Thursday, August 29, 2013

Shutdown/Default Update

One of the true policy pundit insiders, Ezra Klein of Wonkblog at the Washington Post, put up this headline for a post yesterday afternoon: "I'm Sacred of the Debt Ceiling. You Should Be, Too". Ezra is known for balanced, thoughtful reporting, although he makes no bones about being on the Progressive side of things. But he is not an alarmist. So what's up?

Let's listen to Ezra in some detail:

The closest thing to a plausible case (for an agreement) I’ve heard is some kind of negotiation that Democrats portray as a deal to fund the government and replace sequestration and that Republicans portray as a deal to raise the debt ceiling. But for that to work, the two sides actually need to agree to something. The Obama administration isn’t going to delay the health care law for a year or accept heavy new cuts without tax increases. Republicans aren’t likely to accept tax increases. So, what’s the case for believing they can reach a deal, exactly?

The Democrats’ quiet hope is that House Republicans will overplay their hand and, as terror mounts over the debt ceiling, Senate Republicans will cut a meaningful deal with Obama and the House will let the package pass by waiving the Hastert rule. That’s possible, of course, but hardly likely. House Republicans don’t like getting jammed by the Senate, and powerful conservative groups have been policing Hastert rule violations much more aggressively of late.

And then there’s the possibility of simple miscalculation. Remember when Boehner’s “Plan B” failed on the floor of the House? When the farm bill failed on the floor of the House? When the Transportation, Housing and Urban Development appropriations bill failed on the floor of the House? The odds of Boehner and Cantor thinking they can pass something and simply being wrong about that are not zero.

And that’s the problem. None of the safe outcomes are likely. None of them even look particularly plausible, at least right now. And that’s scary. If you’re not at least a bit worried about the debt ceiling, you’re not paying close enough attention.

Great summary of the current uncertainty. Before going on, try to answer the following questions for yourself:
  • Will Obama accept more cuts, or a restructuring of the sequester away from Defense cuts, or further entitlement cuts without new tax revenue?
  • Will Obama cave from his stated positions to avoid a shutdown or a default?
How you answer these two questions will most likely decide what you think will happen. My answer is No to both. Can I prove this in any way? No. It's what my overall study of the situation, of this multi-year budget battle, and of Obama the man leads me to conclude. One of the biggest problems is that Republicans are absolutely certain the answer to both questions is Yes. Obama will cave, and he will accept a deal without new taxes.

Quite simply, they do not know their opponent. This will prove a fatal error, I believe.

An amendment to my earlier posts: the debt ceiling drop dead date has moved to October 15, too soon for the battle to be fully joined. So I predict short-term CRs for both the budget and the debt ceiling, adjusting the collision date to, most likely, early December.

This, I believe, decreases the default probability - although it is still substantial, and makes the likelihood of a Senate substantive deal, including taxes, that is passed through the House at the last minute by breaking the Hastert rule, a more likely outcome.

And what will that mean? Obama will have gotten the deal he wanted in the summer of 2011 plus he will have banked the upper income tax hike. If so, nice work, Mr. President.

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