Belmont Club

Idle Speculation

Rep. Paul Ryan and his crew were reported to be acting as the general staff for the Republicans in the debt limit confrontation, developing ideas and drafts for a bill that may come to the floor Tuesday. Ryan declined to say what was in the works. But Neil Johnson at the Gazette Extra asked Ryan a few questions to dredge up some indications of what factors are in play.

The fact that Ryan was given the general staff task is interesting in itself. It suggests two things. That any strategy will be centered around Ryan’s context because the task was delegated to him and that Ryan’s point of view now has mainstream legitimacy within the GOP. Here is their exchange. The comments in italics are mine.

Q: U.S. Sen. Mitch McConnell has floated a compromise that could lay the debt ceiling increase in the hands of the President Barack Obama and couple it with a plan with federal spending cuts, which Republicans suggest could total $1.5 trillion. That’s less than the $2.4 trillion in cuts Republicans say is needed to balance out the debt limit increase proposed by the White House. Where do you stand on this sort of a compromise?

A: “I’m withholding judgment on it right now. I’d like to see the details instead of making positions based on hypotheticals. That idea is still alive, it’s still discussed. Right now, our (Republican) negotiators are trying to get to spending cuts. … The question is how much spending cuts we can get from this president. Clearly not enough to fix our fiscal problems.”

Q: But is this kind of compromise a step in the direction in which a solution is likely to come?

A: “Look, no matter how much the president wants to raise taxes, you can’t address this problem with tax increases. Spending is the problem. … The kinds of spending cuts being talked about fall so far short of what’s necessary to avoid a debt crisis in this country. … This moment I don’t believe will be the one where we’ll solve all of our fiscal problems, but we’ll get a down payment on them.”

Ryan is not ruling out a McConnell’s proposal, but his subsequent remarks suggest that a ‘big solution’ is less likely than a smaller one that raises the limit partially, mostly on the strength of spending cuts.

Q: Some Republicans in Congress have warned the GOP could stand to take blame from the president for a bad economy if the federal government doesn’t reach a solution on its debt limit by Aug. 2. Officials from the Federal Reserve and major American banks have warned a default would mean a financial mess, saying it would be akin to the federal government shooting the U.S. economy in the foot. Are you concerned by those implications?

A: “Of course I’m concerned if we actually had a default. Of course. I think default is highly unlikely. … I think … nobody is adopting a strategy of moving us toward default. The problem is if we just raise the debt limit without doing anything, like the president has asked, that, too, will undermine confidence in the bond markets and could trigger a debt downgrade. … We (Republicans) are trying to get some spending controls so we can get a down payment on the problem to avoid a debt crisis.”

Ryan is not completely buying the choice of ‘cave into the President or face a default’. He may call the bluff and raise one of his own: ‘Mr. President, if we give you what your asking for the bond markets will punish you for carrying more debt.’

Q: Some Republican lawmakers seem to be leaning toward a compromise with the White House on the debt ceiling, while some freshman Republicans continue to only want deep spending cuts. Some consider this a major division in the Republican Party and put it at the heart of the political deadlock on the issue. Where do you stand? Do you think there’s a major division among Republicans?

A: “It’s not a division within the party. It’s more of an argument over tactics, not principals. An example is (U.S. Rep.) Michele (Bachmann). She’s probably the most prominent ‘I will vote for nothing’ person. She’s said under no circumstances will she vote for a debt limit increase. It’s a position derived out of frustration with all the spending and the desire to reduce spending and cut government. Anybody who’s fighting for fiscal responsibility on our side of the aisle shares those principals. It’s just that some people differ over tactics.

“I believe it’s important that we cut spending to keep our interest rates low so our economy has a chance to heal. That’s what’s most important, here.”

Ryan seems to be saying that there are no strategic differences within the Republican Party over whether or not to oppose the President. In that there is unity. The debate is over the tactics, about which he is saying nothing. Interestingly, Ryan gives no indication over whether an agreement on tactics is possible or whether the disagreements will manifest themselves in split efforts within Republican ranks. But he does seem to vaguely imply whatever his staff has up their sleeve can bring even Bachmann aboard.

Q: Moody’s Investor Services is reviewing a possible downgrade of the U.S. government’s bond rating over the specter of a default and unpaid debt. And credit rating agency Standard and Poor’s said because of the impasse, there’s a 50 percent chance it could downgrade the government’s credit in coming months. What are your thoughts?

A: “These warnings were coming with or without this impasse over the debt limit. They were coming because of our fiscal problems. It was becoming clear that our government wasn’t getting our fiscal house in order. This impasse shows you the difficulty we’re having in cutting a modest amount of spending over a 10-year period. … We’re spending money we don’t have. Our debt has skyrocketed.”

Q: Do you think the warnings should come as a wakeup call for both Republicans and Democrats?

A: “If it came as a shock to anyone, I hope it will serve as a wakeup call.”

Ryan is reemphasizing the message that the bond crisis is here to stay. Whether the Republicans cave, which he implies they will not, or whether they continue to resist the President, the countdown on the dollar has started.  This fuse will keep burning beyond whatever deal is reached and it is an open question whether or not it will reach the powderkeg despite everything.

From Ryan’s remarks one can deduce that a reasonable degree of competent strategic thinking has been going on. You could do worse. In terms of what will actually be proposed, if I were to guess, the Congressional response would be to give the President some kind of take-it-or-leave-it partial rise on the debt limit based mostly on spending cuts. That would put the ball in the President’s court. The President would probably reject it.

At that point one should watch the bond markets. Both sides will interpret its gyrations to support their point of view. But given the volatility of the world economic situation it will probably be impossible to game the outcome of Ryan’s move. Europe’s woes may suddenly become an external influence. Or perhaps something else may happen next week to scramble the picture. My guess is that Ryan doesn’t know what will happen next either. But he is willing to toss the cherry bomb into the Democrat’s court to find out and that will play out in all kinds of legislative maneuvering and more conferences in the coming days.

One unnoticed factor here is that Obama, by not coming up with a plan of his own has perhaps unwittingly ceded to the Republicans the initiative. By doing this, the President may have made a mistake. Obama and the Dems are waiting on the GOP proposal. They can guess, but can’t be sure what’s in it. Therefore Ryan and his boys, by knowing what’s in it, have a 24 hour information cycle advantage going in while the Dems figure out their response, especially since the Congressional Democrats have to coordinate with the President. Basically it looks like the GOP will be able to return the serve. They’re playing for an error.

What are the chances the President will make one? So far, Obama is critically depending on his “air cover”, ie his advantage with the media. He ceded the initiative to the Republicans because he can punish them from the network heights as they scuttle around under his gaze. So he lets them scurry, hurling his thunderbolts from the White House.  The problem with this, as the European sovereign default crisis showed, is that the narrative can break. The President can lose credibility beyond the ability of his “air cover” to compensate. And then he will find the fact that he’s opted for all-or-nothing very expensive.

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