Dems in weak spot on debt

SF Examiner ^ | 5/24/11 | Conn Carroll

[markomalley]

Treasury Secretary Timothy Geithner announced May 16 that the U.S. government has reached its legal debt limit, and that he had to dip into federal pensions to meet the country’s obligations. And if Republicans stick to their demands for major spending cuts, Geithner is going to have to start getting even more creative. It wasn’t supposed to go like this.

When Democrats decided to pass on raising the nation’s $14.29 trillion debt limit during the 111th Congress’ lame duck session this December, the game plan for the 112th Congress was simple: scare “responsible” Republicans into voting to raise the debt limit, just as they were scared into voting for TARP. This would both negate charges that Democrats were the only party raising the country’s debt, and drive a wedge between Republican leaders in Congress and their tea party base.

At first, everything seemed to go according to plan. Geithner sent a scary letter to Congress warning of a financial crisis worse than 2008 if the debt limit was not raised before March 31. Republican congressional leaders even acknowledged that the debt limit had to be raised.

But the White House then made two mistakes: It believed its own news releases and underestimated the lessons of TARP. The two are related.

Many on the left seemed to actually believe the predictions of doom in Geithner’s first letter to Congress. Geithner claimed failure to raise the debt limit would force the Treasury Department “to default on legal obligations of the United States” causing “long-term negative impact on U.S. creditworthiness.” Geithner claimed, “Because Treasuries represent the benchmark borrowing rate for all other sectors, default would raise all borrowing costs … leading to reductions in spending and investment, which would cause job losses and business failures on a significant scale.”

But this reasoning assumes that markets treat all financial obligations equally. They don’t.

The other big mistake the Obama administration made was to forget how much skepticism TARP created in Congress about claims that the sky is falling. A number of incumbent senators (such as Utah Republican Bob Bennett) were forcibly retired by voters because they acted unquestioningly on such fears. As a result, the 112th Congress has a much stronger spine. And Geithner hasn’t helped matters by constantly shifting the date the world would end — beginning with March, then July, and now August.

The left’s response to this unexpected conservative resolve has been to call Republicans hostage takers. Paul Krugman is advising Obama to call the Republicans’ bluff and make them start shooting hostages. There is just one problem. Obama is the one holding the gun.

As the Government Accountability Office has certified, Geithner has complete authority over how to prioritize federal government payments. Over the next year, the U.S. government will have more than enough tax revenue to make interest payments on the debt, send out Social Security checks and pay the troops. The only reason the U.S. would ever default on its debt or miss a Social Security check would be because Geithner chose to fund other priorities instead.

Obama’s resulting bargaining position is quite weak. If he wants to raise the debt ceiling, he has only two alternatives — sign off on severe Republican spending cuts or on severe spending cuts by Geithner.

All this could have avoided by raising the debt limit when Democrats had control of Congress back in December. They thought they were being clever by forcing Republicans to buy in. They appear to have miscalculated.

[sickoflibs]

RE :”Dems fear “the label” - they don't fear taxing ans spending.”

I think their original plan was to raise taxes after the economy made a major recovery, which they thought would be well before the 2010 midterms.(as did some Republicans) If the economy significantly recovered by early 2010 Obama could have got away with tax increases and still got re-elected as well as held the house in 2010. It would have been his economic ‘kill Bin laden’ scenario for Obama.

But the economy was worse than they thought and what they did was the wrong things and so it crapped out again last year, not helped by Greece. That helped poison support for Obama-care too. So what was their best political option? Stage a defeat (surrender) on taxes, tell their base they had no choice(that progressive base is very unhappy over this too), and use the issue to cloud the ‘we are broke’ Republican moral argument on debt and deficit reduction. That was their best play of the hand they had. It is now being used effectively to generate opposition to the Ryan plan.

[dalebert]

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