As the Debt Ceiling Deadline Nears, It's Time For a Reset

The nation is at an impasse. Though some may quip that markets have barely reacted to the shutdown, it wise to point out that Washington gridlock has costs. Perhaps not catastrophic at the scale of a nuclear attack, or a Lehman crisis, and perhaps exaggerated by Republicans and Democrats for political gain, but there are costs.

Meanwhile Democrats and Republicans have been reiterating their talking points, albeit not bridging the differences. The Democrats remind us that the Affordable Care Act (ACA) passed in the House, the Senate, and was signed by the President. The 2012 Presidential Election was won by Obama who made no secret of his plans to implement the ACA during his campaign, the Supreme Court affirmed the its constitutionality, and Obama pledged in 2011 to never again negotiate with a gun, or more specifically a debt ceiling, over his head. They remind us that interrupting funding of contracts midstream, or doing the same with transfers to beneficiaries, are both akin to a default in spirit.

Republicans remind us, perhaps less eloquently, that the House members were elected to legislate appropriations, and that the debt ceiling provided the House with leverage to do just that. They point out that if the legislation does not address their concerns regarding Obamacare, attempts to defund it, a rationalization between the current implementation and the original act, is their obligation until such time that the Senate and the President debate the legislation in question.

In disputes, or negotiations, there is rarely "one" party that is exclusively at fault. Certainly, the Republicans risked "causing" a crisis by unilaterally putting their demands on the table. The Democrats risked causing a crisis by unilaterally (in 2011 and now) suggesting that the Republicans in the House had no right to put demands on the table, and that the Executive and Senate therefore would simply not negotiate.

There have been misstatements of fact on both sides, some that I would characterize as gaffs, though others as architected disinformation. The Republicans' decision to use the Debt Ceiling as a point of leverage was premeditated, and designed to maximize their bargaining power. When Republicans deny that, perhaps based on their assertion that the "ceiling" does not equate to default on contractual debt, they anger Democrats. Similarly, the Democrats' strategy of equating debt ceiling negotiations with terrorism, not to mention their argument that negotiations are unprecedented, reveals a Party and a President in Obama that's earned four Pinocchio's from a Washington Post columnist.

70% for, 30% against votes, and polls, characterize laws that are serious, groundbreaking, and that change the social fabric of the nation, according to the now deceased and legendary Democratic Senator from New York, Patrick Moynihan. So while the Republicans are familiar with the fact that ACA is the law of the land, their point that the "House" rules appropriations is also valid. Voters soundly rejected the Pelosi House in the 2010-midterm elections that followed Obamacare's passage, and then a Republican Majority in the House was re-elected in 2012. So Republicans can correctly say that voters threw out the old House that introduced Obamacare. The ACA passed on a party line vote, as "an appropriations bill," with payoffs to certain legislators whose states got exemptions.

Given that history, the ACA can hardly be described as sacrosanct historic legislation of the type Moynihan described. Since the Pelosi House could only get the ACA Bill to the Senate floor by labeling it an "appropriations bill," it's more than a bit ironic that the new House is now attacking its continued legitimacy during a budget CR battle.

Supreme Court scholars explain that Obamacare as originally written and communicated was found to be unconstitutional. Specifically, Obama asserted that it would contain "no new taxes." Justice Roberts at least superficially modified it, by interpreting the unconstitutional penalty as a tax. Since then Obama has further altered it, going back on numerous representations of the initial bill, ordering exemptions for unions, big corporations, and subsidies for congressional staffers. House members now are voting to re-legislate the ACA, and arguably can more legitimately do so, than either Roberts or Obama. Doing so during the appropriations process is no more illegitimate than using that process to pass the original legislation.

Like Tip O'Neill, and Senator Obama himself, who negotiated around the debt ceiling, it is reasonable for the House to force discussions about postponing implementation, about waivers, and about subsidies and penalties. Their argument that the "debt ceiling" arena is the only way to get Obama to the table to do that is both accurate, and also valid.
The problem for the economy going forward is that Republicans do not have to cave, so the impasse continues. Given that the Secretary of the Treasury can, and will, prioritize interest payments on debt come October 17 (and November 1, when a large payment is due) without defaulting on debt, there is an increased risk of a crisis dragging on, racking up more and more pain for the nation. That is, if the October 17 "deadline" is breached.

The debt ceiling not being raised would imply that the current "deficit" of about $600 billion per year of spending out of $3.6 trillion dollars of planned spending, would not continue. Period. Without a debt ceiling increase, federal spending would equal federal revenues, essentially on a month to month basis.

Though this spending cut averages to $50B per month of belt tightening, the actual amount of reduced spending would vary from month to month. It would be materially larger in some months, due to varying tax receipts and budget dynamics. The economy in a GDP sense would suffer, and tax receipts would to. Professor Balkin of Yale Law School has written about this. Not raising the debt ceiling before November 1, therefore, would theoretically be painful for all, but not involve a legal default. Inflicting pain is the nature of a deadline, and deadlines are universally used in all realms of interactions, and by prior Congresses, to effectuate action.

Since this deadline is just weeks away, now is the time for a reset of the negotiations.

The Republicans can't repeal or defund Obamacare. I expect they will gain some temporary concessions, and revisit the ACA after the 2014 midterm elections. They will also negotiate numerous other aspects of the CR and debt ceiling.

The Dems can't "not negotiate." They will use Republican recalcitrance as an excuse to smooth out the already rough edges of ACA implementation. Perhaps they will streamline Obamacare to achieve some of its core objectives, while making it less intrusive, and less irreversible. Perhaps they can achieve some other concessions, such as an extension of the debt ceiling for a full year, putting the next crisis beyond the 2014-midterm elections.

For now President Obama is resisting (and citizens are paying the price) just as Ford, Carter, Reagan, Bush, Clinton, and Bush II once did. But eventually, and sooner rather than later, Obama will work with the House under the pressure of a deadline.