Falling back to the debt ceiling?

We’ve hashed out the political dynamics of the fiscal cliff a number of times, with its ever-diminishing options for House Republicans.  The New York Times’s Jonathan Weisman hears from aides in House Republican leadership that if Democrats won’t negotiate in good faith to resolve entitlements as well as revenues, the GOP may just extend the middle-class tax rates and wait until Barack Obama needs to borrow more money to cover costs for the former:

With President Obama insisting on higher tax rates for affluent Americans and winning public support for the idea, Congressional Republicans find themselves in an increasingly difficult political spot and are quietly beginning to look for a way out.

Senior Republican leadership aides say they are contemplating a fallback position since a standoff over expiring tax rates will be portrayed by Democrats as evidence that the opposition is willing to allow taxes to rise on the middle class to keep taxes from rising on the rich — and their intransigence could mean taxes go up on rich, poor and middle class alike.

The leadership officials now say that if no deal can be struck to avert the automatic expiration of all the Bush-era tax cuts and the onset of deep, across-the-board spending cuts, they could foresee taking up and passing legislation this month to extend the tax cuts for the middle class and then resume the bitter fight over spending and taxes as the nation approaches the next hard deadline: its statutory borrowing limit, which could be reached in late January or February.

Why take that option?  Because thanks to the sequestration deal from the summer of 2011, Democrats have no real reason to negotiate before the end of the year:

But Republicans also know they have a problem: many liberal Democrats are more than willing to return to the Clinton-era tax code, and to allow across-the-board spending cuts to take effect, which disproportionately affect the military, rather than compromise too much with Republicans after the strong Democratic showing in the elections.

“It’s a terrible position because by default, Democrats get what they want,” said Representative James Lankford, Republican of Oklahoma, who admitted his party is boxed in.

The fight looks better when the debt ceiling comes into play, which won’t happen for a couple of months:

In the debt ceiling fight, the tables might turn. Many conservative Republicans say they are willing to let the nation default if Congress refuses to cut spending. If the tax rate fight is resolved by the time the debt limit increase is needed, Democrats will find themselves without the leverage they now have with the expiration of the lower tax rates a certainty unless Congress acts affirmatively.

Greg Sargent believes that Republicans are fooling themselves if they think Obama will blink in a game of chicken over the debt ceiling:

So here’s a prediction: If this happens, Obama will refuse to negotiate over the debt limit, just as he’s refusing to negotiate over tax rates on the rich. The message will be clear: We’re not talking, if the debt ceiling (the nation’s economy) has a gun pointed at its head.

Now, it’s true that if the middle class tax cuts are extended, Democrats lose a key piece of their leverage, and the remaining things Dems will want — an extension of the payroll tax cut and unemployment insurance, and a rise in the debt limit — will give Republicans a basis for renewing the push for deep entitlement cuts. But there is reason to believe that this time, Obama and Democrats will tell Republicans that they won’t brook the debt ceiling having any part in the talks.

The argument is straightforward: This isn’t 2011 anymore. Last time, Republicans had won an election; this time, Obama and Democrats won. Polls show the public increasingly sees Republicans as the intransigent party and the primary obstacle to compromise in Washington. The economy is on the mend; by threatening another drawn out debt limit battle, Republicans are recklessly putting the recovery at risk. The GOP’s brand is in tatters, and the party will ultimately cave on this point rather than risk more public blame for threatening to tank the economy again. Powerful GOP-aligned interests in the business community, including the Chamber of Commerce, won’t tolerate another debt ceiling fight. Having perennial fights over whether the country will pay its bills is no way to govern, and it simply must stop. The only way to put an end to this madness is to refuse to negotiate if the GOP insists on trying it again. Therefore, no discussions over the debt ceiling. Period.

Don’t bet on it.  After seeing Democrats refuse to negotiate in good faith this month, House Republicans won’t hesitate to return the favor, especially when it comes to getting some traction on entitlement spending, which is the real driver of the deficits and spiraling debt position of the US.  Those powerful GOP-aligned interests like the Chamber of Commerce know that default is coming without serious entitlement reform, because those programs are unsustainable even in the medium term.  Having a default now or a few years from now doesn’t make much difference, and having one at the present levels of debt to GDP is more solvable than it will be down the road.

Of course, none of this will be necessary if both parties agree to give significantly on their trench warfare.  Former Obama OMB chief Peter Orszag writes that Republicans have to agree to add revenue through raising marginal tax rates, but that Democrats can’t be serious if they think that will solve the deficit issue:

So the question for the Democrats is: Even if you win higher marginal tax rates, how do you plan to get the debt limit increased? The Republicans, after all, could cave on raising taxes but still be unwilling to include a debt-limit increase in the agreement, absent any changes to entitlements. In that case, the fiscal-cliff victory would be Pyrrhic, with another crisis arriving in February or March.

In any case, Democrats should affirmatively want entitlement reform that is progressive and puts the crucial programs on a sounder footing. …

The administration claims that it is committed to reforming Social Security — just not right now. But why would reform be easier in, say, 2014, when nothing is forcing action, than it is today? (And if the problem is that Republicans are reluctant to vote for additional revenue as part of Social Security reform, how exactly does that change over the next year or two?)

We should start to see some real efforts to reach a compromise starting next week.  This week is when both sides rev up their engines to demonstrate their willingness to go full speed in the game of chicken.  By next week, Congress will have to have legislative language to put in place in order to get a bill passed in time to deal with the fiscal cliff in all of its phases. If we’re hearing nothing but engines revving by the end of next week, John Boehner may well decide to reverse the leverage and put Democrats in the vise of entitlement reform vs default after the first of the year.