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Troubled by Debt Limit Despite Reassurances

For months, I have been exceedingly nervous about negotiations over the debt limit. Whenever I would say there was a real chance that we would falter and default, if only for a brief period, old political hands would say not to worry — that this had happened many times before, that we would get a deal because we had to get a deal and that the leaders, namely Speaker John Boehner (R-Ohio), were telling people privately that they understood defaulting on the debt was not allowable.

Of course, we have had endgame negotiations of this sort many times before, and game playing and posturing by partisans, with their positions, votes and rhetoric changing depending on which party controlled the White House. But the previous games were different; Members on both sides of the aisle (including then-Sen. Barack Obama) knew they could safely posture without any real danger of the debt limit vote going the wrong way, and they knew leaders were both mature enough and strong enough to find necessary compromises — as with all endgames, usually at the eleventh hour.

What is different now? First is that for the first time, ostensibly credible opinion leaders are making a case that breaching the debt limit is no big deal. They include Sen. Pat Toomey (R-Pa.), GOP presidential candidate Tim Pawlenty, billionaire hedge fund manager Stan Druckenmiller and a slew of conservative editorial writers, columnists and talk-show hosts. Their declarations have now been embraced by the lion’s share of Republican lawmakers — both making it easier for them to vote against the debt limit and making it harder for their leaders to justify any difficult concessions that they make to achieve a deal.

Second is that the endgame negotiations have a less firm drop-dead deadline that usually constrains the negotiations — as we saw with the continuing resolution, when everybody knew that at midnight on a date certain, without a deal, major parts of government would shut down. This time, some of the same opinion leaders above are scoffing at the Aug. 2 date announced by Treasury Secretary Timothy Geithner. If in fact the Aug. 2 date is reached without a debt limit increase, and Geithner says that actually we can go another several days or a week or longer, it will damage his credibility and make another deadline less meaningful. If the deadline is real, and Members don’t believe it, we could slide past it and experience that unprecedented guillotine.

Third is recent history. The last time we had a credible threat of financial Armageddon came in fall 2008, when every major figure in economics and finance believed and said we were teetering at the abyss of economic disaster — with the possibility of a global credit freeze bringing the global economy down with it, creating a major depression. The response, a form of triage, was the Troubled Asset Relief Program, crafted by President George W. Bush’s Treasury secretary, Hank Paulson, tweaked by Congress, and supported by all Congressional leaders and the two parties’ presidential candidates. It failed in the House, with a substantial majority of Republicans voting against it. Only after the Dow Jones Industrial Average dropped 700 points in response did Congress reconsider and pass TARP.

For all its imperfections, TARP will go down as a great success, at little or no cost to taxpayers. But it was deeply unpopular, and one can argue that former lawmakers such as Sen. Bob Bennett (R-Utah) and Rep. Bob Inglis (R-S.C.) lost their renominations and their seats in significant part because they supported their president and party leaders and voted for TARP.

The lesson here is twofold: No longer do establishment figures, whether in or out of politics, hold sway or have credibility with rank-and-file populist lawmakers. And many lawmakers who still might believe those establishment figures fear that if they act on that belief they will suffer the fate of Bennett, Inglis and others.

Fourth is the negotiating stance of Republican leaders, up to and including Boehner and Senate Minority Leader Mitch McConnell (Ky.). By repeatedly and publicly taking taxes off the table, saying that they will be happy to negotiate with the president and Democrats, so long as they just accede to the GOP wish list, they are making it harder to reach a deal that can stick. Of course, some of this is posturing for negotiations.

President Ronald Reagan was especially masterful at taking firm, hard-line stances repeatedly as his opponents moved toward him and then cutting a deal that made concessions at the end, and getting a better deal. But Reagan was almost always willing to compromise — as he did repeatedly on tax increases almost yearly from 1982 on — and Reagan had the credibility with his followers to make his concessions stick.

Especially after the CR deal showed that it was more flash and less substance, Boehner has known that he will face a bigger challenge on the debt limit. That may be one reason he turned the negotiations over to House Majority Leader Eric Cantor (R-Va.), who starts with more traction with the tea party/Republican Study Committee hard-liners in the GOP Conference.

But Cantor has now thrown the negotiating grenade back to Boehner; if after all these public statements, a deal includes some revenues, and especially includes a trigger mechanism that encompasses spending and taxes, which is the only kind that really works, can Boehner sell it to his rabble-rousing troops? Will he be willing to cut such a deal if it means revolt inside the Conference?

The markets have largely shrugged off the possibility that we will in fact breach the debt limit formally, if only for a day or week. Most of the pros agree. They are probably right. But I am still nervous.

Norman Ornstein is a resident scholar at the American Enterprise Institute.

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