Barack Obama needs to pull a rabbit out of his hat quickly before the game of debt brinkmanship in Washington damages more than just his own legacy.
The president, after months of parrying, pleading, and golfing green diplomacy, finally drew upon the full stature of his office to call Republicans back to the negotiating table over the debt ceiling crisis. In reply, Republican house speaker John Boehner said no.
The polarising events of Obama’s 12th solo presidential press conference on Wednesday reveal a great deal about the weakness of his presidency, but very little about the crisis the US faces if the debt deadlock continues.
The US government owes more than $US14.294 trillion, the current limit imposed by Congress. It hit that mark in May, and since then Treasury has suspended investments in federal retirement funds to keep within the law. Debt to its own workers isn’t included in that debt ceiling, so that’s the first liability to go unpaid.
The last time these extraordinary measures were taken it accompanied a government shutdown during the budget crisis between president Bill Clinton and then speaker Newt Gingrich. That’s not to say the debt ceiling has not been hit; it gets hit with every budget and increased accordingly. However, this time the Congress isn’t even leaving the administration sufficient funds to pay all its interest obligations.
The US Treasury has estimated that all extraordinary measures will run out on August 2, and the US will default, but exactly what happens then isn’t clear.
The stalemate sparked the IMF to break a tradition of not rebuking its host country, saying the US risks global repercussions and “severe shock” to the US economy: “These could take the form of a sudden increase in interest rates and/or a sovereign downgrade if an agreement on consolidation does not materialise or the debt ceiling is not raised soon enough.”
Current turmoil was undermining the recovery of the US financial system, the IMF warned, concluding that deficit reduction should begin next year and include spending cuts and tax increases through the elimination of special incentives and deductions. Essentially mirroring the plan the White House had hoped Republicans would accept.
The recklessness of this fight and the indifference Washington shows to the expected global impacts should give every country — and creditor — cause for concern. Confidence in US bonds was an effective definition of a AAA rating, but the petty dysfunction of Washington has a strangle on that golden goose. Yesterday’s US Treasury bond auction was the weakest it has been in a year, and continues a streak of disappointing bond auctions.
But US politicians are playing this game as if it has no impact beyond just 2012 campaign talking points and electoral fortunes of the marginal districts in the mid-western states.
Restoring confidence from this point won’t be easy, analysts are saying, and politicians on both sides have quite different ideas about how to do that. The only common ground is austerity measures, although the Democrats aren’t entirely happy at cutting scholarships, medical research and food-safety programs. Republican house leader Eric Cantor walked out of Vice-President Joe Biden’s talks last week saying the only way to show the world the US is serious about its deficit is to not raise taxes. After the talks collapsed, Obama made calls to congressional leaders on both sides hoping to find a centrist third way, as has become a hallmark of the president’s negotiating style. He expected leaders would rise to the occasion, given the stakes. Neither side gave ground. Instead the threats got worse.
Obama’s press conference, which carries much weight due to its relative infrequency, was what liberals had been asking him to do for the entire length of his presidency: use the office and its pulpit to call out the Republican Party on its unworkable position. Filled with barbs about the GOP wanting to keep tax breaks on “corporate jets for millionaires and billionaires”, it harked back to the language Obama used on the disastrous 2010 mid-term campaign trail. It offered no additional compromise, no new solution. It was the hail Mary play nobody expected, and it missed.
Speaker Boehner didn’t blink, issuing a statement calling Obama “AWOL” and sorely mistaken if he thinks any bill to raise the debt limit and raise taxes would pass. The American people, Boehner said, wanted the spending binge stopped before raising debt limit. All Obama did was upset the other side even more.
Every success of the Obama administration until now has been due to his ability to reach out to moderates with symbolic offers, such as the anti-abortion executive order that helped pass the health care reform, or agreeing to the Pentagon’s protracted timetable to end the Don’t Ask Don’t Tell gay ban. If he promises too much, then he risks the agreement not passing the Democrat-controlled Senate. In brinkmanship with either side, he is untested.
Puffing out his chest and shouting didn’t work, but Obama still has one painful option: he can call a partial shutdown of the government, enough to offset the roughly $120 billion per month in interest fees. It seems extreme, and it is, but with no other adults in the room Obama may have no choice.