Friday, July 29, 2011

The Current Forecast for the Deficit/Debt Ceiling: "Anyone who says they know exactly what happens next is lying"

Ezra Klein of the Washington Post Summarizes It in One Sentence

As of Friday, July 29 morning here is what is known:

  1. The House of Representatives does not have enough votes to pass the proposal of Speaker John Boehner.

  1. The Speaker will try to change his proposal to attract enough votes to pass.

At this point we have a fork in the road.  Yogi Berra is quoted as saying “when  you come to a fork in the road, take it”.

Fork 1:  The House passes some version of the Boehner bill.  Then

A.     The Senate defeats the Boehner bill.
B.     The Senate defeats a proposal of Democratic Majority Leader Reid.

At this point the Republicans in the House, particularly Mr. Boehner will say that

 “we have passed a debt extension.  If the Senate and the President do not accept the House plan, they and they alone are responsible for the Default.” 

This will have achieved the political goal of the Republicans, namely to place the blame for a Default on the Democrats.  Unfortunately it is hard to see how this strategy achieves the economic goals, mainly avoiding a Default and enhancing economic growth.  The Senate and the President could accept the House solution, but they would be committing political suicide to do so. 

No acceptance and no new compromise (unlikely):  A Default takes place.

Fork 2:  The House is not able to pass any debt ceiling bill and the Senate is unable to pass any debt ceiling bill

At this point a compromise along the lines earlier described could take place.  Passing this compromise will take about seven to eight Republican Senators to accept the compromise (unless the Republicans drop the 60 vote requirement) and about 30 to 40 House Republicans to accept the compromise. 

No compromise, a Default takes place.

And when this is all settled,  what happens on October 1, 2011?  Don’t ask.  The Dismal Political Economist knows, but trust him,  you don’t want to.

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