Some Thoughts on Debt Limit Politics

As has becoming increasingly clear, President Obama has been trying to follow President Clinton's playbook and tried to triangulate. That is, he has tried to take positions that are different from the majority view in his own party but are not entirely that of the opposing party. In this regard, it appears that he was trying to make a deal with the Republicans that would include raising the eligibility age for Medicare to 67 and adopting an indexing methodology for Social Security that would produce lower benefits in the future. These are not policies many Democrats would favor.

While some Republican commenters think that the Republicans in Congress should have compromised on the tax reform issues and declared victory for making changes to these two entitlement programs, it is clear that the new Republican members in the House are unwilling to compromise with Obama. From their policy perspective, this is a mistake. There has to be some compromise.

The default threat, interestingly, is pressuring all sides. While Obama is criticized by some Republicans who think he is exaggerating the possibility of default or exaggerating the consequences of defaulting on the debt to pressure them, the default threat also was serving to pressure Democrats to endorse any deal Obama made with the Republicans. The Democrats in Congress must be relieved that it is likely that they will not have to decide on how to vote on a debt limit package that includes cutting Social Security and Medicare. Some may be secretly cheering Tea Party recalcitrance.

Given Obama's rhetoric during these debt limit/budget negotiations, Democrats need to entertain the possibility that Obama is not as liberal as they once thought. It may be that not only does he want to strike a deal that includes entitlement reform with the Republicans out of political necessity but that he really wants to do this and was trying to use the debt limit crisis to pressure members of his own party to accept changes to two major domestic achievements of previous Democratic Presidents – Franklin Roosevelt and Lyndon Johnson. Also, Obama apparently believes that cutting current government spending in an economy with an unemployment rate over nine percent is a good idea. Former Obama economic advisors, such as Larry Summers, do not agree and fear that we will be repeating the policy mistake of 1937. The surviving member of the original economic team, Secretary of the Treasury Geithner, seems to have less faith in fiscal stimulus than the economists who have left the Administration. Many Democrats in Congress also believe fiscal stimulus can be effective and do not want to have to vote for a pro-cyclical fiscal policy, which reducing current spending would be.

In other words, there is disarray among the Democrats as well as the Republicans. This is making the debt limit crisis very difficult to resolve. I believe that a way will be found not to default on the debt, which would have terrible consequences if it happened, but the ability for anything constructive to be done prior to the 2012 elections seems low. One can expect an enormous game of political spin designed to confuse and gain political advantage, which over time will make the public more cynical about Washington than they already are. And, if the economy does not improve, this will add significantly to the unhappiness with how Washington operates.