The Debt Ceiling Crisis: How Does It End?

 Another Economics/Political Science 101 Final Exam Question: It's a
Multiple Choice Test, and the  Selections are Limited.

Question 57:  Assume that the United States is about to reach the statutory debt ceiling limitation, and that the Treasury has done all it can to hoard money to avoid having to stop making payments to those whom the Federal Government owes money.  The President and the Republicans who control Congress (yes Virginia, the Republicans have de facto control of the Senate) are in negotiations, and the Republicans are demanding a decrease in the deficit as the price of agreeing to raise the debt ceiling.  Which of the following is correct?

1. The President and the Republicans agree to a package of tax increases and cuts in non-defense discretionary spending, health care and Social Security.

2. The Republicans refuse to include tax/revenue increases in any deal and the President accepts a package of massive spending cuts in social programs, health care and Social Security.  There may be small cuts in defense programs as a sop to Democrats for accepting a package without revenue increases.  A recent "trial balloon" explored this option.

3. The President refuses to accept the Republican’s position, the Treasury stops making payment.  No one knows what happens next.

4. I don’t know

Answer:

Not A.  There is no possible political scenario whereby Republicans agree to tax rate increases.  In fact, it is not certain that even without tax rate increases an increase in the debt ceiling can pass the House. 

Possibly B: 50% credit for picking this answer.  The President has already caved once on taxes, see December 2010, and may well cave again.  Like last time, he would use the “nation held hostage" reason for agreeing to Republican demands. (Extra credit for those who add that this selection will likely make Mr. Obama a one term President).

Possibly C:  50% credit for picking this answer.  By bringing about a confrontation with Republicans on taxes the President can settle the issue for the 2012 election.  Ultimately he or the Republicans will concede the issue.  Two possibilities arise.

1. The situation defaults to Answer B, with the Democrats having face saving in defense cuts.

2. The Republicans agree to change tax preference items, like ending the mortgage deduction, ending capital gains and dividend preferential tax rates or some other facing saving method and don't call this raising taxes.

Answer D.  The correct answer, at this point we do not know.  The decision will be the President’s, the Republicans have already been dealt their hand and placed their bets.  The President can call, fold or raise. 

Your turn, Mr. Obama.