Debt Ceiling - What Now?
As I write early Monday morning, it appears that the federal government is at the brink of default. The Republicans and Democrats have laid out irreconcilable positions on taxes. President Obama has said that he will not sign a bill that does not have some increases in tax rates on upper-income taxpayers. Republicans have said that they will not accept legislation that provides for such increases. In the negotiations, there has apparently been some progress in identifying spending cuts both sides can accept, but there no compromise is possible on the conflict over taxes.
In the past, when there have been fundamental conflicts, our leaders have found a way to compromise some way or other. Ordinarily, there are ways to broker a deal. If you give me more of this, and one more sweetener, I'll hold my nose and vote for the compromise. Not this time.
Republicans have a vivid memory of what happened to the first President Bush when he backed away from his 1988 campaign pledge, "Read my lips -- no new taxes." Voters did not give him credit for compromise and for addressing the budget deficit. Instead, he got "credit" for being an unreliable negotiator and one who did not keep campaign promises. That was part of the reason he lost to Bill Clinton in the 1992 presidential campaign.
President Obama, by insisting that the Republicans accept some tax increases in exchange for spending cuts, is asking Speaker Boehner to commit political suicide. Moreover, given the adamant positions of many new Republican members of the House of Representatives it is not clear that Boehner could deliver a majority to pass legislation containing tax increases.
Similarly, it is not clear that Obama and Majority Leader Reed in the Senate could deliver a majority of Democrats to pass legislation that began the inevitable and painful process of reining in entitlement spending. Boehner, by insisting that a deal contain no tax increases and significant spending cuts, is asking the President to commit political suicide.
Politicians do not commit political suicide. At least, not knowingly.
What to do now?
Politicians understand that most harsh political rhetoric is part of the game and not personal. Most also understand that, in extremis, they must find a way to work together enough to avoid catastrophic outcomes. A default would most certainly be such an outcome.
The political calculus currently under way of trying to figure out which party would suffer the most from default should end. There is no way to make this calculation; polling data are not at all reliable in guessing the outcome. Once someone or some firm does not receive timely payment from the federal government, her view on that outcome will swamp anything she said to a pollster.
Logically, the Treasury should be preparing to pay certain bills and not others. The Treasury should pay interest on the federal debt and on all other such obligations. I would also argue for making payments to individuals who may not have access to bank loans or the capital markets, such a Social Security recipients. Bills from defense contractors and other firms with such access might be put into a pile for future payment. However logical this approach might be, it may not be operationally feasible. It is not an easy matter to reprogram Treasury computers to pick out payments that must be made from those that can be delayed. In any event, getting to this sad state would be a major black mark on the governance process in the United States.
President Obama and Speaker Boehner should appear at a joint press conference and announce the following agreement:
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We cannot bridge the gap between our parties and the fundamental differences our parties have on the budget of the United States. This issue will have to be decided by the voters at the election in November of next year. The Administration, as is required by law, will present its budget early next year. Republicans have agreed to present their proposed budget in enough detail that it can be scored by the Congressional Budget Office. The two budgets may permit us to make some progress next year, and where possible we will do so.
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But our irreconcilable views will have to be addressed by the voters in an election campaign that will be of historic importance to the United States. That is the way great issues are decided in a great democracy and that is what we will do. For now, we will both support an increase in the debt ceiling, with agreed budget cuts where possible.
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The rest of the job will be in the hands of American voters next year.
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Author: William Poole
William Poole, Senior Economic Adviser
Merk Investments LLC
William Poole is Senior Fellow at the Cato Institute, Senior Economic Adviser to Merk Investments and a Distinguished Scholar in Residence at the University of Delaware.
Poole retired as President and CEO of the Federal Reserve Bank of St. Louis in March 2008. In that position, which he held from March 1998, he served on the Federal Reserve's main monetary policy body, the Federal Open Market Committee. He directed the Bank's main office in St. Louis and its three branches in Memphis, Little Rock and Louisville.
At Merk, Poole contributes to the economic and monetary policy research and analysis providing valuable insights to the portfolio management team. In addition, Poole continues to be an active and sought after speaker and author.
Before joining the St. Louis Fed, Poole was Herbert H. Goldberger Professor of Economics at Brown University. He served on the Brown faculty from 1974 to 1998 and the faculty of The Johns Hopkins University from 1963 to 1969. Between these two university positions, he was senior economist at the Board of Governors of the Federal Reserve System in Washington. He was a member of the Council of Economic Advisers in the first Reagan administration, from 1982 to 1985.
Poole received his AB degree from Swarthmore College in 1959, and MBA and Ph.D. degrees from the University of Chicago in 1963 and 1966, respectively. Swarthmore honored him with the Doctor of Laws degree in 1989. He was inducted into The Johns Hopkins Society of Scholars in 2005 and presented with the Adam Smith Award by the National Association for Business Economics in 2006. In 2007, the Global Interdependence Center presented him its Frederick Heldring Award.
Poole has engaged in a wide range of professional activities, including publishing numerous papers in professional journals. He has published two books, Money and the Economy: A Monetarist View, in 1978, and Principles of Economics, in 1991. During his 10 years at the St. Louis Fed, he gave over 150 speeches on a variety of topics. In 1980-81, he was a visiting economist at the Reserve Bank of Australia and in 1991, Bank Mees and Hope Visiting Professor of Economics at Erasmus University in Rotterdam. At various times, he served on advisory boards of the Federal Reserve Banks of Boston and New York, and the Congressional Budget Office.
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