The negotiations over the remaining items in the “fiscal cliff” are once again stalled, as Democrats hope to get another “three minute bill” through Congress to continue current spending levels. Congress has three looming deadlines:
- Automatic across the board spending cuts, also known as the “sequester”, will take place on March 1, 2013
- The statutory authority of the U.S. Treasury to continue to fund U.S. debt obligations will cease on March 8, 2013
- On March 27, 2013, the “continuing resolution”, which is currently funding federal agencies and programs, including the Defense Department, expires, and with no current federal budget in place, a failure by Congress to reach an agreement would effectively shut down federal government operations.
Currently there are no ongoing negotiations between Democrats and Republicans, and while both sides are saying that they expect those negotiations to resume later this month, no new date for talks has been agreed to. The current lack of a federal budget, and the willingness of President Barack Obama and Democrats to push for another “continuing resolution”, instead of seeking a budget deal for the remainder of 2013, is creating further tensions between the two sides.
Republicans are now saying that the White House has reversed its position on spending cuts, after promising cuts during the negotiations over the “fiscal cliff”. Democrats dragged their feet during those negotiations, resulting in a bill that was seen by Senators only three minutes before it was scheduled for a vote in the U.S. Senate. President Obama had claimed that he was for a “balanced approach” in tackling the “fiscal cliff”, but once the agreement was approved by Congress, President Obama reversed course. President Obama has vowed that there will be “no negotiations” in his demand that the debt ceiling be raised by $2 trillion dollars, and that he expects for Congress to add additional taxes upon high income earners and corporations before he can consider any reductions in spending.
President Obama has mentioned only one item that he might consider cuts to: Medicare. However, the President has not been specific about any cuts to Medicare that he and the Democrats would be willing to consider. Ratcheting up tensions even higher, Senator Charles Schumer (D-NY) said on Friday that Democrats have no intention of negotiating over an increase in the debt limit, and that any bill that Republicans want for raising the ceiling must be “clean”, meaning that the bill cannot have spending cuts included. Schumer believes that if Democrats continue to stonewall the Republicans, Republicans will be forced to give in to President Obama’s demand, and raise the debt ceiling without any spending cuts from his side. Speaking to the matter, Schumer said, “If they realize for sure that they’re not going to have a negotiating partner, they’ll have to find another route to bring the change that they want and they won’t risk the full faith and credit of the United States. The only way they get leverage is when they think we might negotiate on those issues. There was a very sad moment in 2011 when that happened. And I think there’s a strong consensus at both ends of Pennsylvania Avenue among Democrats not to repeat what I would call — I think what most of us would regard — as a mistake.”
House Majority Leader John Boehner (R-OH) shot back at the number three Democrat in the Senate, insisting that House Republicans will demand one dollar in spending cuts for every dollar that President Obama wants to raise the debt ceiling. Boehner’s spokesperson Michael Steele, speaking to Obama’s insistence that he will not negotiate over the debt ceiling, said “wishful thinking is not a solution.”
Senate Republicans are turning up the heat on Barack Obama while the President is still on vacation in Hawaii. Senator John Cornyn (R-TX), writing in an op-ed piece for the Houston Chronicle, had this to say about President Obama’s demands: “It may be necessary to partially shut down the government in order to secure the long-term fiscal well being of our country, rather than plod along the path of Greece, Italy and Spain. President Obama needs to take note of this reality and put forward a plan to avoid it immediately.” Senate Minority Leader Mitch McConnell, in an op-ed piece for Yahoo News, said that the President is in a fight, right now, over the debt ceiling, like it or not. “The President may not want to have a fight about government spending over the next few months, but it’s the fight he is going to have, because it’s a debate the country needs. For the sake of our future, the President must show up to this debate early and convince his party to do something that neither he nor they have been willing to do until now. Over the next two months they need to deliver the same kind of bipartisan resolution to the spending problem we have now achieved on revenue — before the 11th hour”, wrote McConnell.
The President did not wait long after the fiscal cliff deal had been signed to demand even more revenue to push forward on his 2013 agenda that does not include spending cuts. In his Saturday radio and internet address, President Obama had this to say: “If Congress refuses to give the United States the ability to pay its bills on time, the consequences for the entire global economy could be catastrophic.” Obama went further to signal that he expects more revenue to be part of any deal over the sequester, saying that if elected officials from both parties “focus on the interests of our country above the interests of party, I’m convinced we can cut spending and raise revenue in a manner that reduces our deficit and protects the middle class”. However, President Obama neglected to mention specific areas of the federal government where he is willing to cut spending.
The President’s choice to ignore calls for spending cuts has resulted in an announcement, from Secretary of Defense Leon Panetta, that the Department of Defense has begun planning to implement the sequester. The Secretary has sent notice that many within the 800,000 strong civilian component of DOD could face furloughs if the sequester is triggered. DOD is scrambling to prepare for what would amount to a $600 billion reduction in spending over the next ten years, on top of $485 billion in reductions that have already been worked into the agency’s current budget. Panetta has said that further reductions to defense spending would result in a reduction in maintenance and troop readiness exercises, base support services, Tricare services, facility and commissary hours and defense contracting work. These cuts could result in increased threat levels for U.S. forces in areas of heightened tensions around the globe, in Africa and the Middle East, as well as lead to an accelerated departure schedule for forces currently stationed in Afghanistan; something that NATO is not prepared for right now.
