In the Nation's Interest

Strike Up the Koto. The Kabuki Has Begun.

By Joseph Minarik

You already have heard that the next fiscal cliff that we will encounter on our journey to Responsibility will come with the conjunction of the expiration of the appropriations at the end of this fiscal year (a date certain, September 30 / October 1, 2013) and the collision of our nation’s debt with its statutory limit (a date highly uncertain, hitherto estimated by the leading nongovernmental authority, the Bipartisan Policy Center, at somewhere between mid-October and mid-November).  But in the last week or so, Washington’s two non-negotiating negotiating partners made their first moves onto the public stage.

On Thursday of last week, the House Republican caucus reportedly held a telephone conference call during which Speaker John Boehner (R-OH) laid out the first steps in his negotiating strategy (AKA Kabuki).  The Speaker said that he would put forward a short-term continuing resolution (CR) to continue agency appropriations at this year’s level – higher than next year’s statutory spending caps – so that the threat of a government shutdown (from the expiration of appropriations) would be postponed until the onset of the threat of a debt-limit crisis – presumably to increase his side’s negotiating leverage.

The conference call, of course, was private, and we have learned only what Members on the call have been willing to relate to the press.  Those accounts, therefore, could suffer from either faulty memory or intentional spin.  But by all accounts, the Speaker’s conservative wing was not happy.  Those Members reportedly have insisted that appropriations, however short-term, should be passed only on the condition that a provision be included to prohibit the expenditure of any funds to implement the Patient Protection and Affordable Care Act (AKA “Obamacare”).  (A few Members would demand approval of the Keystone XL pipeline as well; any other precondition conceivably could be added.)

Despite what the press portrayed as vocal opposition from the conservative wing, the Speaker really didn’t offer very much to the Democratic side.  Again, he reportedly was speaking about only a temporary bill of less than one-quarter of a fiscal year’s duration – just enough to extend the appropriations standoff until the expected collision with the debt limit.  He (and Majority Leader Eric Cantor (R-VA)) reportedly suggested that the same demands regarding health-reform implementation could be attached to exhaustion of the debt limit.  And the press reports gave no indication that the Speaker suggested any change in the statutory appropriations caps.  The Congress could pass higher appropriations in a temporary bill; but without a change in the caps, the temporary overage would merely be recaptured in a later sequester, pinching government operations even harder at the end of the year.  It might even lay the groundwork for further cuts later, given the eventually lower rate of spending.

Of course, the Republican House could not actually write this scenario into law.  The Senate would not pass such a bill, and the President surely would veto it.  This maneuver would be either a political statement before a contrary ultimate agreement, or a threat that the President either capitulate on his healthcare law or suffer a government shutdown and/or a Treasury default (use of that term is controversial).  Most Washington watchers would characterize either a shutdown or a default as an extreme outcome, but a default as much the worse of the two.  That the Speaker would maneuver to connect the two outcomes suggests that he is at least keeping his options open, while extending the process would allow the heat and the pressure to build.

Then this week, the Administration acted – or perhaps reacted.  Treasury Secretary Jack Lew added to his portfolio of letters sent to Congressional leaders, which in the current environment means the Speaker, since the last postponement of the debt limit tensions in May.  In this new letter, Secretary Lew for the first time provided a point estimate of the onset of serious default risk, placing it at mid-October.  The Secretary, as he and his predecessors always have, asked the Congress to act expeditiously to increase the debt limit.  His purpose seemed to be to send a message that the drama over the annual appropriations and the debt limit could not be long postponed.

The Treasury typically is reluctant to make public point estimates of the final moment of a collision with the debt limit.  And the language of Secretary Lew’s letter suggests that its mid-October estimate is conservative.  But based on the BPC’s estimate, Secretary Lew’s request for action prior to that time is only prudent.  Truth be told, with all of the good will in the world, the Treasury cannot project its cash position with precision over even a few days.  Numerous routine cash events are none the less quite unpredictable; and at this moment the chance of military operations in Syria, and the multiple contingencies that could follow from them, is far from routine.  And this is not an annual budget deficit projection, where, as in horseshoes or hand grenades, close is good enough.  A small error in a cash projection near the debt limit could have disastrous and irreversible consequences.

Opinions differ, and are strongly held, but in my opinion the United States of America should give the widest possible berth to any risk of a failure to pay any of its bills.  Members of Congress who wish to create an action-forcing event should do so over the annual appropriations, rather than court what could become a global financial crisis.  The downside of a federal government credit event is far too great to take any chances.

It is impossible to say how this Kabuki will play out.  Rational players on both sides fear being jammed at the last instant by the other, after a failure to negotiate straightforwardly.  Congressional Republicans will accuse the Administration of waiting until the last moment before demanding a total capitulation, at the risk of the Republicans’ being identified as to blame for a default.  The Administration will counter that the Congressional Republicans want to be handed the tools for an effective negotiation over their hostage, when they had no right to take the hostage in the first place.  This is a principled debate that will not be easily resolved.

And this entire confrontation is not a negotiation where one side wants 100 and the other side wants 80, with the possible result that after lengthy and painful negotiations both can somehow find their way to accept 90 as the answer.  This is, rather, the culmination – for this year – of a long-running ideological dispute in which the disputes effectively are over the difference between yes and no, and large shares of both sides believe that compromise is totally unacceptable.  The swords in this Kabuki are not made of wood.

Enjoy the play.

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