Dive Like an Italian

Repub­li­cans in Con­gress laid down the law in July, 2011: no exten­sion of the debt ceil­ing unless Pres­i­dent Obama agreed to severe fis­cal restraints.

Amongst talk of a $4 tril­lion “grand deal”, talks broke down repeat­edly, and finally Pres­i­dent Obama and Speaker John Boehner made a joint announce­ment: a “super­com­mit­tee” made up of six Democ­rats and six Repub­li­cans, six Rep­re­sen­ta­tives and six Sen­a­tors, would sit down and nego­ti­ate a “take it or leave it” deal for Con­gress to pass with­out mod­i­fi­ca­tion. If the super­com­mit­tee failed to come to an agree­ment by a Thanks­giv­ing dead­line, then the unthink­able would be trig­gered: a deal to cut a half tril­lion dol­lars from Democrat-​​favored edu­ca­tion, trans­porta­tion, and Medicare pro­grams and another half tril­lion from the Republican-​​favored Depart­ment of Defense, on Decem­ber 31, 2012, at the same time $5 tril­lion in Bush-​​era tax reduc­tion would expire in accor­dance with the agree­ment result­ing from a sim­i­lar show­down at the end of 2010. Every­one hated the deal, so it was the best pos­si­ble deal to reach.

There was a brief flir­ta­tion with the debt ceil­ing again early this year, but the Repub­li­cans in Con­gress declined to call atten­tion to it and the ceil­ing was raised with very lit­tle fanfare.

The econ­omy has been grow­ing, albeit slowly, hit­ting a growth rate of 2.2 per­cent dur­ing the last quar­ter. That frag­ile recov­ery is endan­gered, almost every­one agrees, if Con­gress fails to act. As Con­gress is adept at fail­ing to act, that seems a pos­si­bil­ity worth contemplating.

A recent Con­gres­sional Bud­get Office report warns of a “fis­cal cliff” if Con­gress does noth­ing in the next few months. They project that the econ­omy will con­tract by 1.3 per­cent if Con­gress fails to act. Mark Zandi, Chief Econ­o­mist at Moody’s Ana­lyt­ics, esti­mates that eco­nomic growth would be slowed by 4.6 per­cent if the agreed-​​to mea­sures went into effect. Either of these sce­nar­ios would send the United States into a sec­ond reces­sion, per­haps even another depres­sion. (See U.S. Econ­omy, 1937.)

Speaker Boehner recently had tough words for the Democ­rats. On May 15, he drew a line: “we should not raise the debt ceil­ing with­out real spend­ing cuts and reforms that exceed the amount of the debt limit increase.” This, com­bined with a no-​​new-​​taxes mes­sage (“Any sud­den tax hike would hurt our econ­omy, so this fall — before the elec­tion — the House of Rep­re­sen­ta­tives will vote to stop the largest tax increase in Amer­i­can his­tory”), means that reach­ing a com­pro­mise deal by the end of the year may be impos­si­ble. Ezra Klein of The Wash­ing­ton Post thinks that either Speaker Boehner’s vision is faulty, or we will dive off the cliff into a fis­cal crisis:

So we’re not likely to have a “debt-​​ceiling cri­sis.” We’re either likely to solve our fis­cal prob­lems early in the year in way that defuses Boehner’s debt-​​ceiling threat or we’re likely to spend 2013 in a state of per­ma­nent cri­sis in which Con­gress lights the econ­omy on fire by fail­ing on the Bush tax cuts, the auto­matic spend­ing cuts, the debt ceil­ing, and the appro­pri­a­tion bills needed to keep the fed­eral gov­ern­ment open.

Politico reported this week that defense con­trac­tors are plan­ning to force Congress’s hand by send­ing out a mil­lion lay­off notices to employ­ees before the Novem­ber 6 elec­tion. The con­trac­tors, frus­trated at Con­gres­sional inac­tion, claim Fed­eral law requires 60 days’ notice to employ­ees about to be RIFed. With the fis­cal cliff set for Jan­u­ary 2, that means lay­off notices will be sent out Novem­ber 2. It’s not easy to pre­dict what sort of voter anger that might pro­voke, or who it would be directed at. It would be a pro­fes­sional polit­i­cal consultant’s night­mare, with no time to con­trol the spin before the vot­ers had their say. Last year’s debt ceil­ing agree­ment would remove $50 bil­lion from the Defense bud­get in each of the next ten years (hence the half tril­lion dol­lar sav­ings over 10 years). “It’s dan­ger­ous and irre­spon­si­ble for Con­gress to play with this,” says Sen­a­tor Kelly Ayotte (R-​​NH).

