Wonkbook: Brace yourselves. This fiscal fight could be worse than 2011′s.

September 24, 2013

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(Photo by Karen Bleier/AFP/Getty Images)
(Photo by Karen Bleier/AFP/Getty Images)

Much of Washington -- not to mention the financial markets -- is taking comfort in the fact that think they've seen this movie before.

In 2011, House Republicans threatened to shut down the government and breach the debt ceiling unless the Obama administration made substantial concessions. Though the negotiations were tense, the two sides ultimately came to an agreement. There was no shutdown. There was no default. The lesson most everyone took away was that Washington always figures it out in the end.

But this isn't 2011. It's potentially much worse.

What's lost in the comforting analogy is how much the two sides agreed on in 2011:

1) Republicans had just won a massive victory in the midterm elections, so both sides broadly agreed that Republicans had a mandate to cut spending.

2) Both sides agreed that there should be negotiations over the debt ceiling. Indeed, by the time the debt ceiling hit, negotiations had been ongoing for months.

3) Both sides agreed that the aim of those negotiations was reducing the budget deficit.

As deep as the disagreements over policy were, these broadly shared premises led to negotiations that led to an agreement that cut the budget deficit by cutting a trillion dollars in discretionary spending and another trillion dollars through sequestration's spending cuts.

The ultimate deal, in other words, precisely tracked the issues on which the two parties agreed.

In 2013, however, the parties don't agree on anything:

1) Republicans believe Obamacare's unpopularity gives them a mandate to defund or delay the law. Democrats believe that their victory in the last election gives them a mandate to implement their agenda.

2) Republicans believe there should be negotiations around raising the debt ceiling. Democrats emphatically don't. Currently, there are no ongoing negotiations, nor any plan for them.

3) Republicans believe the aim of these negotiations should be defunding or delaying Obamacare. Democrats say they will not, under any circumstances, delay or defund Obamacare.

There is, quite literally, no shared ground for a deal. Democrats and Republicans disagree on everything from the principle of negotiations to the potential objective of those negotiations. And "disagree" is almost too light a word. They hold mutually exclusive positions that neither can abandon without sparking an overwhelming backlash from their base and seriously harming their credibility in negotiations going forward.

The GOP is operating by analogy to 2011, assuming that the Obama administration -- or at least Senate Democrats -- will eventually crack and offer concessions. The Democrats are also mindful of 2011, but for them, it's an object lesson in why they can't negotiate: Otherwise, the GOP will keep taking the debt ceiling hostage, putting the U.S. at a permanently higher risk of default.

Making matters even worse, it's not even clear who represents the Republican Party in 2013. Speaker John Boehner already had to pull his favored CR from the floor and replace it with a bill that met Sen. Ted Cruz's demands. Senate Minority Leader Mitch McConnell is facing a tea party challenge in Kentucky. It's not clear whether either leader has the flexibility or authority to credibly negotiate on behalf of the GOP, if negotiations were even taking place.

Most in Washington and on Wall Street hold to a serene faith that the two parties will figure something out. And that's probably right. But in interviews with both Democratic and Republican staff from the House and Senate leadership, as well as the White House, I have yet to hear a plausible story for how they figure something out. The tales range from the unlikely -- Republicans expect Senate Democrats to force the White House to delay the individual mandate, while Democrats expect Boehner to simply fold and absorb the backlash from his party -- to the nonexistent.

"I don’t know the end of this movie," says Rep. Chris Van Hollen, ranking member on the House Budget Committee. "I don’t think anybody knows how it ends. And that’s a very dangerous place to be in."

Wonkbook's Number of the Day: $25 million. That's how close we are to the debt ceiling, according to Bloomberg News. The number will likely fluctuate up over the next few weeks, until the "X-date" sometime in late October.

Wonkbook's Graph of the Day: The key graph about the debt ceiling.

Wonkbook's Top 5 Stories: 1) the difference between a shutdown and the debt ceiling; 2) The Fed vs. low inflation; 3) ready or not, Obamacare; 4) how about emigration reform, just for Congress; and 5) Lerning the hard way?

1) Top story: Government shutdown? Ugh. Debt ceiling? Oh no!

