News reports indicate that President Obama has “engaged” on reaching a deal to raise the debt ceiling. Let’s hope so, and about time! The president is the key to getting a deal in the first place, and if he chooses, it can be substantively good, but it will only happen when he chooses to make it happen.
Let’s start with the substance. It is clear that just raising the debt ceiling will provide no real comfort to markets. Recklessly raising the debt ceiling would prove that we are on track to sail directly into the teeth of a sovereign debt crisis. So any real deal has to both raise the debt ceiling and deal with the substance of the problem. Namely, that the projected explosion in spending outstrips any reasonable expectation that the U.S. can grow its way out from underneath an already dangerous federal debt overhang. So, a real deal would include near-term (“discretionary”) spending cuts, caps to control medium-term discretionary spending, and real changes to actual entitlement programs that would signal a commitment to controlling the spending explosion.
There is nothing in the research literature that supports the notion that raising taxes is a good way to deal with a simultaneous challenge in the pace of economic growth and the budget. And the Obama administration agreed in December that near-term tax increases were economically dangerous. Nothing has changed materially since that time.
So it has been perplexing that for months President Obama has fiddled with fundraisers, golf, and rediscovering his Irish roots while precious time burned and his team “negotiated” about raising taxes. Democrats did not raise taxes for the two full years that they controlled the House, Senate, and White House. Democrats could not raise taxes in the lame-duck session of 2010 when they had 59 votes in the Senate and control of the House. It is completely politically vacuous to somehow believe that a tax-raising deal can go through the Congress.
President Obama needs to explain this to his Democratic allies as the first step toward a deal. Only the president can make that case and make is stick (see December 2010). It has been baffling to await this moment, because the president needs a deal. He can neither afford a serious market disruption and economic crisis — that would be the death knell of his presidency — nor continual reminders between now and November 2012 of his fiscal fecklessness. He needs a real deal, fast, that pushes the next debt-limit debate past the election.
Congressional Democrats need this deal too. If the president fails, 2012 will be an electoral disaster. In short, the political incentives align for Democrats to throw overboard their class-warfare death wish, get a real deal for spending reductions, and move the debate to 2013.
Time is short, so the president better get serious about settling the details and beginning retail sales to the House and Senate Democrats necessary to pass the increase. And make no mistake about it, Democrats will have to vote to raise the debt limit — it’s their spending spree that is coming home to roost.
Some have speculated that instead the president will play chicken, remain missing-in-action, and use a late-August crisis to push through a clean increase in the debt limit. That logic hinges on believing that the Congress will panic and simply pass a debt limit increase. That is unlikely, as a reckless increase has already failed and the public is dead-set against it. Instead, the temptation will be to put together faux spending cuts. But a faux deal runs the serious risk that credit markets jump to the conclusion that the debt jig is up and financial conditions go south.
It is precisely this risk that President Obama can’t afford. Instead, he has the right incentives to reach the real deal.
So, it’s better late than never. Welcome to doing the right thing, Mr. President.