The Republicans Have Won. Will They Get Out of Their Own Way?

The GOP came to the debt ceiling fight with goals of avoiding a deal where they have to vote for tax increases and preventing President Obama from getting a political victory.  Given what US House Speaker Boehner and Senate Majority Leader Reid are working on today — new debt-reduction proposals without tax increases — the Republicans have won.  The question is, will they now stop fighting and declare victory?  If they keep pushing the Tea Party agenda, they will snatch defeat from the jaws of victory. 

Last week pollster Mark Blumenthal examined the findings of last week’s various polls of the public on the debt ceiling fight.  First: “Americans prefer a deal featuring a mix of tax hikes and spending cuts to a deal featuring just spending cuts.” Second: “most of the surveys find strong sentiment in favor of compromise, especially among Democrats and independents.” Finally: “the surveys all show Americans expressing significantly more confidence and trust in President Obama’s handling of the issue than of either the Republican or Democratic leadership in Congress.” Polling today showed economic pessimism in the US at its highest point in 15 years.  When asked whether the policies of President Barack Obama and the Democrats or President George W. Bush and the Republicans were more responsible for the economy’s current condition, 29 percent pointed to Obama while 57 percent pointed to the GOP.

The GOP has the upper hand now because the debt ceiling needs to be raised and can’t be raised without their votes. But the public doesn’t support their position or their leadership. Democrats are desperate to avoid a debt crisis that could stall the sputtering economy. But if the GOP overplays their hand, they will lose, as the public is insisting Congress avoid a preventable economic calamity, and they’re ready to blame the GOP if one happens.

But there’s plenty of evidence that the Tea Party tail is wagging the Republican dog, and that the GOP intends to stay in its foxhole rather than declare victory and go home.  Yesterday the House and Senate Tea Party Caucuses introduced a bill that would direct Obama to prioritize federal payments to the nation’s creditors, Social Security recipients and soldiers serving in Afghanistan and Iraq.  No mention of Medicare in there, by the way. 

So how long could this national nightmare go on for?  In his remarks Friday, the President insisted that any debt limit extension be ‘through the next election, into 2013.’ He has threatened to veto a shorter term increase.  Over the last 20 years the nation acted 44 times to increase the debt limit. Ten of those 44 times the extension lasted more than a year.

I’ve always believed markets are the best predictor of events.  Over at InTrade, the online futures market, the betting money is that there is only a 28% chance the government will raise the debt ceiling before the August 2 deadline, rising to a 75% chance by the end of August; and a 64% chance that the US’s AAA rating will be downgraded by the end of the year. 

My call: I don’t see a path to a deal in time. I bet we default on August 2 but enact a short-term increase to the debt ceiling sometime in August.  It’ll be tied to some novel process to make the requisite cuts on a fast track through Congress later this year.  The credit ratings agencies will see this continuing drama and begin downgrading US creditworthiness.  A month or more goes by where tough decisions on which Federal bills to pay must be made — and in one of those months, Medicare payments aren’t made.  Seniors go wolfpack wild and light up the phones on the Hill.  Congress sees the mushroom cloud on Wall Street and gets its act together sometime in the fall, agreeing on just enough cuts to satisfy Wall Street. 

But the damage will be done, and Obama will sail into 2012 on a campaign of being the last reasonable guy standing in Washington.  And he’ll win — all because the GOP didn’t know when to stop fighting this week.

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