Why the GOP Is Playing the Dangerous ‘Default Game’
Business + Economy

Why the GOP Is Playing the Dangerous ‘Default Game’

REUTERS/Kevin Lamarque/The Fiscal Times

Many House Republicans were furious with thefiscal cliff agreement approved by Congress on New Year’s Day that extended Bush era tax cuts to all but the wealthiest Americans and significantly raised taxes on individuals making more than $400,000 a year. The deal also postponed $100 billion of across the board spending cuts for a couple of months, but with no commitment to cutting Medicare and other entitlements.

Rep. Paul Broun, R-Ga., called the final agreement a “mockery” that failed to address “a very serious spending addiction that has crippled our country’s livelihood and taken a toll on the American people.” Default they might, despite President Obama’s unflinching stand to not allow the GOP to hold the economy hostage over raising the debt ceiling.

After repeating at a press conference yesterday that “We are not a deadbeat nation,” Obama said, “Republicans in Congress have two choices here: They can act responsibly and pay America’s bills, or they can act irresponsibly and put America through another economic crisis. But they will not collect a ransom in exchange for not crashing the American economy.”

“I think it is possible that we would shut down the government to make sure President Obama understands that we’re serious,” House Republican Conference Chairwoman Cathy McMorris Rodgers of Washington State told Politico. “We always talk about whether or not we’re going to kick the can down the road. I think the mood is that we’ve come to the end of the road.”

If the past is prologue, Republicans are in a bad place. Many are predicting major changes in the GOP or at the very least, a continuing split within it that will undermine the unity of the party and what it stands for. When 85 Republicans joined 172 Democrats to pass the fiscal cliff tax deal, the split within the party widened. Now, it’s the debt ceiling’s turn.

House Speaker John Boehner – feeling the heat from many rank and file conservatives – has vowed to hold out for spending cuts equivalent to the amount of increased borrowing authority granted the Treasury. House Republicans are seriously considering dramatic steps, including default or shutting down the government, to force Obama to agree to cut more spending by the end of March.

“The consequences of failing to increase the debt ceiling are real, but so too are the consequences of allowing our spending problem to go unresolved,” Boehner, wrote in a statement Monday afternoon. “Without meaningful action, the debt will continue to act as an anchor on our economy, costing American jobs and endangering our children’s future.”

Boehner is caught in a vise. He narrowly won reelection as Speaker last week after 12 Republicans defected and voted for other candidates. Many of those defectors complained that Boehner was too compromising in his negotiations with Obama over a fiscal cliff deal, and are demanding that he adhere more closely to their demands for deep spending cuts and an overhaul of entitlement programs.

House Republicans are scheduled to hold a retreat on Wednesday to thrash out strategies that would get the administration to agree to substantially greater savings than the $1.4 trillion of deficit reduction approved by Congress and the White House.

President Obama said repeatedly at a White House news conference yesterday that he would be open to talks about further savings of $1.5 trillion over the coming decade, but it would have to be a “balanced package” of spending cuts and tax reform to eliminate costly deductions and loopholes for the wealthy. The administration contends that while the economy continues to recover, deep spending cuts now would hurt seniors, students and the poor and might shove the economy back into a recession.

So once again, the two parties are at a standoff: Boehner and Senate Minority Leader Mitch McConnell, R-Ky., say they would oppose any additional tax increases, and that all the future savings must be extracted from Medicare, Medicaid and other costly government programs. And they may have a point.

Yesterday’s presidential news conference – the last of Obama’s first term – came just a few days after the release of new government figures showing the government is on track for a $1 trillion deficit for the fifth consecutive year. And, for the fourth time, Obama will again miss the legal deadline for submitting his budget to Congress.

The Treasury technicallyhit the current debt ceiling Jan. 1, but has been taking “extraordinary measures” to buy additional time before the government begins to run out of cash. Treasury Secretary Timothy Geithner informed Democratic and Republican congressional leaders yesterday by letter that his department expects to exhaust those extraordinary measures between mid-February and early March.

“Any estimate, however, will be subject to a significant amount of uncertainty because we are entering the tax filing season, when the amounts and timing of tax payments and refunds are unpredictable,” Geithner said. “For this reason, Congress should act as early as possible to extend normal borrowing authority in order to avoid the risk of default and any interruption in payments.”

If the extraordinary measures were allowed to expire without an increase in borrowing authority, Treasury would be left to fund the government solely with the cash it has on hand on any given day. “As you know, cash would not be adequate to meet existing obligations for any meaningful length of time because the government is currently operating at a deficit,” Geithner said.

Since the administration and Congress came within an eyelash of taking the country over the fiscal cliff on New Year’s Eve, the president seemed to want to talk about almost anything but the next chapter in his relentless battle with Republicans over spending, tax and debt issues.

Now, as he prepares for his second term, Obama’s focus has been largely on gun control, immigration reform and accelerating the withdrawal of U.S. troops from Afghanistan. But the national debt keeps dogging him. This time, the fight will be over raising the debt ceiling again and by how much; whether to allow the more than $100 billion of across the board cuts in defense and domestic programs to take effect next month as part of sequestration, and – more fundamentally – whether to tackle major tax and entitlement reform this year.

The president’s State of the Union address is still four weeks away, but Obama tipped his hand on his thinking yesterday and in remarks he delivered to a group of middle class Americans on New Year’s Eve, just before Congress approved the fiscal cliff compromise.

Obama said that he had long favored striking a “Grand Bargain” with Congress “that solves our deficit problem in a balanced and responsible way that doesn’t just deal with taxes but deals with spending in a balanced way so that we can put all this behind us and just focus on growing our economy.”

“But with this Congress, that was obviously a little too much to hope for at this time,” he said dismissively. “It may mean we can do it in stages. We’re going to solve this problem instead in several steps.”

In short, his passion for a comprehensive deal on taxes, spending and entitlements along the lines of the recommendations of the Simpson-Bowles fiscal reform commission has waned. Instead, he is likely to take a minimalist approach that precludes major corporate and individual tax reform and rules out cuts and changes in Medicare, Social Security and other entitlement programs this year.