Politicopedia: A Simple Breakdown of the Issues: Why Both Parties Are Wrong When It Comes to the Debt Ceiling

It seems that the only news that anyone ever hears anymore is about the debt ceiling. From the president's catastrophic warning that the economy will collapse if the ceiling is not raised by August 2 to Republicans absolute inability to envision any type of tax reform that is not tax breaks, the debate seems to be going absolutely nowhere. But who is correct in these arguments? And the better question is, who will ultimately win?

The Sides

House Republicans: 2010 freshman House Republicans rode to Washington on a wave of rhetoric regarding cutting the deficit, stopping the out of control spending spree, and making sure that America lives within its means. This is the main Republican talking point, that if everyday Americans cannot run up debt and get away with it, then neither should the federal government.

Conservatives are also quick to equate the United States spending patterns to that of a credit limit on your credit card. Representative Martha Roby (R-AL), explains it best on her House website,

“The debt ceiling is like having a credit limit on a credit card...As you spend with the card, you have to pay interest on that debt and you have to get more cash to pay the debt as well.”

She said once you are unable to pay the interest on the debt, you have reached your debt ceiling. At that point, you have to call the credit card company to ask for more credit. [Roby Press Release, 06/16/2011]

Republicans are pushing for broad spending cuts to get America back on track, but the details are not yet known on what specific programs they would like to cut. House Republicans would also like to see the overhaul to Medicare proposed in the Paul Ryan "Path to Prosperity" adopted as a way to cut future costs.

They have until this point rejected all forms of tax increases. This includes any increases in the marginal tax rate (the rate that individuals pay per year) as well as the closing of tax loopholes for millionaires, billionaires, hedge fund managers, and corporate jets.

It should also be noted that there even exists a rift in the beliefs of House Speaker John Boehner and the rest of the republican caucus in the House. Boehner created an internal backlash among the GOP when it was discovered that himself and the President were discussing possible ways to raise revenues.

Politico explains that Boehner's willingness to talk tax rates with President Obama drew criticism from a number of members within his own party and ultimately forced him to back off from the issue almost entirely:

Tax hikes, by any name, are a non-starter for a party that forged its brand on the mantra of lower taxes and less government, and Boehner’s willingness to talk rates with President Barack Obama — particularly in the context of House Majority Leader Eric Cantor’s refusal to do so — raised eyebrows within his conference. The uproar among Republicans, on and off Capitol Hill, forced Boehner to back away from the “grand bargain,” setting up a testy White House meeting where little was accomplished Sunday night. [Politico, 7/11/2011]

Senate Republicans: Surprisingly, the leaders of debt talks in the Senate have a different take on the issue. After the founding of the so called gang of six (which has since disintegrated), the republican leader of those talks, Saxby Chambliss, had some surprisingly candid words:

“I’m taking arrows from some on the far right,” he told the Rotary Club of Atlanta in an appearance with Mr. Warner on Monday. “Are some people going to pay more in taxes? You bet.”

And the New York Times is quick to point out:

Mr. Chambliss has been increasingly outspoken in arguing that additional revenues must be part of a debt-reduction plan, given the scale of the problem. [New York Times, 04/16/2011]

While this does not necessarily mean that his views are shared by a majority of Republican Senators, the seriousness with which that previous statement was taken by both conservative bloggers and fellow Senators suggest that the Senate may be more willing to discuss revenue raises. Regardless, any deal on raising the debt ceiling must and will ultimately come down to the House. With a large majority and a number of staunch conservative, tea-party backed freshman with very little to lose politically, the debt ceiling debate will hinge on President Obama and John Boehner working out some type of deal that appeases House Republicans. At this current time, with the apparent differences seeming more and more irreconcilable, a deal seems terrifyingly low.

President Obama: This is where the discussion gets very interesting. President Obama has once again attempted to paint himself as the negotiator-in-chief (to the disappointment of many liberals and the ire of others). In his weekly address, this is what President Obama said:

Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.

I was actually a little bit shocked when I heard those words. President Obama is starting to sound like the very Republican points that he campaigned against in the lead-up to the 2008 election.

Paul Krugman said it best in his most recent article. After citing the above quotation, Krugman explained,

That’s three of the right’s favorite economic fallacies in just two sentences. No, the government shouldn’t budget the way families do; on the contrary, trying to balance the budget in times of economic distress is a recipe for deepening the slump. Spending cuts right now wouldn’t “put the economy on sounder footing.” They would reduce growth and raise unemployment. And last but not least, businesses aren’t holding back because they lack confidence in government policies; they’re holding back because they don’t have enough customers — a problem that would be made worse, not better, by short-term spending cuts. [New York Times, 6/30/2011]

President Obama is going farther than any other Democrat in his attempt to broker a deal with House Republicans. Today, reports out of the White House said that Obama was offering significant reductions in Medicare spending and even offering to tackle the rising costs of Social Security. The Huffington Post is even reporting that Obama offered an increase in the eligibility age for Medicare, from 65 to 67, in exchange for Republican movement on increasing tax revenues. This could cause an enormous rift between the President and House Democrats, who have vowed to stay united in their fight against any entitlement reform.

But President Obama has also called for a number of tax reforms that serve to appease congressional Democrats. These include raising taxes on millionaires and billionaires, as well as eliminating tax loopholes for corporate jet owners (which would generate $2 - $3 billion over the next ten years), big oil companies, hedge fund managers, and a number of others.

Eliminating the tax loopholes for hedge fund managers alone could generate between $20 billion over the next decade, and eliminating tax breaks for oil companies would raise another $40 billion. Eric Toder at the Tax Policy Center explains that hedge fund managers current have their income taxed at the low capital gains rate of just 15 percent.

