Goldman's Alec Phillips warns that the upcoming fight over lifting the debt ceiling could be harder than the 2012 fight, which was brutal and confidence crushing.
Unfortunately, the upcoming increase may be more difficult to enact than the increase in 2011. Few spending cuts had been enacted before the previous increase, which left lawmakers with several areas of the budget from which to pull potential savings. Congress eventually settled on $2.1 trillion in spending cuts, essentially all coming from a reduction in spending appropriated by Congress (about $900bn from caps on "discretionary" spending, and $1.2 trillion from "sequestration"). While hardly non-controversial, these cuts did not affect specific programs but instead capped overall spending, thus reducing political opposition. The fiscal agreement Congress just passed increases revenues by about $600bn over 10 years (compared with a full extension of expiring income tax cuts), and while this second round of savings was much more controversial than the first, a majority of the public supported the tax increase, which was targeted on high incomes.
More specifically. Suppose the Congress wants to raise the debt ceiling by $1 trillion, then that means an addition $1 trillion in cuts must be found.
But this is not easy. For one thing, no party has identified where they would find another $1 trillion in cuts to discretionary spending. Furthermore, if the cuts are going to come from entitlements, then Obama would demand that there also be new taxes, which the GOP won't accept. And beyond that, Obama has already said he won't negotiate cuts for a debt ceiling hike this time.
These factors imply that the next debt limit increase will be at least as difficult to enact as the last one was, and that there is a clear possibility of breaching the limit and causing more significant disruptions to government financing. Phillips is not alone in worrying.
Phillip Klein at the Washington Examiner says the same thing in a column tonight, that the debt ceiling could be harder this time around. His logic is similar to Goldman's: There just aren't obvious avenues to cuts:
This time, however, it will be more difficult for Republicans to get Democrats to agree to spending cuts. In the summer of 2011, both parties were essentially placing bets on the outcome of the 2012 election. With Obama re-elected and Democrats still controlling the Senate, Democrats believe they are in a stronger position.
The 2011 debt-limit deal reduced projected spending by about $917 billion. There isn't much desire among victorious Democrats to cut discretionary spending further, and there is deep resistance to cutting mandatory spending by reforming the big entitlement programs -- Medicare, Medicaid and Social Security.
Congress is also running out of gimmicks. Scrambling to come up with further spending cuts during the 2011 debt-limit fight, lawmakers created a bipartisan, bicameral 12-member "super committee" tasked with finding at least $1.2 trillion in deficit reduction. In theory, the members would be motivated to act, or else face automatic cuts to defense and nondefense spending at the start of 2013. They failed to come up with a solution, but this week's fiscal cliff deal delayed the automatic cuts -- or sequester -- for another two months.
We wrote a few days ago that it was quickly becoming clear why The Boehner Rule (the principle that any debt ceiling hike has to correspond with a dollar-for-dollar cut in spending) is so ridiculous and unsustainable.
There just aren't obvious areas that anyone could possibly agree to find $1 trillion cuts every year. It's already significantly harder than it was just in 2011.
By the way: Goldman estimates that March 1 will be the day the US hits the hard debt ceiling. That's also the same day, coincidentally (?) that the sequester is supposed to kick in. Circle it on your calendars.
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