A Further Perspective

The President’s Box

Mr. Obama has a way out of the bind he's put himself in on the debt ceiling. 

By 10.7.13

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By refusing to negotiate the debt ceiling, the President has drawn another red line. Once again, he is in a tenuous box of his own making.

Contrary to the myths presented by the President and his allies, consider the following:

First, the President can prevent default on our debt and the disruption in the flow of critical entitlement via legislation. He has refused to sign it.

Second, the debt ceiling has been referred to as the “nuclear” option, but it has nothing to do with the full faith and credit of the United States, which can be preserved regardless of the outcome of the fight. In impasse, the U.S. will still pay its bills, but its spending will be limited to the extent of tax revenues. The real fallout from a standoff would be the economic damage that would follow as a result of the dramatic reduction in government spending.

Third, the world’s economies rely upon the smooth functioning of the market for U.S. Treasuries including the $4 trillion “repo” market that uses Treasury securities as collateral and provides much liquidity to the U.S. financial system. If the ceiling is not lifted, rates will rise. But the Repo and other markets will function as they have in past crises.

Unlike this president, many of his predecessors saw wisdom in negotiating with Congress over the debt ceiling. Reagan conceded lower defense budgets, for example, due to debt ceiling threats from the Democrats in 1984.

When the 1995 Gingrich House shut down the government, it maintained its majority in the ensuing 1996 elections (the first re-election of a Republican House since 1928). This show of strength led Clinton, many believe, to concede to a balanced budget deal in 1997. In the heat of the debt ceiling battle of 2006, the White House and we at Treasury maintained a constant dialogue with Harry Reid’s office as a good faith signal to our adversaries.

Apparently, there will be no such dialogue for this administration. To emphasize the point, this president’s surrogates equate such discussions to negotiating with terrorists and arsonists.

Which leads to the President’s latest box: on one hand he and his surrogates forecast “economic collapse” should the ceiling not be raised. On the other hand, by cutting off discussion, he is signaling his resignation to such an outcome. But is it conceivable that he would willingly catalyze economic Armageddon over a debt ceiling impasse?

The answer must be no. Surely the President’s advisers are warning him of an impasse followed by economic dislocation at which time his only defense to the nation could be: “a few rogues in the House made me do this.” That would be an epically weak political concession, and evidence of a colossal failure of leadership.

The President is in an untenable position. If Republicans force an impasse, he will have two options and they are both grim: risk economic collapse or ignore the debt ceiling and continue to borrow, sparking a constitutional crisis.

There are two lessons to be drawn from this entire episode of brinksmanship over the debt ceiling.

First, it shows the ferocity with which a democracy responds when the will of the majority is disregarded -- as was the case with Obamacare. Yes, a Democrat Congress was duly elected and the Affordable Care Act was passed and signed into law. And, yes, its legality (not its popularity) was confirmed by the Supreme Court.

But all of that cannot obscure Obamacare’s unpopularity with the majority of U.S. citizens. And because Obamacare is the basis for the current standoff, it is the only ground upon which arms can be laid down and a deal can be made.

Second, it reveals the debt ceiling for what it is -- an artificial construct that should be eliminated. It serves little purpose other than creating a Washington Kabuki dance of political posturing and propagandizing to the least informed voters. It also presents legal ambiguity: a Congress that withholds approval of an increase in the debt limit would, de facto, contravene prior approved budgets.

The President can end the standoff by giving Republicans a face-saving concession that will cost him little and spare the nation further economic decline: a delay in Obamacare’s individual mandate, just as he has with employers. In return he should ask for a repeal of the arcane debt ceiling law. This would free him and his successors from this unproductive construct forever.

If the Republicans agree, both parties and the country walk away winners.

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About the Author

Emil W. Henry Jr. is CEO of Henry, Tiger, LLC, a private equity firm, and is a former Assistant Secretary of the Treasury.