How politics have come to dominate the debt ceiling debate

Even though we have heard countless references and discussions about the risks associated with rising the US debt ceiling, we should not be surprised that there is still no deal as the supposed deadline of August 2 looms. The debate over a compromise solution has become so politicized both sides are now hardening their positions rather than looking for compromises.

The Republicans have staked their positions: no new taxes and massive spending cuts, in particular to entitlement programs. The presence of a vocal and uncompromising Tea Party contingent makes it difficult for the more moderate Speaker of the House, John Boehner, to deliver votes on a compromise deal with Barack Obama. Consequently, the odds of an historic deal between Obama and the Republicans appear very remote.

Obama, having realized that his re-election depends on capturing a majority of the independent voters and keeping his political base intact, seems willing to go some way on spending cuts, but insists on increasing revenue to some extent. Meanwhile, the Democratic left has grown worried the president’s concessions could upset the Democratic base. At issue for Democrats are the Congressional elections of 2012 and regaining control over Congress.

Recent unemployment figures have complicated matters. Nagging unemployment has proven to be a significant drag on the economy. Like he did with the wars in Iraq and Afghanistan, Obama is now owning the economy. The Republicans have successfully been able to add the debt ceiling debate to the conversation, making the extremes in both parties reluctant to cut a deal.

What, then, will happen with the debt ceiling? Will the U.S. default on its debt, setting the stage for a potential economic catastrophe? Or is the threat of a default just a Democratic ploy to force the Republicans to bend? Considering that the U.S. is still the biggest and strongest economy in the world, and given that the U.S. currency is the reserve currency of the world, a default or the possibility of one should not be taken lightly. It is almost certain a short term compromise deal will occur. One would hope principle will triumph over politics. However, the last few days do not bring encouraging news.

This will be a leadership moment for all concerned. President Obama has modest approval ratings (between 46 per cent and 48 per cent), while support for Congress is hovering around the 20 per cent mark. The president has a bully pulpit and this should be a decided advantage. Moreover, the Republicans have no clear frontrunner to go head-to-head with Obama. How effectively Obama uses those advantages in the days ahead may well determine his fate in 2012.




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How politics have come to dominate the debt ceiling debate

  1. “One would hope principle will triumph over politics. ”

    One idea every one  can agree with. Too bad we can’t agree on who is principled and who is playing politics.

    Charles Krauthammer:

    Treasury Secretary Tim Geithner warns that failure to raise the limit would be disastrous. In that he is correct. But he is disingenuous when he suggests that we must raise the ceiling by Aug. 2 or the sky falls.

    There is no overnight default. Debt service amounts to about 6 percent of the federal budget and only about 10 percent of federal revenues. This means that for every $1 of interest payments, there are roughly $9 of revenue the government spends elsewhere.

    Move money around – and you’ve covered the debt service. Cover the debt service – and there is no default. What scares Geithner is not that we won’t be able to pay our creditors but that his Treasury won’t be able to continue spending the obscene amounts of money (about $120 billion a month) it doesn’t have and will (temporarily) be unable to borrow.

    Equally salutary is the air of crisis that will be generated by the fear of default. We shall have a preview of what happens when we hit the realdebt ceiling several years from now, i.e., face real default. That’s our current fiscal trajectory. Under President Obama’s budgets, debt service, now $214 billion a year, climbs to $931 billion in a decade.

    The current debt-ceiling showdown, therefore, is an instructive dry run of an actual Greek-like default, which awaits if we don’t solve our debt problem.

    http://www.washingtonpost.com/opinions/our-salutary-debt-ceiling-scare/2011/06/02/AGQQGZHH_story.html

  2. They’ll raise the debt ceiling, that isn’t even a question

    What they’re quibbling about is restoring previous taxes on the rich, a peculiarly American obsession

    • hey emily…. stop it with this tax the rich nonsense… its about economics.. you tax the rich and consumption comes down… you cut spending and government spending comes down… anyway you slice it there will be a decline in gdp and the u.s will enter recession..that they really never got out of. 

      • What the US needs….what everyone needs…is Bretton Woods II, and jobs.

        I’m IN economics dude.

        • no, they need to re-instate glass-stegall. anyways, i bet you probably think raising the debt ceiling is a good thing. 

