Thursday, January 20, 2011

Do the GOP debt-limit schemes make sense?

From Jennifer Rubin at The Right Turn (Washington Post):

Republicans are popping up with new schemes on the debt ceiling. They don't just want to extract big cuts in spending; they actually want to refuse to raise the debt ceiling. I asked James Capretta, a fellow at the Ethics and Public Policy Center and former associate director of the Office of Management and Budget (in charge of, among other things, health care) whether these ideas make sense. The short answer: not really.
First, the debate is "way premature," Capretta observes. The debt ceiling won't need to be raised until April, maybe as late as June, Capretta points out. In the meantime there will be the State of the Union address, the Republican House budget plan and lots of tussles. The debt ceiling fight is in essence putting the cart before the horse, making a threat without knowing the ground on which conservatives stand.
Second, Sen. Pat Toomey (R-Pa.) is correct that there is no firm statutory basis for deciding whether we pay bond holders (debt) first or other government obligations. So the administration was using scare tactics to declare that there would be an automatic default. (Tim Pawlenty has made the same argument.) But here's the kicker that Toomey points out:
If we do not raise it, the government's tax revenue will enable us to fund roughly two-thirds of projected expenditures, including interest payments. Without the ability to borrow the other third, spending cuts would be sudden and severe: Projects would be postponed, some vendor payments would be delayed, certain programs would be suspended, and many government employees might be furloughed. Default would easily be avoided, but these cuts would certainly be disruptive.
Capretta contends (and I heartily agree) that despite their vim and vigor, the House Republicans are not going to cut one-third of the government --right now. That is why, despite all of the arguments for why we don't technically have to raise the debt limit, we really do. Toomey, I suspect, understands this: "Congress should make increasing our debt contingent on immediate cuts in spending and effective reforms of the spending process that helped get us into this mess." In the end he is simply calling for essentially what House Majority Leader Eric Cantor (R-Va.) is advocating.

Capretta points out that there is no "conceivable spending plan" out there to cut a third of the budget, so the best Republicans can do, following Toomey and Cantor, is to extract $50 billion to $100 billion in real cuts. (Today, Sen.Jim DeMint (R-S.C.) is out with a plan to cut $125B.) That would be a significant accomplishment.
Now that we have parsed the theatrics, what is ahead? Capretta recalls that in 1995, President Bill Clinton "counterpunched." He didn't actually roll out his own budget until midyear, vowing to be "fiscally conservative" but to do so in a way liberals liked (e.g. tax hikes, slashing defense). However, Capretta doesn't think that "Obama has the luxury of counterpunching." If he comes out at the State of the Union and says he wants fiscal discipline but "details to follow," Capretta argues, the public will recoil.
Instead, Capretta surmises that the Obama team (Jack Lew, Gene Sperling, etc.) is going to try to be fiscally conservative -- "the Democratic way." That entails health-care price controls ( the "double down on Obamacare" strategy," Capretta calls it), tax reforms that hike taxes on business and investors, a Social Security plan with massive tax increases, and big defense cuts.
What is wrong with all that? Well, it will strangle the economy, for one thing. It's not "fiscally responsible" to say, "Oh, we spent a trillion dollars but we raised a trillion and one dollars." That is a formula for squelching growth and jobs. Nevertheless, it might be -- if Capretta's take is correct -- exactly what Obama is up to.
What are the Republicans to do then? I'd suggest putting away the phony debt ceiling argument for a while. Begin to talk about the size and functions of government that are necessary. Start to explain the connection between taxes, debt and job growth. Then come out with a budget that doesn't scare the voters to death (as cutting spending by one-third certainly would), but that entails, Capretta suggests, real entitlement reform and actual spending cuts to be followed by multi-year freezes on discretionary spending. Frankly, Republicans should keep their eye on the ball -- and not the debt ceiling.

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