The Government Shutdown and Debt Limit Fights Are Merged

President Obama reiterated today that he will not negotiate over the debt limit. This has been his stance for the past couple of years after the disaster that was the 2011 negotiations. Using the debt limit as extortion is not acceptable. It’s not how our government works and Obama cannot give in to Republican hostage-taking. The problem is that Obama may not have a choice.

We are currently in day eight of the government shutdown and Treasury will breach the debt ceiling sometime in the next two weeks or so. The only way for Obama to demonstrate that he really means it when he says that he won’t negotiate over the debt ceiling is by forcing Speaker John Boehner (R-OH) and House Republicans to raise the debt limit with zero concessions. And guess what? Boehner would reluctantly bring such a bill to the floor at the last minute, because he understands how catastrophic a default would be. Obama knows Boehner understands this and will wait him out if necessary.

The problem comes with the government shutdown. If the two parties come to an agreement before the debt ceiling deadline, that agreement would very likely include a debt ceiling increase. Boehner knows that even if tosses it in there without receiving any concessions, he can still turn around and tell his members that he broke Obama’s pledge not to negotiate. At the same time, Obama can’t reject that.

If the two parties don’t come to an agreement over the government shutdown by the deadline, it will force Boehner to surrender and raise the debt limit without concessions. This would be embarrassing for the speaker and would infuriate his conservative members. He would also lose significant leverage in the government shutdown negotiations. From his comments today, the speaker understands all of this as well.

That’s why I’m confident that a deal will be reached by October 17, the approximate date that the government won’t be able to pay all of its bills. It will take until the 11th hour so that Boehner can return to his conservative members and say he got everything he could out of the president. Both sides will also ramp up the rhetoric and partisan attacks as the time goes by in order to gain leverage in the standoff. Boehner is still hoping that Obama is bluffing, although he knows that is highly unlikely. Obama is still hoping that Boehner will cave and raise the debt ceiling with a clean CR, also highly unlikely to happen. Yet, neither side is going to let go of those hopes and that will force these fights to continue until the last minute.

But they will come to an agreement. It will include a new CR with a debt limit increase and some minor concessions (a new non-binding supercommittee, repeal of the medical device tax, etc.) to placate the Tea Party. Unfortunately, that means Boehner can return to his members and tell them that Obama negotiated over the debt limit. When we hit the debt ceiling in the future, we’re going to go through this entire process again and conservatives will claim that Obama negotiated in 2011 and in 2013. It won’t be true, but it won’t matter. Hopefully then there won’t be a government shutdown fight to muddy the waters. Unfortunately, right now there is.

Wall Street Isn’t Falling For The GOP’s False Debt Ceiling Premise

The Washington Post’s Greg Sargent has a great post today on the inherent contradiction of the Republican Party’s debt ceiling position. On the one hand, Republican leadership has said that the debt ceiling must be raised. The U.S. cannot default. On the other hand, they are demanding concessions from the president for doing something they know they have to do. As Sargent said on Twitter, “if Rs concede debt limit MUST go up to avert econ disaster for all, why are they entitled to something in return for it?” The answer is that they aren’t entitled to something in return. Here’s Sargent:

The second argument made by Republican sympathizers is that, okay, Republicans will raise the debt limit in the end, but they don’t want to, so it’s still a concession on their part. But why don’t they want to raise it, if they know it must happen to avert economic disaster? The only conceivable answer is that staking out a posture of reluctance to raise it gives them leverage to extract concessions.

This gets to the core truth about this debate: As long as it’s an open question whether Republicans are prepared to allow default, the claim that Republicans are threatening to do extensive harm to the country in order to extort concessions from Dems that a radical faction of their party is demanding is 100 percent right.

On the other hand, if it is not an open question that Republicans are prepared to allow default — that in the end, John Boehner will definitely raise the debt limit with support from Democrats when it comes down to it, because he knows it must happen — then why are we even having this discussion at all?

These are very important points. The media is fueling Boehner’s negotiating strategy by buying into the premise that Republicans are actually willing to breach the debt ceiling. It’s unclear how many House Republicans fall into that camp, but we know that Boehner isn’t one of them. As the speaker of the House, he can bring a bill to the floor that will raise the debt ceiling and it will pass with plenty of Democratic support. If Boehner holds true to what he said, there is no story here. The House will raise the debt ceiling. Period. Any talk about concessions or negotiations supports the House Republican’s false premise that we could actually breach the debt ceiling.

While the media may be falling for Boehner’s trick here, Wall Street isn’t. There’s been a lot of reporting on the fact that the bond markets are calm and investors don’t seem particularly worried about a default. That’s because they understand that Boehner will raise the debt ceiling. They read the coverage of the debt ceiling. They see Ezra Klein write that he’s “scared of the debt ceiling” and Jonathan Chait say that the “debt-ceiling showdown is the fight of Obama’s life.” They see congressmen worry that they don’t know how this will end. They see and read all of this.

And they don’t care.

They know there won’t be any negotiations and that Boehner will raise the debt ceiling eventually. There isn’t a freak out in the markets, because there is nothing to freak out about. Unlike the media, the market isn’t buying into this false Republican premise.