Monday, April 11, 2011

More Sound than Fury in the Budget Battles Ahead

The strategic gamesmanship leading up to the budget compromise that was reached late last week suggests a blueprint for the budget battles to come. But while many observers believe that Washington is bracing for even more epic battles to come, when Congress considers the budget for the rest of the fiscal year and legislation to raise the debt ceiling, my guess is that there will be more sabre-rattling than a serious effort to avoid raising the debt ceiling. Here are three reasons why.

First, even Democrats agree that cuts are necessary; and even Republicans know that deep cuts are difficult. There will be collusion to fight, but not necessarily to disagree. Certainly, Republicans and Tea Partiers still enjoying the honeymoon from last November's elections have successful set the frame of "spending cuts" such that Democrats have been forced to fight the battle on Republican turf. But everyone already accepts that the federal government has to rein in its spending. Now, Republicans will have to take their pick between fiscal restraint and their social agenda. So far they have been consistent in prioritizing the former, for when push came to shove, even Senator Tom Coburn dropped his insistence on the Planned Parenthood rider. For Democrats, the question is not whether they can beat Republicans at their own game and propose a bigger budget slash than Republicans want, but whether they can reset the political agenda, postpone the issue, or talk about something else. Both sides however, will be sure to start off each new debate with maximal bluster and deliberately over-reach, so as to win the maximal concession from the other side and to achieve a final resting point closest to one's original pre-bluster preference.

Second, last week revealed that neither side wants to risk the political fallout of a government shut-down. Conventional wisdom holds that Bill Clinton was the net political winner when Republicans forced a government shutdown in 1995 and 1996. Last week, even Tea Partiers revealed their interest in seeing government work, not shut down. The budget talks were the first real test of the Tea Party in government, the first test of Speaker Boehner's ability to unite a diverse group of freshmen and veteran Republican congressmen, and the first test of President Obama's ability to reconcile Democrats and Republicans after his announcement to seek a second presidential term. Because nobody wants to risk appearing obstructionist, the irony of divided party control in Washington - which was the case the last time a president managed to balance the budget - is that it may well prove to be more constructive than gridlocked in the short-term. The long run, of course, is a different matter. Nobody in Washington thinks about that.

Third, while Democrats are hailing the $38 billion cut in spending they acceded to as the biggest real spending cut in history, the fact is this amount represents 12 percent of the amount (about $300 billion) we would have to cut from the budget so that Congress would not have to raise the public debt ceiling of $14.294 trillion, which the Treasury Department expects we will hit in about a month. Not even Congressman Paul Ryan or Senator Marco Rubio have proposed plans aggressive enough to save us $300 billion in one month. When politicians make the most noise, then we know that they are interested more in the semblance of trying than confident in the possibility of a solution.

If the last ten years, in which we have raised the debt ceiling ten times is any guide, it is very likely that we are going to have to raise the debt ceiling, if not the US government would not be able to raise money to fund its operations, or more important, to pay its creditors. That’s when talk of default comes in, but no politician wants that to happen, at least not on their watch. Because politicians are re-elected in the short term, most have preferred to raise the debt ceiling rather than countenance cuts draconian enough to reduce the public debt in the long term, when they would not be around the reap the political benefits. The end result of the short-sightedness generated, in part, by our zippy electoral time-horizon is that we are already defaulting by stealth, by the gradual depreciation of the US dollar so that the value of our debt measured in foreign currencies can be lowered.

So epic fights aren’t really on the way. There is going to be a lot of noise, but American politics evinces substantive policy changes only when we are at the brink. But as long as we are allowed to raise the debt ceiling year after year – and we have done this 79 times since 1940 – we will continue to hear more sound than fury.

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