On the Debt Ceiling, It’s About Who Will Win, Not Who Is Right

As the U.S. hits up against the debt ceiling a week from today, there are two potential outcomes.

The loudest voices are saying a default would be catastrophic, as the country would be perceived as unable to pay its obligations. The rest think the situation would be serious but not catastrophic. (I tend to side with the latter.)

Ultimately, though, the polarization among political leaders rests on the potential for economic calamity. Ideologies are driving this divide. And while it’s not important which side is correct regarding the debt-ceiling issue (and the accompanying shutdown/Obamacare issues), it’s important to determine which side will prevail.

Ideologues on the left want more leeway so our financial obligations can be covered (until we run out of money again). Ideologues on the right probably don’t mind compromising, but they want to be taken seriously when they say Obamacare is damaging.

Regarding the debt ceiling, billionaire investor Warren Buffett said: “We’ll go right up to the point of extreme idiocy, but we won’t cross it.” I don’t like to agree with Buffett. And in the context of fiscal policy, his definition of extreme idiocy is likely far different from mine. But I have tended to think his quote encapsulates the mentality of our elected officials quite well. At the end of the day, they’re all going to sing kumbaya to perpetuate the status quo even if it means threatening the country’s future financial health.

Goldman Sachs has said the necessary and consequent tightening of the fiscal reins could equal 9% of gross domestic product, or GDP. Whether that figure is accurate is irrelevant. The number is large enough to illicit caution among the public and bolster the position of politicians who say the economy could go over the cliff, bringing Americans with it.

Using the market as a sentiment gauge for this issue, it would seem the general population isn’t concerned that our leaders might cross the point of extreme idiocy. (Tell us what you think here.)

But could this time be different?

Sure. And I think the potential for disappointment rests on the ideological differences, which are larger than they’ve been in decades. The kicker is that Obamacare hasn’t been in play before this round of debt-ceiling talks.

Obamacare isn’t popular among Americans (though some form of universal healthcare is). It’s already produced unintended consequences even though much of its impact is still uncertain. It’s causing insurance companies to raise premiums. It’s pressuring doctors to comply. And it’s exacerbating a structural shift to part-time employment.

It can be said that it’s a drag on Americans and small businesses, on the economy. My personal insurance premiums are going up. My church is reaping zero benefits but will incur additional costs of providing insurance to its employees. The Cleveland Clinic has said it will cut $330 million in costs, including layoffs.

Those are only three examples, but they run the gamut. And that’s why it’s a lever in the debt-ceiling fight. And that’s why this is not going to be a quick and easy agreement at the 11th hour again.

I imagine the rhetoric will further intensify. I imagine we will hit the deadline without a continuing resolution. And I imagine the financial markets will react adversely. But markets will help ideologues on the left gain a lever to counter the right’s Obamacare lever.

The economy is certainly vulnerable. But I don’t think we need to worry about a catastrophe until we get a real test of the ideological resolve at the end of this month.

Best,

JR