Thursday, August 8, 2013


I am predicting a Shutdown, most likely in November, when the debt ceiling limit is reached. I think we'll get through the September 30 date, when the Government needs a new budget, but it will be close.

 I now put the odds of a Shutdown at 80%. I am also predicting that the debt ceiling may be threatened but not breached, as GOP leadership does seem to know this is a No-No. Nevertheless there is a chance the GOP will miscalculate, sending the US towards default.

 First, September. This is when the "Defund Obamacare" battle will be fought. Senators Cruz, Lee and Rubio will lead the charge in the Senate. Most Members of the House GOP caucus will take up the banner. The White House will say No Go. And we'll have a game of chicken right up until near the end, when moderate Senate Republicans will convince the GOP to fold and sign a 60-90 day Continuing Resolution, kicking the can into December or a bit beyond. If they mistime it, there may be a short shutdown, until the CR is put in place and signed by the President.

Then the real talks will begin. And here is where it gets interesting. A group of 8 Senate Republicans, including Senators McCain, Graham, and Corker, have been meeting with the White House in an attempt to find a way around the spending impasse. Reports on progress have been "medium rare" - good vibes and listening, no specific progress. I think what has happened in these talks is that a significant core of Senators know the White House will not do a deal without new revenues. If this has been communicated in such a way that the Group of 8 believe the White House will not move off this position, then we have a good chance (better than 50/50) to get a New Cuts plus New Revenues (about $600 Billion of each) deal to replace the Sequester. This deal, likes its close cousin, Immigration Reform, will pass the Senate with 10-15 GOP votes joining with all Democrats.

This might happen in September. I think it is more likely to happen in October, after the first crisis point has been passed. And like Immigration, it will be up to the House to decide the bill's fate.

So what's your guess? Mine is that after losing the September 30 battle, the House GOP will force a shutdown. The debt ceiling will get a clean bill raising it for up to a year. But the Government will shut down. And after 2-6 weeks of closure, a deal will be done, most likely in line with what the Senate may have done - a Sequester Replacement Bill, about $600 billion in cuts over 10 years combined with about the same amount of new tax revenues from closing loopholes, replacing the across-the-board $1.2 trillion in the current Sequester program. If the Chained CPI change to Social Security is also thrown in (modestly reducing future Social Security benefits by using a lower number inflation calculator), the President will get some modest job stimulus.

If this is the result, or something close to it, this will be a staggering loss for the GOP. Remember the deal Obama was trying to negotiate with Boehner in the Summer of 2011: $2.8 trillion in cuts with $1.2 trillion of new tax revenues. The above deal is $2.8 trillion in cuts plus interest savings and $1.2 trillion in new taxes. But in the summer of 2011, Obama was willing to make the upper end tax cuts permanent. Two years later: same deal, but the taxes on the wealthy have already gone up. Staggering.

Why is no one forecasting this sort of outcome? Because almost everyone, on both sides of the aisle, assume the Democrats and Obama will cave. In most peoples' view, this is because "he always caves": the extension of the Bush tax cuts at the end of 2010; giving way on the $250,000 level and moving it to $400,000 in the Fiscal Cliff deal, etc.

Obama will not cave because the economics are now on his side.

Back in December 2010, the Bowles-Simpson report said $4 trillion in cuts or new revenues were needed to stabilize the debt. In April of 2011, Obama finally accepted this number as what the country needed to get on a sound economic footing. With the Budget Control Act of 2011, $1.5 trillion in cuts were put in place. With the January 2013 Fiscal Cliff deal, $600 trillion in new tax revenues were added. When the Sequester kicked in (April 2013) another $1.2 trillion of cuts were put into the mix. Result: $2.7 trillion in cuts, $600 in new revenues. With interest savings over 10 years, this would approach the $4 trillion target.

Obama can and will say: No more cuts. We must replace the sequester. To do that we need about $600 billion in new tax revenue. But no more cuts. Our work is done. The deficits and debt are under control. And the CBO agrees.

Obama does not want to show his cards. The GOP wouldn't believe him anyway, and his position might well come off as inflexible. But if the GOP Senate Group of 8 were to come up with this apparently on their own, which is my prediction, then it's an idea Obama certainly has floated, but the Senators will have picked up on it on their own. The President knows he does best when the public perceives him as strong but flexible.

Remember Bob Woodward's big critique of the President: if he were a powerful leader, he would mold the political system to do his will, and had he been a true leader, he would have had the deal in August 2011. So what's wrong with doing the deal in 2013, adding one tax increase on the wealthy in for good measure, while watching the GOP self destruct?

Incomplete leader? Bad negotiator? Crap. The GOP has no idea who this guy is, and in 2014, they will lose the House, while Dems will easily retain the Senate. And whom will Republicans blame? They cannot possibly even imply that Obama foresaw most of this in early 2011, for that would admit his brilliance. Since that's impossible, they will just tear apart each other.

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