Occam's Razor

Predictably, Republicans walked away yesterday from negotiations on extending the federal debt ceiling. It was predictable but it was also childish. Led by House Majority Leader Eric Cantor, Republicans attending the talks led by Vice President Joe Biden said there was no point in continuing negotiations unless all tax increases were taken off the table.

Essentially, Republicans at the talks no longer believe in negotiations. By definition, when parties are negotiate each side has to compromise. In negotiation, no side gets to have it completely their way, particularly when Republicans control only one house of Congress. Republicans do not want negotiations; instead, they putting all their chips on the capitulation square.

That’s sticking to principle, but it’s not going over well with voters. Voters are completely comfortable with tax increases as part of reducing the deficit, particularly on the well off. Naturally, Republicans contend otherwise, although numerous polls contradict them. The only poll that seems to matter to Republicans are surveys of other Republicans. The rest of us are, after all, something lesser. We are those little people that the late Leona Helmsley despised. Yet voters, like Republicans, also suffer from cognitive dissonance. A majority of voters also do not favor extending the federal debt ceiling, so in that sense Republicans are following the will of the people. Voters also want to keep Medicare in its current form. Voters, like Republicans, want to have it both ways.

Only of course you can’t have it both ways. Our debt problem is a direct result of decades of doing just this. Republicans at least realize that if you cannot raise taxes then to reduce the deficit significantly you have to butcher entitlements like Medicare. If they succeed in their plan, then they guarantee their own political irrelevance in the next election. What is needed is some give and take. What is needed, frankly, is something rarely seen in Washington of late: statesmanship.

Statesmanship means looking out for the good of the nation as a whole instead of just your own partisan interests. It means that to achieve a larger goal, everyone has to make sacrifices. So far Democrats have given a lot, and have largely conceded on the point that expenditures need to go down to balance the budget. Now is time for Republicans to show some statesmanship as well and agree that at least some taxes need to be raised. Some of it can be done by removing subsidies, which, contrary to the opinions of Grover Norquist are not tax increases. In any event, when you have a budget deficit as large as we have now and have divided government, it cannot be fixed instantly. It happens slowly and incrementally. It’s very much like trying to instantly turn an aircraft carrier. You can’t turn one of them on a dime.

The federal government, for better or worse, is a huge institution and an economic machine with intricate ties into our economy. Defaulting on our debt would exacerbate our problems. It would make borrowing money more expensive. If we needed to fight another war, no matter how noble, and needed to borrow money to wage it, if we default we might not be able to do so. No one knows exactly what would happen if we did in fact default but almost everyone agrees it would be very bad. Some Republicans live in La-La Land, and think a short-term default would have no negative consequences but would give way for capitulation to their demands. If default happens, it is likely to be calamitous to economies and markets not just in the United States, but also across the world. Default is also the greatest way to ensure the irrelevance of the Republican Party. If they are seen in retrospect as responsible for default, a new depression is no way to garner political capital.

It may not be convenient and it may be politically painful, but this problem will resolve itself not through capitulation but only through negotiation. Where to go from here? Eric Cantor suggested that the big boys need to step up: President Obama, Speaker Boehner and Senate Majority Leader Reed have to cut a deal and try to sell it.

To make the deal though will take some external actors as well as some smart tactics. Thankfully, the external actors are already nervous. Bond rating firms are threatening to lower our nation’s bond ratings if an agreement is not in place by early July. This means fewer will want to lend to us, and those that do will demand higher interest rates. The biggest stick out there is probably the U.S. Chamber of Commerce, which has threatened to work against Republicans who refuse to extend the debt ceiling. Generally, only big business gets the undivided attention of Republicans.

Lastly, it’s time for the President to make an aggressive case to voters. Thus far he has been under the radar on the issue. It would involve not just Oval Office speeches, but going on the road, outlining the scope of the problem, making the case for tax increases as part of a solution, and noting that deep cuts have already been agreed to. He needs to use the power of his office to peel off just enough nervous Republicans to make a deal happen. He needs to paint a potential doomsday scenario if default occurs, and bring with him noted and credible authorities, like the president of the U.S. Chamber of Commerce and the Chairman of the Federal Reserve. There are still no guarantees, as Republicans are obviously not playing with a full deck. But it might work. If it doesn’t, it will be clear which party was not interested in negotiation, but only in capitulation.

To most Americans, the debt ceiling is abstract. They are against debt in general, but have little idea that not raising the debt ceiling means defaulting on our debt. They do understand the importance of having a job, so it will be important to make the link between a default and an economy that could tailspin.

The most likely outcome will be last minute incremental extensions to the debt ceiling without real political accommodation, simply dragging on political paralysis. The economy is faltering for many reasons, but given the huge effect of the federal government on the economy, what is really making everyone nervous is that Washington’s deeply partisan politicians simply refuse to give and take. Business likes predictability in affairs, and unless there is bipartisan plan forward, there will be none.