It doesn’t look like we’re going to get the $4 trillion deficit-reduction deal President Barack Obama has been talking about. So what happens next?
Seeing the recent breakdown in talks, it’s hard to imagine what Obama and Vice President Joe Biden thought they were going to get in these negotiations.
The Republican House will not pass a tax increase. If the only deficit-reduction deal acceptable to the Obama White House is one with a tax increase, then there can be no pact right now.
If we get to Aug. 2 without a debt-limit increase, the federal government will have to stop paying about 40 percent of its bills to stay under the debt cap.
Bondholders will get paid, and Social Security recipients probably will too. Groups likely to get squeezed include Medicare providers, government contractors, and state and local governments.
In 1985 and 1995, Presidents Ronald Reagan and Bill Clinton rode the structural advantages of the executive branch to wins in fights over the debt limit. Clinton’s win came when he threatened to delay a Social Security payment; House Speaker Newt Gingrich blinked and passed a debt-limit increase.
Obama’s hand is even stronger this time, because Republicans do not control the Senate. In 1995, Republicans could send spending and debt-limit bills to the president with unacceptable terms attached, and force him to veto them and shut down the government.
This time, no debt-limit increase will reach the president’s desk at all, allowing him to place the blame for whatever happens even more squarely on Congress.
If you’re not happy that you don’t have your money, Obama will say, “Call John Boehner.” And then the debt ceiling won’t be just the president’s problem anymore.
A stop in payments to state governments will be especially politically damaging. It won’t be easy for states to deal with a stoppage in federal aid payments, which make up about a fifth of state and local budgets.
While some states will be able to patch over a delay by drawing down reserve funds, reserves are already low due to the recession. Many states will have to issue short-term debt or delay their own payments to vendors and beneficiaries — including local governments, which would repeat the process all over again.
This mess is avoidable. The United States needs a fiscal adjustment — in the medium term. We do not need a deficit-reduction package today; indeed, with the economy so weak, it is probably best to put austerity off until roughly 2013. There is no need to figure out the terms of that austerity package in the context of the debt-limit fight.
Republicans have spent the past two years warning about the damage that uncertainty does to the economy.
Creating an artificial crisis by preventing the government from paying its bills is an unnecessary source of economic uncertainty if there ever was one.
Republicans in Congress can avoid both a political and economic mess by passing a clean debt-limit increase and putting off the deficit fight for another day. The question is whether they will have to first get burned before figuring that out.
Josh Barro is the Walter B. Wriston fellow at the Manhattan Institute, focusing on state and local fiscal policy.