According to Mr. Toder,

They basically get a share in the gains and losses of the hedge fund. Now, the argument that's often made is this is really indistinguishable from compensation. So why should this be taxed at 15 percent when, you know, if you're a salesman on commission, you're getting taxed at rates up to 35 percent?

President Obama is also going above and beyond the amount of reductions that even House Republicans have called for:

Rather than roughly $2 trillion in savings, the White House is now seeking a plan that would slash more than $4 trillion from annual budget deficits over the next decade, stabilize borrowing, and defuse the biggest budgetary time bombs that are set to explode as the cost of health care rises and the nation’s population ages. [Washington Post, 7/6/2011]

While those on the left like Paul Krugman are flabbergasted that Obama would so quickly cave on entitlements (even a program like Social Security in which House Republicans had not even looked at for potential cuts), others close to the President see this as political posturing to demonstrate to the Republicans that everything is in fact on the table.

Congressional Democrats: House and Senate Democrats have largely played a sideline role in the discussions. This is largely due to the fact that, when it comes to striking a deal, they have almost no role to play. Although recently, they have announced that the caucus is unified in its defense of all entitlement programs, which, although being politically powerful and popular and could lead to re-election in 2012, may long-term be disastrous for the economy.

The Analysis: Looking at the debt ceiling debate from a practical standpoint, both sides are incorrect (although one more than the other). Republicans are wrong for essentially holding the fate of the economy hostage in order to drastically cut spending while Democrats are wrong for not recognizing the necessity to reform entitlements.

While I disagree with the way in which Republicans are using the debt ceiling as a political bargaining chip, I am forced to ask: Has the debt ceiling debate up until now had a net positive effect? Think about it: the debt ceiling discussions have allowed us to approach issues that are generally off limits for elected representatives (especially in the House where every single session is an election session and congressman are far more likely to shy away from drastic changes to popular programs). The Senate has already voted to eliminate ethanol subsidies and its only a matter of time until the House does the same and the President and congressional Democrats are attempting to negotiate the closing of many unfair tax loopholes for major corporations. In addition to those "sacred cows" (by which i mean programs that are generally popular to fund), the Hill is reporting that major cuts to the overblown Defense Department budget are also on the table:

National security spending could be cut by as much as $700 billion in a deal to raise the debt limit...Sources told The Hill recently that GOP negotiators are ready to break with recent Republican ideology by trading large defense cuts for not raising taxes as part of a debt-ceiling deal. [The Hill, 7/7/2011]

Furthermore, President Obama, along with congressional Democrats and House Speaker John Boehner, are considering closing a number of tax loopholes that could generate billions of dollars.

However, the debt ceiling debate has had a number of negative consequences, and if it is not raised in the coming weeks, it could result in, to quote new IMF Chief Christine Lagarde, "really nasty consequences." This is where my frustration with Republicans comes into play: While I agree that there are spending overruns in all sectors of government, I do not believe that holding the economy hostage is the answer.

Additionally, some House conservatives (largely the freshman class) are pitching a balanced budget amendment while simultaneously reassuring Americans that their number one priority is to create jobs. It is by all intents and purposes impossible to do both. Cutting spending $4 trillion dollars while simultaneously opposing any form of tax reform that are not additional tax breaks adds up to greater spending and a contractionary economy.

Democrats are not off the hook. While Congressional Democrats are accusing Republicans of "playing politics" with the debt ceiling, they themselves are also doing it, perhaps to an even greater degree. Democrats are leveraging the fate of our country in the long-term with short-term political gain in the form of picking up seats in the 2012 election. Entitlement reform is widely unpopular, and why shouldn't it be? What American would seriously want their benefits to be cut? But Americans do not yet understand the importance of reforming our entitlement programs, something that make up more than 60% of the federal budget. And Democrats are doing nothing to solve the problem. The Paul Ryan "Plan to Prosperity" is, in my opinion, wrong for the country, and the way that it handles medicare would end up costing seniors thousands more dollars in the long run. But at least they had the motivation to release a plan, despite how wildly unpopular it turned out.

I give Republicans credit for taking such a risk in releasing a plan for medicare (despite my misgivings towards it). But if both sides are so dug in that no deal is made by August 2nd, House Republicans will ultimately be held at fault. Despite the fact that Democrats are also posturing, at least they are making an effort in attempting to find some type of compromise, some large-scale plan for reducing the deficit that integrates the deep spending cuts that Republicans have asked for with the elimination of tax loopholes that the Democrats want. Politics is about compromise. In a divided, partisan Congress, bills only become law when they are able to integrate both parties interest into a single bill. For House Republicans, it is 100% their way or else there is no deal. That is not the way politics works and that is not the thinking that will get us off of this economic precipice. For a group of freshman congressmen who have so often touted the superiority of the United States over all other countries, their political brinkmanship could have dire consequences, and could cost the United States its promising future.

The Conclusion: In this most recent round of talks, President Obama comes out as the clear winner at the moment. The combination of proposing such a long-term, large-scale deficit plan ($4 trillion dollars in savings over 10 years) with his willingness to put everything on the table makes him looks like the leader of the deficit hawks. Despite this, the irreconcilable differences between the President and House Republicans are beginning to seem more and more difficult to tackle.

And the consequences of not reaching a deal would be absolutely dire. If there is any time when Republicans and Democrats need to compromise, this is it. The fate of this country depends on it.

Articles Used For This Post/Further Reading Suggested:

Monday, July 11, 2011

Why Both Parties Are Wrong When It Comes to the Debt Ceiling