          • I’m sorry, but the old rules no longer apply

            The world is globalizing, and yet we are still using an economic infrastructure from WWII….plus manufacturing has left the building and we are now in a knowledge economy, so we have structural unemployment.

            The US is the only country WiTH a debt ceiling, another peculiarity of theirs….and it doesn’t matter how much debt you have as long as you have the ability to pay it off.  The US no longer does.

          • so what are you trying to say? developed economies can’t have a manufacturing base? what about Germany? How about Japan (before fukashima)? and so on.. who is we with structural unemployment? Canada? 

            and it doesnt matter how much debt you have? do you work? what happens when you have alot of debt and there are interest rates involved? even reasonably low ones? and then what happens when purchasing power is eroded? what are you left over with? It’s a good thing that the united states has a debt ceiling… because debt is not capital! hahaha imagine if they would continue spending money (which is borrowed) to prop up the (s) part of gdp… ya sure i can get a credit card and after i spent my life savings just use the credit card until i run out of money on my card… guess what.. after that creditors wont lend to me because i am not credit worthy… i don’t understand how much simpler i can put it to make people understand but you my friend must be brainwashed or don’t understand capital formation or economics for that matter… ya keep running deficits… what happened to lets say…. ireland? greece? portugal? spain? and now italy? Europe is entering a DEPRESSION because of this crap and you think its good to run deficits.. please do me a favour and never get involved in finance (or economics)… imagine if my financial adviser told me to run deficits every year…

            but ya lets spend… because government intervention has really helped in the past 3 years… where are all the jobs that were supposed to be created? qe1? qe2? go read a book. 

          • @twitter-30575203:disqus 

            Developed economies can only do niche manufacturing…Germany and Japan only manufacture specific things for specific purposes

            Yes Canada has structural unemployment as do most western countries….there are thousands of jobs available, but no one to fill them. The jobs are knowledge-specific, not things like factory work.  It’s skilled work,  not just a ‘job’.

            I said it doesn’t matter how much debt you have AS LONG AS YOU HAVE THE ABILITY TO PAY IT OFF

            The US doesn’t need a debt ceiling …it’s a political thing. One that is totally useless for anything but political theater.

            Like I said dude, I’m IN economics, so don’t try to tell me my business.

          • you clearly don’t understand anything…. if i was your professor i would fail you.

          • @twitter-30575203:disqus 

            May 30, 2010
            There is a cult of ignorance in the United States, and there always has been. The strain of anti-intellectualism has been a constant thread winding its way through our political and cultural life, nurtured by the false notion that democracy means that “my ignorance is just as good as your knowledge.
             
            Isaac Asimov, Newsweek interview. 1980.

            Now go away with your nonsense.

          • wow… didn’t think you would present yourself with such an incriminating quote towards your own ignorance. i totally agree… go learn some goddamn math. 

          • @twitter-30575203:disqus 

            Nice try, but no cigar.

            I also told you to go away with your nonsense, in that post

      • Taxing the rich won’t dent consumption the way taxing the poor will. The poor may have less to spend, but there’s a lot more of them, and they spend a much higher percentage of their income than do the rich.

        Besides, it’s largely the rich (and thier political puppets) that made this mess to begin with; why shouldn’t they pay to clean it up?

        • okay keith, here we go again… another economic genius. i dont think if you make 250k you are rich… if you live in new york city… you are defiantly not rich. i gotta ask you a question… why dont you go out one night… maybe to lets say… a nightclub… or a restaurant and observe what people are ordering… i know for a fact that i sure cant afford those luxury items and as a consequence i opt to stay home… because spending MONEY I DON’T have wouldn’t be such a good idea or would it? anyways keith… thanks for trying to give it a shot… but… no cigar my friend. 

          • I agree; $250K is not rich; these days it’s upper middle class. I’m talking about the 5% who have about 80% of the wealth (just pulling numbers off the top of my head; I know it’s somewhere in that range) who need the loopholes closed and need to be properly taxed.

            Mind you, given the lower tax rates in the States, a small bump for those in the $250K+ range (say the equivalent of a dollar a day) would not be missed by those being taxed but in the aggregate could bring in a fair amount of extra cash.

            BTW – since you sneeringly call me an economic genius (something which I would never claim to be, though I do manage my own meagre funds pretty well) I can only assume you think you are. So where exactly is your doctorate in economics from?

