Debt Ceiling Fight Could Be Train Wreck

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By Sean West

As I suggested likely in these pages, Congress and President Barack Obama managed to find a way to avert the dreaded fiscal cliff with a good enough deal to raise some new tax revenue but avoid a massive tax rate increase as well as automatic spending cuts. What they didn’t do was create a new form of bipartisan political interaction that gives reason to be optimistic about how they will address the debt limit and government spending decisions that loom in just a few weeks.

While lawmakers can be proud that they exceeded the expectations of many by not allowing a massive growth shock, the real story of the fiscal cliff is one of opportunity cost. President Obama and Speaker John Boehner had a chance to set in motion a new form of bipartisan cooperation. Even if they failed to agree to the larger framework deal that keeps escaping them, it would have been a far better sign for the future if the cliff deal had been brokered directly by the two people in Washington with real power. Instead, it was left to their respective surrogate and colleague -- Vice President Joe Biden and Senate Minority Leader Mitch McConnell -- to broker a last-minute deal.

Trouble is, the Biden-McConnell troupe is likely a one-hit wonder. House Republicans feel they were fleeced by their Senate counterparts; it’s hard to see the House abdicating responsibility to the Senate again in the near future. And Obama -- by letting Biden broker a deal many congressional Democrats dislike while the president  stoked public support for the administration’s position -- increased bad blood both within his own party and also with House Republicans, with whom he will have to deal in the weeks ahead. In the process, however, Obama did manage to secure a major tactical victory; the deal satisfied many of his policy goals.

It’s too early to say that the debt limit negotiations will necessarily be a train wreck, but the last few weeks provide little reason to be too optimistic that politics will soon change for the better. Obama could upend political dynamics by taking a different approach to his second term. He could set a new, more bipartisan tone in his inaugural and State of the Union addresses, perhaps shaking the dynamic of brinkmanship and last minute-ism that has taken hold. House Republicans -- with a reduced caucus due to the loss of eight seats in November's election -- may well find themselves approaching budgetary battles differently than they have in the past. But there’s no evidence either side intends to follow a new script.

So we’re left looking forward to a debt ceiling, sequestration, and continuing resolution fight that may be nastier than the fiscal cliff imbroglio. At least in the case of the cliff, both sides had aligned incentives in that neither actually wanted across-the-board tax increases or spending cuts to take hold. But the incentives are now much different. Obama wants to break the Republican desire to extract dollar-for-dollar spending cuts for debt ceiling increases by refusing to negotiate on the issue. And unless Obama gives House Republicans significant spending cuts -- or at least a credible illusion of them -- they are going to hold out until the bitter end on increasing the debt limit.

While I was one of few optimists about the chance of a fiscal cliff deal, I am cautious about the path forward.

(Sean West is head of the United States practice at Eurasia Group, a global political risk advisory firm. Follow him on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.



-0- Jan/03/2013 13:55 GMT