The Art of (No)Compromise

July 17th, 2011 by Lee Eldridge

Hopefully this will be the last time I feel compelled to write about the debt ceiling for a while. There are other subjects I want to tackle, but this issue remains front and center in the news. Just a few thoughts.

President ObamaDefault and Economic Armageddon
The administration has repeatedly talked about how if we don’t raise the debt ceiling, it will cause the U.S. to default on its obligations and cause economic Armageddon that could push us into another recession. They use these two points interchangeably, often mixing them within the same quote. But they’re not the same point at all.

Credit rating services have warned that if we go into default, they will lower our credit score. They have also warned that if we do not come up with a long-term plan to tackle our deficits and debt that we risk hurting our credit rating.

The deceitful portion of this entire conversation by our politicians and media pundits is the assertion that we’ll go into default at all.

The federal government is expected to collect more than $170 billion in revenues in August. That’s more than enough money to service our debt (avoiding default), make social security payments, Medicare payments, Medicaid payments, pay the military, and more. Other government agencies would have to be temporarily shut down until money became available. But there’s absolutely no chance that we would actually go into default in the foreseeable future. And there’s no chance that we wouldn’t be able to make social security payments to our seniors. At least in the short-term.

Now the administration’s second point about economic Armageddon is a much trickier issue to predict. And I’m not sure who to believe on this one. From President Obama to Paul Ryan, politicians from both sides have warned about the dire consequences of not raising the debt ceiling. Though this could easily be “cover your ass” mode for our politicians. It’s better politically to predict doom and be wrong, than to predict that everything will be fine and we end up with economic Armageddon.

I tend to have more faith in the market than this. Business leaders understand what’s at stake here — the long-term financial health of our government and our economy. I suspect that there’s a good chance that the markets will give Congress time to resolve this issue beyond August 2nd before it reacts. But the market can spook, and it’s a legitimate risk.

I’m not advocating anything in particular with these comments. I’d like to see a reasonable deal get done by August 2nd. More on that in a moment.

Compromise
Sometimes it’s all in your point of view. What is compromise? The Democrats tell us that compromise is raising taxes by $1 trillion, and offering spending cuts that may or may not result in around $3 trillion is savings over the next ten years. The Republicans, many who do not want to raise the debt ceiling at all, tell us that compromise is requiring trillions in real cuts to federal spending and entitlement reform in exchange for raising the debt ceiling.

The Democrats have refused to proceed without tax increases. The Republicans have refused to proceed with tax increases. Everything else is spin.

Do you remember the last negotiation over the budget? The two sides agreed upon $30 billion in spending cuts. But when the actual cuts were scored, it was really only about $300 million in savings. So excuse me for being skeptical over the Democrats’ spending cuts. Word has it that the Democrats have only targeted around $1.5 trillion in cuts to accompany their $1 trillion in tax increases. There is no “grand plan” for a $4 trillion deal. It will never happen.

The Polls
I watch the polls because I find them interesting. But they should always be taken with a grain of salt. And I would never advocate that we should govern through polls.

Last week, President Obama cited a poll and said that “80% want higher taxes” as part of a deal to slash the deficit. His point is that reasonable people understand that we need to increase tax revenues as part of the negotiation, and that the Republicans are not reasonable. “The American people are sold,” he said. “The problem is members of Congress are dug in ideologically.”

But to me, this is a misrepresentation of the Gallup poll he uses to reach this conclusion. According to Gallup, 50% of those polled said that we should fight the deficit with spending cuts only (20%) or mostly with spending cuts (30%). The poll also shows that 11% favor tackling the deficit with only tax increases (4%) or mostly tax increases (7%). That leaves 32% who said that we should fight the deficit equally with cuts and increased taxes.

Since 20% said “spending cuts only”, the President has concluded that 80% “want” tax increases, and agree with him on how to fight the deficit.

In my opinion, the “plan” proposed by the administration does not reach the level of “mostly spending cuts”. Matter of fact, has anyone actually seen a plan from the administration or from Democrats? I didn’t think so. All of this is a far cry from “80% want higher taxes”.

I will also tell you that Gallup often tracks more favorably towards liberal issues than many other polling services. In a recent poll from Rasmussen, their results show that “Just 34% think a tax hike should be included in any legislation to raise the debt ceiling. A new Rasmussen Reports national telephone survey finds that 55% disagree and say it should not.”

The Politics
Let me be clear, President Obama has no interest in reducing the size of government. Our current spending levels are where they are because that’s where the Democrats set them. The only reason that the President is discussing a “big” deal is because he needs to push this conversation out beyond the 2012 election. He needs to increase the debt limit by at least $2.4 trillion to guarantee that this conversation doesn’t come up during the election.

When you’re in the middle of a negotiation, you always ask for more than you want. That’s how it works. Does the President really want a $4 trillion deal? If so, he should have asked for $6 trillion. He asked for $4 trillion because what he really wants is at least a $2.4 trillion increase in the debt limit. The number is arbitrary so long as we don’t have to have this discussion again for the next 18 months.

What Needs To Be Done
It’s still my opinion that this negotiation should only include spending cuts (as I stated here). We need real tax reform, not just closing a few loopholes to generate more tax revenues. And we certainly cannot negotiate real tax reform in the next week.

If I was in Congress (it would likely have to start in the House but it would be better from the Senate), I would propose a $1 trillion deal for real spending cuts and an equal increase in the debt limit. Certainly moderates and conservatives can find $1 trillion in cuts to agree upon over the next five years. This deal wouldn’t push us out beyond the next election, but it buys us more time to continue the conversation. The President has said he will not sign a shorter term deal, but is he really ready to accept the responsibility for not raising the debt ceiling? I doubt it.

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