Default Is Well-Played Threat as Republicans Press Spending Cuts

When House Majority Leader Eric Cantor walked out on the bipartisan debt-ceiling talks in late June, all of Washington professed shock. For some cable news addicts, it rivaled the Casey Anthony trial in its titillation factor.

Opinion writers and Democrats warned that Cantor was sacrificing the global economy for the sake of politics. The Republicans seemed to be playing brinkmanship with the debt ceiling, which the Obama administration says must be raised by Aug. 2 to avoid a U.S. default.

It’s time to take a deep breath and stop fretting because the likelihood the U.S. will default on its debt obligations is very slim, Bloomberg Businessweek reports in its July 11 issue. Republican leaders may engage in some theatrics, yet in the end they will almost certainly take their bows and allow the curtain to close without incident. Republican leaders have professed in unwavering terms that there will ultimately be a happy ending.

“Nobody believes the United States is going to walk away from its obligations,” House Speaker John Boehner told Fox News on June 28. A month earlier, he told financiers at the Economic Club of New York that letting the debt talks fail would be “irresponsible.”

Boehner has been hammering at the same point since just days after the November elections, which returned the Republican Party to power in the House.

Deal ‘as Adults’

“We’re going to have to deal with it as adults,” he said to reporters then, explaining that he was already talking to newly elected Republican lawmakers to impress on them the importance of preventing a default. “Whether we like it or not, the federal government has obligations, and we have obligations on our part,” he said.

Republican leaders share that sentiment. Just a few months before his walkout prompted headlines, Cantor, the No. 2 House Republican, was lecturing his party’s rank and file on why they can’t let the U.S. default.

During a private January retreat attended by more than 200 House Republicans at a waterfront hotel in Baltimore, Cantor implored the politicians to view the debt negotiations as a “leverage moment,” according to a person close to the representative. Cantor never suggested that allowing a default was even a possibility.

Policy Goals

Seeking to use the debt discussions to score policy victories, Republicans are demanding big spending cuts from the Democrats. Republicans also want to slash entitlement programs such as Medicare. And so far they’ve held firm against Democrats’ demands to increase government revenue by ending subsidies for oil and gas companies and tax breaks for businesses and the wealthy.

Cantor said on July 6 that Republicans would agree to close tax loopholes only if they are “coupled with offsetting tax cuts somewhere else,” something the Democrats are loath to do. The Republican stand plays well with its base, especially budget-conscious Tea Party backers such as Michele Bachmann, the Minnesota representative and Republican presidential contender.

Still, at the same time it is making demands, the Republican leadership is suggesting that Tea Partiers shouldn’t expect to get everything they want during the debt-ceiling talks.

At the Baltimore retreat, Cantor urged his colleagues to think of the debt ceiling issue as the second of “three bites at the apple.”

Last Year’s Talks

The first bite came in the form of the 2011 budget negotiations, which almost ended in a government shutdown in April but instead resulted in a compromise that included $38 billion in spending cuts Republicans favored. The leadership wants to build on those gains during the debt-ceiling negotiations and sees the 2012 budget talks as another chance to extract spending cuts from Democrats.

Republicans’ pragmatism is motivated in part by the memory of 1995-96, when a congressional budget impasse led to two government shutdowns -- and the Republican leadership got the blame.

That episode is “a scar that doesn’t go away,” says Michael Franc, president for government studies at the Heritage Foundation, which backs limited government.

Then there is the money issue. In the 2010 elections, Republicans took in the majority of donations from the securities sector and hedge funds. Both groups sided with Democrats in 2008.

Wall Street Money

That money is “up for grabs” again in 2012, says John Pitney, a political scientist at Claremont McKenna College in Claremont, California. Republican leaders are eager for Wall Street to know the party won’t trigger a financial apocalypse, he says.

Republicans don’t have much incentive to strike a deal before Zero Hour. Brinkmanship worked well for them during the April budget negotiations, when they came to an agreement just hours before the deadline.

One possible outcome: The two sides could make a temporary agreement to delay the day of reckoning, forcing them to revisit the debt limit again before the 2012 elections.

There may be plenty of prime-time drama on the way to the deal, with Democrats such as Senator Charles Schumer of New York accusing the other side of trying to sabotage the economy, and Republicans such as South Carolina Senator Jim DeMint saying the Obama administration is “playing chicken.” In the end, one or both drivers will swerve.

To contact the reporter on this story: Laura Litvan in Washington at llitvan@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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