Boehner Succeeds in Switching Demands

October 9, 2013Danny Vinik 7 Comments

Ezra Klein picks up on an important point in this morning’s Wonkbook:

Two issues led to the shutdown. One was defunding or delaying Obamacare. The other, as Sen. Ted Cruz put it, was “making D.C. listen.”

What’s been remarkable — and largely unnoticed — is that Republicans have abandoned both those demands.

…

What’s odder about the shutdown, though, is that Republicans have also abandoned their core policy demand. They’ve largely stopped talking about Obamacare. They’re begging simply for negotiations. Their latest plan, in fact, is for another budget commission:

The GOP’s play, announced by Cantor at the meeting, is to push for a bicameral commission that brought comparisons to the “supercommittee” from the 2011 Budget Control Act.

In a Wall Street Journal op-ed, Paul Ryan articulates the emerging strategy. “To break the deadlock, both sides should agree to common-sense reforms of the country’s entitlement programs and tax code,” he writes. The word “Obamacare” never appears in the piece. Nor does any other reference to the president’s health-care law.

The Republican Party initially justified this shutdown and these tactics to itself by arguing that it was channeling the will of the people and justified by the dangers of Obamacare. But they’ve lost pubic opinion and realized Obamacare isn’t up for negotiation. But the loss of their original rationale for the shutdown hasn’t led them to reopen the government.

It shouldn’t surprise anyone that Boehner and Republican leaders first started by demanding the president defund or delay Obamacare. Speaker Boehner could not betray the Tea Party and split his party in half by bringing up a clean CR. Even if he had brought up a clean CR that also repealed the medical device tax, the Tea Party still would’ve been infuriated. It would’ve split the Republican party in half. This has clearly been the case all along and Boehner’s strategy has always been to slowly ratchet down GOP demands over time so that the Tea Party believes he fought for them. First it was defund Obamacare. Then it was delay Obamacare. After that it was delay the individual mandate. As Klein points out, GOP demands now have nothing to do with Obamacare.

Boehner knew all along Senate Democrats and Obama weren’t going to change the law. It was a non-starter. But he had to at least show his conservative members that he fought for them. Allowing a government shutdown to happen and drag out for a couple of weeks is a good way of showing them that.

His next step was to quietly switch demands from something unattainable to something possible. This was the toughest part as the Tea Party would revolt if it became clear he was giving up on their goal of stopping Obamacare. As Klein notes, this switch happened “largely unnoticed.” That’s a big victory for Boehner.

Now he still has to return to his party with some concession from the president. It doesn’t have to be much, but he can’t have chosen two major fiscal fights and return with nothing. He also must show that he fought as hard as he could – that means waiting until the last minute to make a deal. This is Boehner’s strategy in every one of these fights and it has succeeded repeatedly. In my first article defending Boehner, I wrote that his strategy is the following:

Lie to his caucus, allow them to “take control” and make it seem as if disaster will strike

Use that desperation to subtly change the conversation to the upcoming disaster and extract concessions from Democrats

Go back to his caucus, say he got everything he could and convince them to vote to avoid the crisis at the last minute

Keep his speakership by allowing himself to seem weak and extract some concessions

Lather, rinse, repeat

Allowing the conservatives members to “take control” required shutting down the government this time. But the rest is unfolding exactly as I wrote. He lied to his caucus about stopping Obamacare, allowed them to “take control” and is now using that desperation to extract any type of concession from Democrats in return for opening up the government and raising the debt ceiling. He’ll then go back to his members, say he got everything he could and we’ll avoid a default. The Tea Party will be angry, but not quite angry enough to challenge his speakership. Lather, rinse, repeat. The hardest part was switching his party’s demands from stopping Obamacare to a fiscal concession. Now that he’s done that, the rest isn’t too difficult. It’ll just take until the 11th hour to play out.

The Government Shutdown and Debt Limit Fights Are Merged

October 8, 2013Danny Vinik 2 Comments

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.

Debt Ceiling Extortion

September 24, 2013Danny Vinik 7 Comments

I have no doubt that Congress will raise the debt ceiling. Republicans simply have no choice, but to accept defeat and move on. The United States government pays its bills. Period.

Beyond that though, it’s remarkable how idiotic this argument has become.

Republicans cannot hold the debt ceiling hostage.

In 2011, the last time debt ceiling brinksmanship almost caused an international financial crisis, Republicans were screaming that any debt ceiling increase must be offset by equal spending cuts. The entire goal was to reduce the deficit. While playing chicken with the debt ceiling was irresponsible then, there was at least a bit of logic in terms what Republicans were holding hostage and their ransom demands.

This time though, Republicans are holding the debt ceiling hostage while demanding a one-year delay in Obamacare. There is no connection between the two. Republicans are using the debt ceiling to extort the President. Worse, some Republicans seem ready to breach the debt ceiling if Obama does not back down and agrees to delay his signature legislative achievement. This is where things get absurd.

If we do breach the debt ceiling, it will likely have a significant, long-term negative impact on our debt. Rates on U.S. Treasury notes are lower than any other bond because investors are 100% confident that the U.S. will repay its creditors. The chance that a debtor doesn’t pay its creditor is called credit risk. Companies and countries close to bankruptcy have high credit risks. But the United States is never close to bankruptcy because the dollar is the world’s reserve currency and the U.S. can print its own money. It can always pay back its creditors. That’s why interest rates on Treasury bills are so low. But, if we breach the debt ceiling, that non-zero credit risk rises substantially. Suddenly, it becomes a very real possibility that the U.S. could not pay its creditors. Even if Treasury prioritizes bond payments so it does not technically default on its debts, the act of breaching the debt ceiling will likely shock investors and force them to increase the risk assessment of Treasury notes. That means considerably higher-interest rates for the U.S. in the long-term and thus higher interest payments.

In 2011, J.P. Morgan estimated that rates on Treasury Bills would rise 50 basis points if we breached the debt ceiling. They predicted that it in the long-term, that would add $75 billion per year to the deficit. Compare that to the sequester, which was the result of the 2011 debt ceiling deal. It cut spending by $1.1 trillion over 10 years. Breaching the debt ceiling would effectively undo nearly three-quarters of those cuts in the form of increased interest payments.

So, in 2011, Republicans were so concerned about the deficit that they took the debt ceiling hostage to extract $1.1 trillion in spending cuts.
Now, Republicans are so concerned about Obamacare that they’ve taken the debt ceiling hostage and risked adding $750 billion to our long-term debt.

If Republicans were so worried our long-term debt two years ago, why are they willing to undo most of those spending cuts this time? Does that seem like Republicans actually care about our debt and are using the debt ceiling as a principle to get our fiscal house under control? Or does it seem more like an irresponsible, reckless party risking a global financial collapse in order to extort the President?

That’s why President Obama and Senate Democrats cannot and will not negotiate on the debt ceiling. There is nothing principled about Republican arguments here. The debt ceiling is simply a mechanism to hold the President hostage and force his hand. That’s unacceptable. Enough with debt-ceiling histrionics. Our democracy does not work that way.