The Debt Ceiling Conundrum

America has a massive deficit and on August 2 it will reach its debt ceiling, meaning the upper limit Congress has set for itself to borrow. It will reach this limit whether or not Congress does anything long term about the deficit due to interest alone. Currently Congress, led by Republicans, refuses to raise the debt ceiling without a deal on the deficit. When the Republicans say "deal" they mean "deal with not one penny in tax increases." President Obama would like the debt deal to involve tax increases and massive cuts but he cannot get this, so he proposes eliminating tax loopholes and massive cuts. John Boehner is on board with this personally but many other Republicans call any loophole closure a "tax increase." Boehner worries that Tea Party sentiment could propel him out of the Speaker's role and propel a Tea Party member into it which is why he is stalling. Meanwhile President Obama has problems of his own because Democrats do not want cuts to sacred Democratic programs like Medicare and Social Security. We are between a rock and a hard place.

The debt limit matters because many say that failing to raise it would damage the credit rating of the United States. This could send markets into a spiral. Some are warning that a double dip recession could result from failure to raise the debt ceiling while people on the right say that the left is merely scaremongering. Personally I think the truth lies somewhere between the two but in the end either side could be right. What matters is the political aspect of this deal. I believe that we are currently at a precipice and the entire thing hinges on the market's reaction to it. This could either be a major victory for Republicans or President Obama. It could also spell disaster for either one.

If the debt limit is increased even with a deficit deal I imagine both sides will declare victory and go home.The real issue is if there is not a deal, which is a very real possibility. In a sense the ball is in the Republicans' corner so this ends up being a real conundrum for them, one that could result in either major success or major failure for the party. The way I see it the party may be wagering their chances in 2012 on this deal. After all, Obama just wants a deal. Republicans are being hard lined on taxes. They also do not want to do anything for Obama that he could claim as a victory in 2012 which a debt deal would be. Here is where the conundrum comes in.

Remember how I said that commentators are divided on the overall effects of the USA refusing to raise the debt limit? Well therein lies how it will aid Republicans. If there is no debt deal and the economy continues to rise as it has been with little change in the direction of the market it will be nothing less than a huge victory for Republicans, especially of the Tea Party variety. In the end it will show that Obama was fearmongering the entire time and the debt limit doesn't matter after all. They will be able to save face and claim that they stuck to their principles with little to no consequence. They will also be able to claim that Obama is a weak president since he would never cave into their debt deal involving major cuts. If the Republicans stand firm with no economic consequences this will energize their base in 2012 and give them major talking points. This is what Republicans are betting on. If they move far enough to the right and keep pushing on eventually they will be proven right and the country will move with them. This is what they hope for and it may come to fruition, but there is an equal and opposite scenario.

Republicans could very well fail to raise the debt limit, America's credit rating could be damaged, the market could take a dive, and at the most extreme the USA could be plunged back into a recession. If this happens the party will be over. No, it will not be the end of the Republican Party, but it will probably be the end of the Tea Party. If refusing to raise the debt limit backfires it will be like handing Obama's reelection to him on a silver platter. Obama will have a few irrefutable talking points to use against Republicans. One, he will be able to say Republicans deliberately hurt the economy in order to preserve tax cuts for millionaires. Two, he will be able to label Republicans extremists. Three, he will be able to appeal to voters' self-interest. There is a minority of ideologically motivated voters on both sides who will stick to the ideology no matter what but most voters are self-interested. Most voters are worried about food on the table and the cost of prescription drugs, not esoteric ideological principles. If the economy takes a dip because of a debt deal failure voters will react angrily to perceived Republican extremism and Tea Party candidates will go down to defeat. Remember that a lot of the Republican pickups were Tea Party members picking off Blue Dog Democrats. People in these swing districts that fluctuate between conservative Republicans and Blue Dogs tend to be reached through populist sentiment. The Tea Partiers got elected through populist sentiment against big government. They could go down to defeat in a tide of populist sentiment against millionaire tax breaks. Herein lies the conundrum. It is truly a make or break moment for Republicans and we don't know the final result yet.

In the end both sides have chosen different paths. President Obama has tried to play it safe, taking the middle route. This route has its benefits, because most people are in the middle. It also has its disadvantages, since one can end up looking weak and angering one's own base. On the other hand Republicans have chosen to take the opposite route and run to the hard right. This has its advantages, because in the end Republicans could get their way, it could be a success, and they would be vindicated. On the other hand they might be proven wrong and the entire economic theory will go into the toilet. This is Vegas style politics. In the end what is at stake is the economy and the future of far-right politics. If the economy does not go down in absence of a deal it helps the right, if it does the Republican Party could go down to defeat and end up in the political wilderness which could lead to a David Cameron like move to the center. Only time will tell, but it is going to be interesting to see.