense, and there is a large block of pro-defense Rs who aren’t happy with the sequestration, together they can be the core that cut a deal with the president.

Another important date to keep in mind is the president’s State of the Union address on Feb. 12. With the Treasury announcement that the special steps on the debt ceiling will run out at some point between mid-February and early March the speech will come at a key point in the debt ceiling process. The president will be speaking directly to the Congress in the Republican-controlled House chamber, so the dramatic impact will be great. It is a true bully pulpit and I think has the potential to really put the Rs in a corner.

The bottom line is that the coming weeks are going to see substantial headline risk related to the debt ceiling. I think at the end of the day if we hit the ceiling, the Treasury will prioritize payments to ensure timely interest payments, but Social Security, USG procurement bills and other disbursement could be delayed. I think the chances of sequester trigger being reached now exceeds 50/50, and government shutdown at the end of March is on the table.

Tom Block is a public policy consultant who had a 21-year career with JP Morgan Chase where he served as head of government relations in New York City and created a Washington research product. He also created the bank’s EU Government Relations program and developed a new position as U.S. Government Policy Strategist focusing on how U.S. government policy impacts capital markets. He has an extensive government and banking background, has worked on political campaigns and as a speech writer. He is a family trustee of Bernheim Aboretum in Louisville and holds a bachelor’s degree in political science from American University. He and his wife make their home in Kentucky. He is a regular contributor to KyForward. Contact him at tomblockct@aol.com.



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