The Debt Limit Smackdown: Chicken Versus Rope-a-Dope

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If you were heading into a complex and lengthy negotiation would you put your key lieutenants on national television to declare how totally screwed you would be if the other side didn't give you exactly what you wanted right now with no strings attached?

Would you draw a line in the sand and claim that crossing it would be the end of the world as we know it? Then move the line as soon as it was crossed? When everyone knows you're going to move it again the next time it gets crossed?

Would you invest every last shred of your tattered credibility in the proposition that if you are not allowed to continue doing what caused the looming disaster you claim you are trying to avoid, with no plan to keep it from happening later, that everyone except you will be punished? And that the reward for giving in to your demands would be getting to watch you throw another tantrum next year over the same issue, which will have only grown worse?

The Profligate Spenders think they are playing chicken over legislation to raise the debt ceiling. They don't seem to understand that the Kamikaze Cutters have an entirely different game in mind.

What did they call it when Mohammad Ali covered up and let George Foreman punch himself silly for eight rounds before Ali popped up and clobbered the exhausted fool?

If you missed it back then catch the replay coming soon.

How foolish is the President going to look standing there week upon week holding a political gun to his own head threatening to pull the trigger, like the sheriff in Blazing Saddles, when the opposition just shrugs and says, who's stopping you?

Imagine the arrival of that fateful day. One-time accounting gimmicks have been exhausted. Marquee federal assets have been theatrically liquidated, with much media wailing and gnashing of teeth. Fort Knox has been raided. And the last smoke-and-mirror balance sheet shuffle has run its course. Sometime this fall, when Uncle Sam genuinely runs out of statutory borrowing authority, the Treasury Secretary will either have to stop selling new bonds or start breaking the law. The President, like any cash strapped householder whose credit cards are maxed out, will be forced to decide which bills he can cover with the revenue coming in and which to dodge.

Can you imagine for one minute that Obama is going to instruct the Treasury to default on T-Bill redemptions or Social Security checks before stopping payment on farm subsidies, bullet trains to nowhere, windmill "investments," ethanol kickbacks, Fannie Mae infusions, electric car stimuli, Planned Parenthood programs, NPR broadcasts, United Nations dues, or anything else on the vast laundry list of discretionary spending programs?

Exactly what would the President's logic be to defend such priorities? How will he shift the blame to an opposition party that will have passed multiple bills to properly prioritize payments only to have those bills shot down by Senate partisans who would rather play chicken trying to defend every acre of their spending empire?

Everyone knows that cuts to discretionary spending alone will not fix the deficit problem. Fine. Who is saying otherwise? How does this truism justify the refusal to start making difficult discretionary cuts now before finding the courage to tackle even less palatable entitlement reductions?

Hoping the Chicken strategy will make the opposition agree to raise taxes borders on insanity. Put aside the wisdom and effectiveness of sucking more tax dollars out of the economy in the midst of a slump and just look at the negotiating dynamics. Getting the Kamikaze Cutters to back down on their no new taxes pledge in order to fund the plans of the Profligate Spenders requires either offering them something they want or threatening to do something horrible to them. How does shooting yourself in the head qualify?

The market isn't buying any of this drama for a moment. Look at bond yields. Does anyone appear to be betting that Obama will succeed in fighting off every spending cut? If they did believe the biggest spender in American history was somehow going to get his way, guaranteeing that federal debt could only be repaid with inflated dollars, what do you think would be happening to bond yields?

There is still time for Obama and the leaders of the Profligate Spenders to save face and demonstrate some statesmanship. Blame the Kamikaze Cutters when all your special interest groups come whining, but if you don't put the patient on a diet he's going to keel over from a coronary on your watch.

There isn't a person outside a mental hospital or an Ivy League faculty who believes the federal government can continue on its current fiscal trajectory, even with tax increases. Change is inevitable. Real change. Bone-deep, re-write the social contract, no more free lunch, learn to live within our means change. What is the political wisdom of demanding that it can only happen over your party's dead body?



Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

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