Even though each of them has exhibited occasional bouts of petulance, I must confess that I have great sympathy for President Obama and House Speaker John Boehner as they grapple with the public debt-ceiling and spending crisis. Each has acted out, sometimes because of exasperation with the other and sometimes as part of a kabuki dance that each must perform for his respective party. But both understand the stakes, and both genuinely seem to want to do the right thing.
That isn’t the case, though, for their congressional colleagues or their parties’ respective bases. It’s as if those on the opposite ends of the political spectrum live in parallel but very different universes. Many Democratic activists inhabit a world in which the most important thing is to protect Social Security and Medicare “as we know it” and to fight off domestic spending cuts, even in programs that are demonstrably ineffective. They blissfully ignore the fact that Social Security and particularly Medicare are on unsustainable paths, both in terms of spending trajectories and demographic trends. How can anyone rationalize a system in which a married couple, each earning average wages ($43,100) and retiring in 2010, will have paid about $109,000 in Medicare taxes between them but will likely receive $343,000 in benefits before they die? With the baby-boom generation now reaching retirement age, fewer of their younger cohorts paying into the system, and health care costs still climbing much faster than inflation, it’s a matter of when rather than if Medicare costs swamp the budget.
Republican hard-liners, for their part, ignore the simple fact that federal taxes, measured as a percentage of gross domestic product, are at their lowest in more than six decades. The top marginal tax rate for individuals is lower than it has been in 73 of the past 78 years, a period of substantial economic growth.
When the late Sen. Daniel Patrick Moynihan said that “everyone is entitled to his own opinion but not his own facts,” he could have been talking about 2011, when each end of the spectrum is concocting its own set of facts and putting blinders on to ignore any contrary evidence. That’s the world in which Speaker Boehner and President Obama are trying to negotiate, with each trying to corral enough support from his base to stop Congress from causing a catastrophe.
It is increasingly looking like it may take a cataclysmic drop in the financial markets, perhaps triggered by the lowering of the bond rating for the U.S. government, to focus minds on both sides of the aisle long enough to get this debt-ceiling deal done. It’s unfortunate that the Dow Jones industrial average might have to fall 500 or 1,000 points before many in Congress are willing to even soften their intransigence. Both sides will have to go along with what many in their bases consider heretical.
So far, investors have handled the ups and downs of the debate with enormous patience, obviously convinced that cooler heads will eventually prevail. But how close to a meltdown does Washington have to go before investors really start to worry that the conventional wisdom is wrong?
After the House initially voted down the Troubled Asset Relief Program on September 29, 2008, the stock market immediately dropped 777 points—a 7 percent plunge. Shortly thereafter, the House and Senate passed the bill and President Bush signed it into law. Perhaps that’s what it will take here. But the pain of such a market drop would be enormous. The years of additional work for those hoping to retire, the body blow to the economy, and the likely rise in unemployment resulting from a severely shaken financial system are all unnecessary, yet they look increasingly likely.
The longer this process goes on, the more likely it is that we will get a temporary deal that extends the debt ceiling for a short period of time, cuts spending by only a modest amount, and raises little or no new revenue. Doing that will tell the markets and the world that we still aren’t prepared to deal with our problems, further eroding confidence in our economy and economic future. This will provide even more disincentive for business leaders to hire, expand, borrow, and lend. That could add a few years to what Northeastern University’s Center for Labor Market Studies described recently as “The Jobless and Wageless Recovery From the Great Recession of 2007-2009.”
If either party thinks that it can politically benefit from this, it should take a look at the polling. Both parties are seeing their favorable ratings tanking and their unfavorable ratings soaring. President Obama’s job-approval ratings are nearly at record lows. If ever there was a situation inviting voters to call for “a pox on both your houses,” it is now. A leading Democratic strategist recently hypothesized to me that he thought that we could see a 2012 election in which Democrats lose the Senate and Republicans lose the House, a manifestation of voters simply throwing the “ins” out and putting the “outs” in. I’m not on board with that thinking quite yet, but it’s certainly plausible given the circumstances.
This article appears in the July 26, 2011, edition of National Journal Daily.