Archive for July 25th, 2011

A Game of Chicken With the Debt Ceiling?

When I was 16 a friend of mine challenged me to a game of chicken.   I had my 1963 Chevy Bel Aire, he had a 1966 Chevy Nova, both old cars.   He described the game — we’d go to a parking lot, start driving toward each other at high speeds, and the first to veer away would lose and have to buy the other a pizza and root beer.    After thinking it over we decided not to, and just went for the pizza.

In a game of chicken the key to winning is to convince the other person you are actually crazy enough to keep going straight ahead even if it means a potentially fatal head on collision.   The other person, realizing that his or her opponent might actually refuse to swerve will ‘chicken out’ and swerve away first, losing.   Two top quality players will wait until the last possible second and both swerve away in time to narrowly avert a crash.   That’s exciting!

Right now in Washington it appears  something analogous to a game of chicken is taking place.   The Republicans, in control of the House but neither the Senate nor the Presidency, what to use the debt ceiling issue to push through legislation that they would otherwise have no chance to pass given their relative lack of power.    The President, recognizing that the House needs to pass something, has tried to broker a compromise, promising significant spending cuts in exchange for both letting the Bush tax cuts expire and closing some loopholes.

Many Republicans, especially those in the Senate and probably House Speaker John Boehner, recognize that this is a good deal for them.    The cuts are significant, the revenue increases minor (still far below what taxes were after Reagan’s tax cut) and the people most upset are Obama’s own liberal base.   Take this deal and the GOP might be setting up a split in the Democratic party.

Speaker Boehner, however, has a problem with his own party — many of them seem to believe that compromise is a lack of principle, and they should stand firm.   So what if the government defaults — most of them don’t like government anyway!    Going into 2012 with the Democrats potentially threatening to take back the House, Boehner doesn’t want a Republican civil war, so he has to get a deal acceptable to his majority.

President Obama’s efforts to negotiate a deal went far, but ran into a barrier when the “Gang of Six” put forth their ideas.  This group of moderate/conservative Democrats and Republicans apparently had more revenues in their plan than Boehner and Obama had been talking about.   Politically, Obama now realized that to get a plan past the Democratic Senate he could not be closer to the GOP side than the Gang of Six was.   He had to increase the new revenues in his compromise plan, causing Boehner to walk out.

Realizing that the Senate rather than Obama was the big hurdle, Boehner sat down to work out a deal with Senate Majority leader Harry Reid.   After all, just as the Republicans in the House want something they can support, the Democrats in the Senate aren’t going to sign on to a partisan Republican bill.   Yes, the House has to pass it, but so does the Senate — and then it has to be something the President can sign.

Sunday night those meetings broke up without a positive conclusion, causing markets in Asia and Monday morning in the US to go down, fearing that the world’s largest economy and major super power might become insolvent.   Symbolically, this would mark the date when the US officially lost its perch as the world’s dominant power.   The potential chaos this could cause in markets scares even the most seasoned investors and bankers.     No one wants this, and some of the biggest donors in the GOP have sent a message to Senate Minority leader McConnell and Speaker Boehner that this would be catastrophic for the US.

Headlines Monday morning told of the talks breaking down, Boehner accused Reid of not bargaining in good faith, and Reid shot back that the Republicans want it “their way or the high way,” unable to compromise.   Meanwhile both the Treasury department and the Federal Reserve are working on contingency plans of what to do if the US defaults, silent about the specifics so as not to cause more market speculation.

To me this looks like a high stakes game of chicken.  Both sides know a head on collision would be potentially fatal to the US economy.     The Democrats come into this a bit stronger.   Besides having both the Senate and the Presidency, they’ve successfully cast this as the Republicans trying to simply get their way, unwilling to compromise.   Indeed, most Democrats in the House believe that compromise proposals out there already give too much to the GOP, they’d prefer the President to be less willing to compromise.

With time running out to reach an agreement to have it passed and signed by August 2nd, the two cars are racing towards each other.   Reid and Boehner stare coldly at each other as they step on the gas, determined to get the other to swerve first — to give in to their demands.   The analogy isn’t perfect.   To “swerve at the same time” they have to find ways to craft a compromise that each side can accept, even without enthusiasm.   There could be some creative flourishes (agree to consider a Balanced Budget amendment later?) or symbolic victories that can allow each side to “save face” for the concessions they make.

It appears the GOP would like to have the debt ceiling raised for a short period, to bring the issue back around election time.   That’s risky for both them and the Democrats.   It also could get a very negative reaction from markets.  The Senate probably will not back down on that — at least not in the form of  the GOP would prefer.

My prediction is that they will “swerve at the same time,” an argument will be made, each side will claim they gave up more than they wanted to, but it was necessary for the good of the country.   They’ll then say that if the voters strengthen their side in 2012 they’ll be in a stronger position, and this will become a campaign issue.   President Obama will hail the compromise, and this bit of political theater will pass.

Then again, sometimes in a game of chicken the two cars crash, even if both drivers realize too late that they’ve waited too long and try to swerve away.   Small miscalculations can have devastating consequences.   So now is the time that Reid and Boehner have to show they’re competent to steer their parties vehicles in this high stakes game.

Though as entertaining as this is, one has to wonder if this really is the best way to obtain compromise and help the country out of an economic crisis?

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