          • hey keith, can you add? i posted the equation for calculation of gdp previously. furthermore, i said both taxation and cuts in spending would have the same impact on the economy. now maybe you can add – maybe you can’t… but, when the government borrows more money which consequently would increase m1 in turn would lead to further devaluation of the currency ( we have seen this in the price of oil, food, gold, etc.) now that 250k is worth much less… so as a customer i have less purchasing power… furthermore the government is going to tax me… so as i become poorer the government is going to take more money out of my pockets due to its reckless policies. i bet you dont live in the north east… but it tends to be very expensive… when you factor things like property tax, your mortgage, food, gas… the list goes on… 250k in new york is not upper middle class by any means… it is not even upper middle class in downtown toronto…. stick to managing your meager funds. My doctorate is from the common sense that you lack. 

          • @VincentP:disqus: Have to reply to myself here thanks to the system limits in order to answer you.

            You have been rude, insulting and condescending in just about every one of your posts on this thread – to me and to everyone else. Time for you to grow up.

            Until you do, I’m putting you on Ignore.

  3. hey retard (because that’s what you must be) if the u.s doesn’t raise its debt ceiling a default WLL NOT occur given the 14th amendment states that treasury is OBLIGED to pay principle and interest first to all its creditors. What will happen is an immediate decline in GDP of 15% since that is the amount of money the government spends trying to prop up the largest economy in the world…. you must have never picked up an economic text book… let me tell you what the equation is… consumption + investment + GOVERNMENT SPENDING + (imports – exports) = GDP

    • You lost me at ‘hey retard’ but never mind, you’ve got Orson Bean liking you. Sounds like you really enjoyed Economics 101.

      • yes, i did enjoy economics 101. didn’t you?

  4. Until regular Americans(voters who turnout to vote) have a shift in philosophy, the spending will continue until someone (perhaps China) tires of supporting the spending habits of the US government.

  5. The irony of making the debt ceiling talks political is that both parties are doing exactly what their “base” wants them to do. Ezra Klein, who writes for the Washington Post, has a great chart: (http://www.washingtonpost.com/rf/image_606w/WashingtonPost/Content/Blogs/ezra-klein/StandingArt/poll%20compromise.jpg?uuid=x90krqwIEeCagMRrnLElXw).

    In sum, Democratic (and Independent) voters would rather their congressperson’s compromise, while Republican voters would rather their congressperson’s stick to their principles, no matter what.

    With Love and Gratitude,

    Jeremiah

  6. “One would hope principle will triumph over politics.”

    The problem is, their politics is all about principle, and neither side wants to surrender theirs. What really needs to triumph is common sense.

  7. I really wish people would count before they ascribe all sorts of policy outcomes to the tea party. The tea party caucus is not necessary for a compromise on the debt ceiling. The size of the tea party caucus has ranged from 30-50 since 2010. Even without them, moderate Republicans and Democrats could easily pass a compromise bill. 

    Compromise is being held up for the simple reason that both sides want a political victory. However, each realizes that the political costs of being blamed for a debt default are inordinately greater than any political victory. Unlike drag-racing teenagers locked in a game of chicken, they’ll swerve. 

    • I disagree. there has to be a reduction in the deficit. this is political suicide for obama… that is why republicans are willing to give him the authority to pass legislation for the debt ceiling with no republican backing. Politically it is a smart move… this is a more important decision then when america decided to invade iraq. Obama is in a very bad position because he has no choice (or so he thinks) to raise the debt ceiling. mathematically when governments run deficits every year (which is what the united states has done pretty much since the 70′s) no matter what the interest rate.. eventually the interest owed on the amount owing will be larger that total gdp… don’t believe me? go to excel and crunch the numbers for yourself and then make a chart… you will be shocked at what you see. politicians lie, numbers dont. case in point america is screwed and will have no other choice but to default on their debt. italy, portugal, spain, ireland, greece, will default. eventually so will the united states… i dont know when but i am certain it will be in the next 3-4 maybe sooner. anyone willing to bet on this? i will gladly wager any amount on that. people… stop listening to the media and politicians.. do the math yourself… its not hard and you dont need any fancy equations… once you crunch the numbers you will see that this path we are on is unsustainable. thank god our politicians in canada are more fiscally conservative than their counterparts in the u.s 

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