Despite GOP claims to the contrary, the bill they passed last week was a straightforward extension of the debt ceiling. The gimmicks in the bill don’t matter … but the reordering of the coming fiscal deadlines do.
The House Republican leadership finally gave up its longstanding position that any increase in the debt-ceiling would have to be accompanied by spending cuts, equal to the dollar amount that the debt ceiling was raised. So score one for Obama. Apparently the GOP actually believed him this time when he insisted that he would not negotiate over the debt ceiling again.
Of course, John Boehner had to save a little face. So, the bill was nuanced in two ways.
First, instead of “raising” the debt ceiling, the legislation technically “suspended” the debt ceiling until May 19. This gives the very conservative wing of the Republican Party political cover — they can technically claim that they have never voted to raise the debt ceiling. Second, the bill included a provision that Congressmen would lose their pay if both the House and Senate did not pass budget blueprints.
Nancy Pelosi was right when she denounced it as a “gimmick.” The 27th Amendment prevents Congress from changing members’ pay in the middle of a session. So, their compensation would be impounded until the end of the term, but eventually they would get it.
While it may sound very grown-up and stern to insist that the House and Senate pass budgets in the next several months, there is no requirement that they actually agree on a budget, pass it and send it to the president for a signature. The requirement, in other words, doesn’t have a lot of teeth.
While the gimmicks included in this bill are irrelevant, the changed political climate is not. We face three significant fiscal inflection points over the next four months. (I omit the April 15 deadline imposed by the House’s debt ceiling legislation because I can’t imagine anyone really cares whether Congress is paid on time. Nor do members have enough buying power to notably affect GDP, Darrell Issa notwithstanding.)
March 1: This is the day the “sequester cuts” supposedly take effect. These massive, across-the-board spending cuts were Congress’ way of punishing itself for not agreeing to more nuanced method of deficit reduction within the confines of the “super-committee” of 2011. The fiscal cliff deal agreed to on New Year’s Day postponed these inevitable cuts for just two months, in hopes that Congress and the president can agree to pare them back.
If nothing is done, the cuts happen automatically. Economists agree that sucking a large amount of money out of the economy right now would be devastating to the recovery. The Defense Department will not be spared from the hatchet — and I suspect that when push comes to shove, even those fiscally conservative legislators will favor defense contractors in their districts over ideological purity. So it’s safe to assume the can will be kicked again for another month so that the two parties can work toward the next deadline.
March 27: This is the day that we could see the government shutdown. Government funding for six months was passed by “continuing resolution” back in September. In order for it to continue functioning, new legislation must be passed. A paralyzed federal government and full implementation of the sequester’s cuts would be a double whammy to the economy.
It would make sense for our elected leaders to deal with both of these issues simultaneously and craft an elegant legislative solution. In fact, a “grand bargain” on the budget could, in theory, address the sequester, government funding, deficit reduction and tax reform all in one fell swoop.
May 19: The debt ceiling must be raised again.
Clearly, the GOP believes that by caving on this most recent debt-ceiling agreement, they have strengthened their hand in the budget debates over the next several months. They may be right. Raising the debt ceiling cleanly was the rational thing to do, and the Republican Party does look more sensible afterward as a result. Obama’s debt-ceiling victory may turn out to be hollow. He still faces an obstinate minority, automatic undesirable budget cuts and the specter of legislating by crisis and deadline.
Given the dire possibilities facing the economy in the coming months, one might expect the markets to be jittery with uncertainty. So far, however, equities seem unfazed by the shenanigans of Congress. Investors and traders are expecting Congress to solve these looming problems sensibly.
Let’s hope they’re right, or we could all be in for a cold spring.