Obama and Boehner: Agreement is still elusive at the 11th hour
OK folks. The grown ups in Washington have failed and its time to begin to steel ourselves for the consequences. As of Saturday morning, there is hopeless gridlock in Washington DC in the debt ceiling negotiations.
An emergency meeting called by the President today with Congressional leaders at the White House also has gloomy prospects.
Yesterday, House Speaker John Boehner walked out of negotiations with President Obama over the same issue that dogged negotiations to begin with – taxes.
Hamstrung by the Tea Party position of no new taxes and unwilling to compromise, it now appears that compromise may be impossible.
The reality now is that there is simply no time before the August 2nd deadline to put together detailed legislation and pass it in both houses. There is also no guarantee that a short-term ‘clean’ extension of the debt ceiling will make any difference to the entrenched positions in another week or two.
The real calculation now seems to be positioning the debate such that the opposing party gets the blame for failure.
My thinking is that Microsoft, who yesterday was reported as paying 7%(!), yes 7% tax, should get to pay more. Hedge fund managers should pay more taxes or at least the same percentage of taxes that I do. I also believe that corporate jets should be taxed and the oil industry should not get to set their own taxes.
Lets take a serious look at the Republican phrase, ”job killing taxes” more closely also. The argument is that we cannot raise taxes on the very rich, because they are the “job creators” of America.
Sad to say this is a canard or misrepresentation in polite language. The truth is that small businesses create the most jobs and employ the most people. That is, businesses between 1 and 499 people, not the larger enterprises. This study will be eye opening for the majority of people.
In addition, during recessions, it is the larger companies that shed the most employees, not the smaller ones. The frequency with which this phrase is repeated is frankly irritating.
The Consequences
Regardless of how ideology got us here, it is what it is. We are here and now have to deal with the consequences of the disagreement in Washington.
It seems the American penchant for divided government is likely to be the major reason we go over a cliff economically, if the worst happens. But that is democracy – you take the good with the bad.
OK. In the best case, the President and Republicans will pass the short-term extension and then work out a deal in the $2.5 to 4 trillion range. This deal would be mostly cuts, but also include $1 trillion-odd in new taxes.
These would come mainly from letting the tax cuts on the wealthiest Americans expire and removing corporate breaks that let wealthy corporations pay miniscule amounts of taxes while exporting jobs by the millions.
In the next best case, a smaller deal is worked out after the extension, in the $1 to $2.5 trillion range, with mainly cuts and just a few tax increases. This would infuriate Congressional Democrats and mean that U.S. fundamentals would remain poor (not enough cuts and not enough taxes). A long-lasting credit downgrade would be inevitable from major ratings firms.
The next best option would be if no agreement is reached and the President unilaterally raises the ceiling himself, and (a big and), his action is affirmed by the Supreme Court. At that point, with leverage gone, the Republicans would hopefully be “free” to negotiate a more ‘balanced’ debt deal.
Next along among the options would be a short period of default, followed by quick agreement after steep declines in the stock market and swift downgrades by all the ratings agencies.
In the worst case, a long period of shut down government with no agreement, the U.S. would be struck a powerful economic blow from which it may never really recover. We should all be hoping we do not go there. It will be disastrous for almost every sector of the economy, except of course, the hedge fund managers betting against America.
The reality is that even the best of these options is now almost certain to result in a U.S. credit rating downgrade, as Egan-Jones ratings company has already done. Despite any agreement reached, the U.S. is still in a deep hole economically, borrowing 40 cents of every dollar it spends and with debts at 100% of GNP.
There are very few good outcomes from the current dispute, so I would be remiss if I did not warn readers to prepare as best you can for rough times ahead. Whatever happens now at this late stage will still hurt.
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