How the debt limit delay will affect US fiscal policy
By now, you know the great taxmageddon story: At the end of the year, a lame duck Congress and a new or newly re-elected president will face the confluence of three extraordinary challenges鈥攖he 2001/2003/2010 tax cuts , the automatic spending cuts adopted in 2010 begin to bite, and the Treasury loses its ability to borrow new money.
But what if that schedule is wrong? What if that third forcing issue鈥攈itting the statutory debt limit鈥攄oes not happen until sometime in the first quarter of 2013? That is increasingly likely, say the folks who watch this sort of thing. And it would completely change the politics of the coming train wreck.
Here鈥檚 what might happen:
Assume President Obama is re-elected. Separating the debt limit from those other fiscal issues strengthens his hand enormously in 2012.
It makes it much easier for him to push Congress to extend the 2001/2003 tax cuts for all but those聽making $200,000聽or more. Without the threat of a government shutdown, congressional Republicans lose their strongest leverage. And they鈥檇 have to explain why they forced a tax increase for nearly all Americans in order to preserve tax cuts for a handful of the wealthiest. Worse, they鈥檇 look like petulant losers.
The GOP hand will be weakened even more by the Congressional Budget Office鈥檚 that falling聽off the fiscal cliff would likely throw the nation聽back into recession. 聽
Obama could, in that environment, come off as the voice of reason鈥攖he role he loves to play more than any other. He could sweeten the pot by offering a deal to delay the automatic spending cuts (which almost no-one supports) and set a date in 2013 by which Congress would enact tax reform and, perhaps, additional spending reductions. He鈥檇 try to work a debt limit extension into the mix too. But worse case, he could put it off until say, March of 2013.
The more interesting speculation, however, is about what happens if Mitt Romney is elected President. If he wins in November, there will be no living human in America more anxious to have the debt limit resolved in 2012 than Romney. He would, I suspect, give up almost anything to avoid having to face the debt limit shortly after he is sworn in. I can hardly think of a less auspicious start to his presidency than a knock-down drag-out brawl over increasing government borrowing.
Just think about it. If he asks for a debt limit increase as one of his first acts in office, already-skeptical tea partiers would abandon him in droves. If he didn鈥檛, and allowed the nation鈥檚 borrowing authority to expire鈥�.Well, no self-respecting ex-Wall Street guy is going to do that.
As a result, a newly-elected Romney would put enormous pressure on congressional Republicans to make the debt limit issue go away. In 2012. That would mean convincing the lame duck Congress to quietly pass a one or two year聽increase.
Just defeated Democrats, who have spent the past year ripping Republicans for irresponsibly holding the debt limit hostage would, of course, switch roles and hold the debt limit hostage. Their price for dealing: Tax increases. Big. Fat. In-your-face-Grover-Norquist tax increases.
So watch what happens to that debt limit deadline. It could change everything.
