Tuesday, July 12, 2011

Debt Ceiling Endgame

This time is different. There isn't a more dangerous sentiment, yet when it comes to the debt ceiling, this time really might be different. While the Beltway chattering class and Wall Street have up till now blithely assumed that a deal will get done at the 11th hour, they ignore an inconvenient fact: the votes are not there.

It's rather simple. Thanks to their ultra-conservative freshman class, the GOP has been adamant that they will not accept any revenue increases as part of a deal. That is unacceptable to the House Democrats. Normally, the opinion of the minority party would not matter -- except for the fact that perhaps a third to a half of the GOP House caucus have signaled they will not vote for any debt ceiling increase. Furthermore, President Obama desperately wants to wring some -- any -- concessions out of the Republicans so that he avoids the awful precedent of the GOP successfully holding the debt ceiling hostage, and he can then sell a "bipartisan compromise" to the public. For their part, the Republican leadership would be more than willing to come to terms with Obama -- they do not want to be blamed for a government shutdown, let alone an outright default -- but they have quickly discovered that they have very little actual authority anymore. John Boehner can not round up the votes for a deal.

So, the Democrats are demanding increased revenue and the Republicans will not budge. Only the fallout from a technical default will change this dynamic. This is why a deal will not be reached before August 2nd. Already, both sides are laying the groundwork to blame the other for the consequences of a failure to raise the debt ceiling. Essentially, the negotiations have stalled as both sides play the blame game instead.

President Obama has taken to the airwaves to make his case that he has offered the Republicans everything they could reasonably hope for -- and they have still turned him down. He will continue to call on "both sides" to come together and reach a deal. He will chide them. He will keep using metaphors ("eat your peas", "don't leave your homework till the last minute") that cast his opponents as immature children. He will thunder that the United States does not default on its debts. He will warn about the catastrophic effects of default that "he can not prevent" (like Social Security checks not going out).  And, as the deadline nears, he will do this in primetime.

The Republicans, meanwhile, are split. The diehard Tea Partiers have been talking themselves into a debt ceiling breach for months. They welcome it. That leaves the GOP elite stuck trying to figure out a way to deflect blame for a shutdown -- which is what would happen when payments get prioritized -- onto Obama. The latest such effort was Mitch McConnell's plan to give the president the power to unilaterally raise the debt ceiling, unless a veto-proof majority of Congress vote that they "disapproved" of the hike. The immediate howls of protest from the Tea Party, and the House GOP, demonstrate why any such legislative legerdemain is a political non-starter.

So how does this end?

The most important political fact about the debt ceiling is that it is incredibly unpopular. That is what made it such an attractive target for Republican hostage-taking. When Gallup polled the question back in May, only 19% of respondents were in favor of raising the debt ceiling, with 47% opposed. Crucially, only 15% of Independents wanted to raise it.

Seemingly, not much has changed. When Gallup returned to the question a few days ago, respondents were still overwhelmingly against raising the debt ceiling, with just 22% in favor and 42% opposed (and 35% not knowing enough to say). Only 18% of Independents wanted it hiked. But, like spending cuts, not raising the debt ceiling may prove to be more popular in the abstract than in reality. When the question is framed if people are more worried about a potential default or about raising the debt ceiling, the results change dramatically.

Independents are evenly split, up 30 percentage points from the more general version of the question. Asking about default fills in the blanks for the possible consequences of not raising the debt ceiling, which over a third of the respondents in the Gallup polls did not know enough about to answer. Of course, even if a deal is not reached an outright default is unlikely -- but Obama will not mention that. And he has the biggest soap box. The messaging war is his to lose.

As the deadline looms and a deal is still not reached, the media will begin reporting on the previously unthinkable: what will happen if there is a technical default. Sensationalism sells. Independents will move more in favor of lifting the debt ceiling. And once the Treasury starts prioritizing payments after August 2nd, support for ending the standoff will spike among the political middle. 

The GOP will get the blame. Obama will use the bully pulpit to hammer home Republican intransigence and their unwillingness to compromise. The David Brookses of the world will notice.  A technical default will not only cause mounting pressure on the GOP from moderates, but it will also lessen it from conservatives. Tea Partiers will cheer the lack of a resolution. The GOP House freshmen will tout their conservative bona fides. They will say they did the best they could. They stood athwart history, yelling Stop -- only to be stabbed in the back by RINOs. 

In the end, Obama will get a debt ceiling increase. Enough moderate House Republicans (such as they are) will defect once markets and constituents erupt. Entitlements will be mostly untouched. There will be very modest revenue increases. And the GOP establishment will be further discredited in the Tea Party's eyes.  Most importantly, the incentives of the two key negotiators -- the President and the Tea Party (represented by Eric Cantor) -- are such that this scenario seems all but inevitable. A debt ceiling breach lets Obama pass off ownership of the bad economy onto the Republicans, while a showdown lets the Tea Party further assimilate the Republican party. Everybody wins. Except John Boehner.