The ability for the federal government to continue to borrow has been further reduced since the U.S. exceeded the debt limit. In a letter to the Senate Majority Leader Harry Reid (D-NV), Treasury Secretary Timothy Geitner announced that the Treasury Department would cease investments in both the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund, and that a portion of the federal government’s investment into both funds would be redeemed. Reports have surfaced that Geithner will be resigning his post at the end of January, leaving the White House scrambling to find a replacement. Bloomberg news has speculated that Jack Lew, the current White House Chief of Staff, is the leading candidate according to President Obama, however Lew’s lack of significant experience in the financial world has sent chills throughout the back rooms of Wall Street, and many analysts expect for rates on U.S. debt to begin climbing as a result. This development is going to significantly raise borrowing costs for the federal government, increasing the risk that the U.S. could default on its obligations as early as February 25. The Treasury Dept. had previously said that on December 28, it would suspend issuance of state and local government securities, also known as “slugs”, as the first of a series of measures, to enable continued operation of the federal government through the end of February.
It appears that if Congress votes to extend the debt limit, that extension would have to be approved by as early as February 22. With the President refusing to agree to spending cuts, and demanding more tax increases, in order to get an agreement with Republicans that he can refer to as a “balanced approach”, it appears that the President believes he can force the hand of Republicans, and is prepared to “slow walk” the negotiations until he gets his way on even more taxes for the wealthy, and for corporations. With the presidential election over, President Obama does not have to ask for political contributions from Wall Street bankers and investment firms, leaving him free to demand more taxes on both. Obama keeps saying that he is willing to agree to spending cuts, but by not mentioning them, he is saying that they are effectively off the table, setting up a bitter fight between Democrats and Republicans in Congress, as well as another potential downgrade of the U.S. credit rating. Any further downgrades to the credit rating of the United States would lead to higher interest rates for all borrowers, not just the federal government. During the 2011 debt ceiling crisis, the Center for American Progress issued a report highlighting the risks to not only retirement accounts of ordinary Americans, but also pointed to the risk of higher interests rates for Americans of all economic classes; not just the wealthy. These risks, believed to have been resolved in the 2011 debt ceiling increase, have come back with even more vigor than before, and that has investors around the world worried.
Is it possible for President Obama to get an increase in the debt ceiling without any spending cuts? His view is that since Republicans were forced to give in on a one year extension of the Farm Bill, and $80 billion in new food stamp funding, in addition to allowing the top individual tax rate to be raised from 35% to 39.6%, along with other increases in revenue, he can easily win Round 2 of the “fiscal cliff” fight and come out unscathed. Obama believes, deep down, that if he uses the “bully pulpit” often enough between now and the end of February, that Republicans will have to either bite the bullet on higher taxes, or he will allow the sequester to happen, triggering massive cuts in defense spending, and forcing Republicans to accept permanent reductions in U.S. military spending, while maintaining current levels of funding for entitlements and Obama’s social spending initiatives. While Obama is speaking of cuts to Medicare, the only cuts he has been willing to agree to have been cuts to defense spending that Republicans have proposed. Essentially, Barack Obama knows that if he can win this fight in Round 2, he will have effectively gained control of the U.S. House, and with it, the power to decide how money is spent by the federal government.
The real question is whether or not Republicans are willing to be co-opted by the President a second time around. Obama’s 58 House Republicans in his “debt coalition” were willing to break ranks with the position of House Majority Leader Eric Cantor (R-VA), during the fight over taxes during the “fiscal cliff” negotiations last month, to keep food stamp and IRS tax benefits flowing to those who pay nothing in federal taxes. While the public position, being established by the Republican leadership in Congress regarding the debt ceiling, is that there will be no increase in the debt ceiling without significant spending cuts within the federal budget, the truth of the matter is that, at least behind the scenes, the word is that the same 58 Republicans may, in fact, be ready to jump ship again in order to avoid a second downgrade of the U.S. credit rating. If the same group of Republicans, who voted for the “fiscal cliff” deal, decide to vote with Democrats to approve a $2 trillion increase in the debt ceiling, without any spending cuts, it will lead to a split in the Republican party.
Getting the Republicans to abandon their own principles on fiscal restraint has been the Obama strategy on the fiscal cliff from day one. By orchestrating the creation of a caucus, within the Republican party, that gives him a solid majority of more than 230 votes in the House, President Obama has proven that he has the capacity to get his way, even when his party does not have control of the House. So long as Republicans are willing to give Barack Obama what he wants, there will be nothing to prevent a double, and soon, triple digit national debt total for the U.S. The “debt coalition” has already proven that they are willing to go along with even more spending, and more taxes on the wealthy. The question is not if these 58 House Republicans will abandon the fiscal principles of their own party again, but when.