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Breakdown of Budget Negotiations Was Inevitable

Led by Chief of Staff Jim Baker III, the Reagan White House was in a much better position to deliver the Republican votes needed to pass a deal on Social Security than Speaker John Boehner (R-Ohio) and Senate Minority Leader Mitch McConnell (R-Ky.) are today on the budget and debt ceiling. The same is true of the Obama administration: Itís not at all clear that Congressional Democrats will automatically agree to whatever the White House negotiates.

But the most important differences between the Greenspan commission and todayís situation are that there was widespread agreement in 1982 that Social Security was about to run out of cash for payments, and there was overwhelming concern about the political consequences if that were allowed to happen.

By contrast, there is no consensus about the Treasury Departmentís repeated warning that the United States will not have enough cash to pay all of its bills if the federal debt ceiling isnít raised by Aug. 2. Furthermore, there is no agreement that the nation will face political, financial or economic disaster if that happens.

This wasnít the case in April when Congress and the White House agreed to the continuing resolution for the rest of fiscal 2011; there was no doubt the government would shut down if a deal wasnít reached. That fiscal precipice and its political ramifications were obvious and impossible to ignore.

This is why the growing concern in financial markets about the debt ceiling situation and the increased coverage of that concern are actually very positive developments. Itís one thing for ďFiscal FitnessĒ to note that the number and price of credit default swaps on U.S. debt have been rising in recent weeks as Aug. 2 gets closer, but the growing concern becomes more obvious when publications such as the Economist report something similar, as U.S. economics editor Greg Ip did in the most recent issue. (Note: The Economist Group, which owns the Economist, also owns Roll Call.)

Increasingly negative market reaction to the debt ceiling problem will make 2011 far more like 1982 and, therefore, greatly increase the chance of resolving the situation by the deadline. Without that, some other key decision-maker will be in a position to take his ball and go home.

Stan Collender is a partner at Qorvis Communications and founder of the blog Capital Gains and Games. He is also the author of ďThe Guide to the Federal Budget.Ē

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