Another threat­en­ing cloud that should speed Congress’s hand: the debt ceil­ing limit may be reached ear­lier than expected, per­haps even before the elec­tion. That would cer­tainly be an Octo­ber sur­prise, par­tic­u­larly if the Obama team decided not to engage in fis­cal “tricks” to extend the dead­line. One could eas­ily envi­sion a sce­nario where Pres­i­dent Obama, behind in the polls in key bat­tle­ground states, decides to scat­ter the chips and cards in a last-​​minute effort to win.

Per­haps we are embark­ing on an Ital­ian Period in United States pol­i­tics. Italy has chronic eco­nomic prob­lems due to polit­i­cal grid­lock and lack of tax com­pli­ance. It has been men­tioned as one of the most likely can­di­dates to leave the Euro Zone. The pub­lic debt of Italy is 120 per­cent of GDP, sec­ond among Euro­pean economies only to Greece (165 per­cent). The pub­lic debt of the United States is esti­mated at 103 per­cent, and we need only pass Ire­land and Por­tu­gal (two more trou­bled Euro Zone economies) to reach Ital­ian lev­els. We have cer­tainly matched Ital­ian lev­els of polit­i­cal dysfunction.

Con­gress’ “approve” (black) and “dis­ap­prove” (red) rat­ings, Real Clear Pol­i­tics polling average.

How can this fis­cal cliff dive be avoided? Con­gress is deeply unpop­u­lar and its approval rat­ing has been hov­er­ing at his­tor­i­cally low lev­els since the 2010 midterm elec­tions. In that “wave” elec­tion, which gave con­trol of the House to the Repub­li­cans and reduced the Demo­c­ra­tic major­ity in the Sen­ate to unten­able lev­els, it was at 20 per­cent. It now stands at 16 per­cent. I argued here in a piece last Octo­ber that the elec­toral prospects for Novem­ber 2012 are so uncer­tain that con­trol of Con­gress may return to Democ­rats in a sort of “reverse wave”. Intrade and the Iowa Elec­tronic Mar­kets now put that pos­si­bil­ity at 21 percent.

Iowa Elec­tronic Mar­kets reckon the chances of Democ­rats hold­ing onto con­trol of the Sen­ate at 36 per­cent, with Intraders fig­ur­ing the num­ber is 32 percent.

Intrade puts the chances of Democ­rats con­trol­ling the Pres­i­dency and both houses of Con­gress at 6.5 per­cent. That’s close to the num­bers you get if you mul­ti­ply the chances of Pres­i­dent Obama’s reëlec­tion, the chances of a Demo­c­ra­tic House, and the chances of a Demo­c­ra­tic Sen­ate (0.53 × 0.21 × 0.32 = 3.5 per­cent). It doesn’t work that way. The odds aren’t inde­pen­dent, but tightly linked.

They fig­ure that the chances of all three insti­tu­tions being con­trolled by Repub­li­cans is six times higher and is the sin­gle most likely outcome.

We haven’t spent much time on the House since that Octo­ber 2011 analy­sis, but the Rothen­berg Polit­i­cal Report rates 67 House seats as “in play”. Of those, 42 are cur­rently Repub­li­can and 25 Demo­c­ra­tic. If those split evenly, the Democ­rats would see a net gain of 8½ seats. They need 25 seats to retake con­trol of Con­gress. Even a small­ish wave might get them to that level. If the split in Con­gress is close to par­ity, then Democ­rats will have to act in a united fash­ion in the early days of the 113th Con­gress to pass laws. Can this happen?

Both houses of Con­gress and the Exec­u­tive need to work together to make a deal before we dive off the cliff. I fear that one group, afraid of los­ing power, might see their best Prisoner’s Dilemma strat­egy is to betray the other party and their coun­try in the bargain.

It would appear that only a strong man­date in favor of Demo­c­ra­tic poli­cies or in favor of Repub­li­can poli­cies on Novem­ber 6 will avoid a cliff dive. As we’ve seen in Michael’s Reëlec­tion Watch and Sen­ate Watch analy­ses, the elec­tions for Pres­i­dent and Sen­ate will be close, and such a man­date is unlikely. I will pray for one anyway.

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