Debt problems weren’t a crisis, but will become one with default

President Obama – and presumably the Congressional Democrats that he thought he had on board – offered some big concessions last week in terms of the debt and deficits. No matter where they come from, $3 trillion in cuts including major changes to Medicare and Social Security can hardly be dismissed. As columnist Kathleen Parker said recently, that represents a “sea change.”

But on Friday, Republicans – this time it was House Speaker John Boehner – left the negotiating table in opposition to any tax increases at all.

Some quick thoughts on where we are and where we’re headed:

• We have to increase the debt limit. Some might prefer for this to be a symbolic vote on future spending, but it’s a straightforward procedural vote on spending money to pay off debts and obligations that have already been authorized by Congress. The federal government was running surpluses a decade ago, but since then we have been bringing in less than we’re spending, all while fighting in two major wars, making increased commitments to Medicare, allowing more seniors to begin drawing Social Security with the assumption of certain payments, etc.
• We have a large amount of debt right now and it’s great to see leaders taking it seriously. But it is not a “crisis.” If there were a crisis, we would be seeing turmoil in bond markets, investors dropping U.S. holdings, major drops in stocks, etc. In short, at least as of yesterday, the markets are assuming that the U.S. debt limit will be extended.
• If markets become truly concerned that the debt limit will not be extended and that the U.S. might actually default on some payments, then we could see some creeping panic. When that happens, maybe as early as this coming week, the pressure will build on Congressional Republicans. Default is serious business, and the current holders of U.S. debt don’t think it will happen. If it does happen, look out below.
• If Congress chooses to reject the grand deals on the table, then it will still have to craft legislation to get this done. That means a bill that will pass the Republican-controlled House, the Democratic-controlled Senate, and be signed by the Democratic President. In a word, that would seem to require compromise.
• I hear a lot of discussion of two particular ratios: federal spending compared to GDP, and federal debt compared to GDP. There has been little discussion about federal revenue compared to GDP, which – because of the weak economy during the recession and because of tax cuts under the Bush and Obama administrations – is at 50 year lows, and this year will be close to post WW II low of 1950. See this graph from Calculated Risk:
• I understand that some Obama detractors think he is not negotiating in good faith. To them I ask this: Why would Obama risk the political fallout from proposed cuts to Medicare and Social Security (have you seen the ads AARP is already running?) if he were not serious about making those cuts?
• Frankly, it might turn out that seniors rise up to fight cuts to Social Security and Medicare. The cuts Obama has conceded already are to the right of the average American voter, according to Gallup. If and when that happens, Obama will be in serious political jeopardy. But right wing Republicans will be in even more political jeopardy.