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.
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.
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.
- US ‘could fall off fiscal cliff’ (bbc.co.uk)
- CBO Warning: Recession Will Follow 2013 ‘Fiscal Cliff’ (theatlanticwire.com)
- Etzioni: U.S. economy heading for cliff (cnn.com)
- The cloud of uncertainty: Dithering in the dark (economist.com)
- US Headed for ‘Fiscal Cliff,’ Analysts Warn Congress (foxnews.com)