President Obama and the GOP Congressional leadership are at an impasse. Failure to reach an agreement on the debt ceiling by Aug. 2nd carries the likely consequence that the U.S. will default on its financial obligations, resulting in unforeseen and unwanted consequences. For the U.S. to continue to borrow in order to pay its obligations, Congress must raise the nation’s debt ceiling of $14.3 trillion dollars. As economists from across the political spectrum urge raising the debt limit, Congress’s inability to do so largely hinges on disagreements between “pro-tax” Democrats and “anti-tax” and spending Republicans.
“[We] urge Congress to raise the federal debt limit immediately and without attaching drastic and potentially dangerous reductions in federal spending…Failure to increase the debt limit sufficiently to accommodate existing U.S. laws and obligations also could undermine trust in the full faith and credit of the United States government, with potentially grave long-term consequences. This loss of trust could translate into higher interest rates not only for the federal government, but also for U.S. businesses and consumers, causing all to pay higher prices for credit. Economic growth and jobs would suffer as a result,” 235 economists urged in a letter to Congressional leaders.
Why have they failed to reach an agreement? Depending on whom you ask, it’s likely that you’ll receive widely divergent answers. Republicans would respond that because the Democrats insist on tax increases and not enough spending cuts, the fault lies with them. Democrats would counter that because Republicans are increasingly wedded to the notion that any tax increases in these financially uncertain times is counterproductive, therefore the GOP refuses to negotiate as equal partners.
This position was certainly validated in the eyes of many Democrats when House Majority Leader Eric Cantor withdrew from negotiations with the White House to reach an agreement on raising the debt ceiling specifically over tax issues. “Each side came into these talks with certain orders, and as it stands the Democrats continue to insist that any deal must include tax increases. There is not support in the House for a tax increase, and I don’t believe now is the time to raise taxes in light of our current economic situation,” Cantor commented. “Given this impasse, I will not be participating in today’s meeting and I believe it is time for the president to speak clearly and resolve the tax issue.”
Republicans in both the Senate and House argue that because Obama has not been personally involved, despite the fact that Vice President Joe Biden was leading the negotiations for the Democrats, they had to pull out of the negotiations until the president became actively involved. “For weeks, lawmakers have worked around the clock to hammer out a plan that would help us to avert a crisis we all know is coming,” Mitch McConnell said on the floor of the Senate. “So it’s worth asking: Where in the world has President Obama been for the last month.”
Following the collapse of the negotiations, the GOP had their wish granted. Last week it was announced that the president would be meeting with all interested parties to hammer out a negotiated compromise. Obama has met separately with John Boehner, Mitch McConnell and Harry Reid. The White House’s position is that any final deal must include a mix of some new revenues, whether it is closing tax loopholes or ending subsidies to accompany spending cuts. Republicans counter that spending cuts are the only mechanism that they will agree to. “The president is willing to make tough choices, but he cannot ask the middle class and seniors to bear all the burden for deficit reduction and to sacrifice while millionaires and billionaires and special interests get off the hook,” said Jay Carney, the White House press secretary. The position taken by Boehner is that any deal will never pass in the House that uses the mechanism of raising new revenues instead of relying solely on spending cuts that would total more than $2 trillion dollars.
According to Rep. Chris Van Hollen of Maryland, before negotiations broke down, Republican negotiators were offered a number of options including tax code reform, ending oil subsidies, abolishing corporate jet taxes and ending deductions and other mechanisms that wealthy Americans use to avoid paying various taxes.
Essentially, none of these options appeared palatable because they are viewed as one form or another as a tax increase. “What we’ve seen on the Republican side, overall, is all take and no give. Any serious approach requires compromise and that’s going to be required to achieve the adult moment Speaker Boehner called for,” said Chris Van Hollen, commenting on the Republican position. “Until the Republicans are more worried about reducing the deficit than they are about Grover Norquist, then we’ve got a problem.” While it is clear is that both sides are at an impasse. The clock is running out before the Aug. 2nd deadline. If Obama and Republican negotiators fail to reach an agreement, the consequences would most likely be dire.
While it is unlikely that the United States will reach the point of social unrest or anarchy similar to what is happening in Greece, the U.S. economy would unlikely be able to regain lost ground and avoid a double dip recession. Interestingly, raising the nation’s debt ceiling shares broad support from the U.S. Chamber of Commerce, Wall Street, AARP, the AFL-CIO and the small business community. Whether this support impacts Capitol Hill remains to be seen.
During his much watched press conference earlier in the week, Obama made clear that any negotiated settlement must include a broad range of approaches including spending cuts and new revenues. “Now, I just want to be clear about what’s at stake here. The Republicans say they want to reduce the deficit. Every single observer who’s not an elected official, who’s not a politician, says we can’t reduce our deficit in the scale and scope that we need to without having a balanced approach that looks at everything,” Obama said in response to a reporter’s question.