Debt-ceiling risks mount. "Mr. Obama is trying a new strategy, refusing to negotiate over terms for raising the debt ceiling and arguing it is up to Congress to give government the authority to pay its bills...With no known talks now occurring among lawmakers over the debt ceiling, businesses, market analysts and lawmakers themselves are uncertain about whether a deal can be reached to avoid the government falling behind on its payments." Damian Paletta in The Wall Street Journal.

Shutdown looming, Senate begins debating spending measure. "Despite Cruz’s attempts to thwart debate, Reid has the ability to set up the spending measure for its first key procedural test vote on Wednesday morning. More votes on the bill would come Thursday. The full Senate will return just before noon Tuesday and the House is scheduled to reconvene Wednesday. Senate debate on the spending measure, formally known as a continuing resolution, is expected to last through the weekend, with final passage coming as late as Sunday evening. The bill would then head to the House, with about 30 hours left until government funding expires Oct. 1." Ed O'Keefe in The Washington Post.

@Goldfarb: All the educated permutations on shutdown/debt ceiling are interesting but not that useful. Nobody knows what's going to happen!

Let's check the polls. "Another poll shows Americans are strongly opposed to potentially shutting down the government if Congress doesn't defund Obamacare. The CNBC poll shows 59 percent oppose the idea, compared to 19 percent who would shut down government before funding President Obama's signature health care law. Among Republicans, more are opposed to a potential government shutdown than support the hard-line stance. While a Washington Post-ABC News poll last week showed 51 percent of Republicans favored a shutdown over funding Obamacare, the CNBC poll shows just 36 percent take that position. Another 48 percent of Republicans say they would rather fund the health care law than risk a government shutdown." Aaron Blake in The Washington Post.

The relative impact of a shutdown vs. a default. "The damage would be fairly minimal in the context of a $16 trillion economy, especially if the shutdown were short. In contrast, a breach of the debt ceiling and the ensuing market gyrations might cost hundreds of billions, perhaps more. For one thing, it would raise the United States’ borrowing costs, with investors demanding more in exchange for their cash. How much more, we do not know. But a 0.5 percentage point increase in Treasury rates — from 3 percent to 3.5 percent, for instance — would eventually cost about $75 billion a year. That would be bad enough. But the related costs to the economy would be far, far worse. The price tag on a huge range of other debt products is benchmarked to the cost of Treasuries." Annie Lowrey in The New York Times.

There’s much less time to avoid a government shutdown than you think. "In theory, the deadline for avoiding a government shutdown is 11:59 p.m. Sept. 30. That gives Congress seven days to figure something out. But those seven days are, at this point, pretty much spoken for...At this point, I think it's likely we avoid a shutdown because the House agrees to the Senate's CR. But it's entirely possible that we could have a shutdown just because there isn't time to work out a deal that averts one." Ezra Klein in The Washington Post.

@TheStalwart: It might be a wise idea for the GOP to attach KeystoneXL (and just that) to a debt ceiling hike. Dems might just look unreasonable opposing.

A government shutdown will cost us billions. "To understand what Congress is risking every time it nears a shutdown, consider what past ones have cost. In 1996, the Office of Management and Budget tallied the two major shutdowns of the decade at about $1.4 billion. Adjusting for inflation would bring that total to more than $2 billion in today’s dollars. But as an analysis by Roy Meyers, a political scientist at the University of Maryland, found, that estimate left out a lot. It didn’t account for the lost value of work that wasn’t done or the $300 million the federal parks would have taken in or the reduced pace of IRS audits." Ezra Klein in The Washington Post.

Mitch McConnell, John Cornyn won’t back Ted Cruz Obamacare tactic. "Senate Minority Leader Mitch McConnell will not join an effort in the Senate to block a House-passed spending bill that defunds Obamacare, a spokesman for McConnell said Monday...The statement represents a divergence from the approach favored by Sens. Ted Cruz (R-Texas) and Mike Lee (R-Utah), who want Republicans to oppose a procedural vote on the House bill before Senate Majority Leader Harry Reid (D-Nev.) plans to strip out the Obamacare defunding provision by a majority vote...A spokeswoman for McConnell’s top lieutenant, Minority Whip John Cornyn of Texas, said that Cornyn too will break with Cruz and Lee." Burgess Everett in Politico.

@pbump: Cannot BELIEVE Reid didn't accept Cruz's request to take a shutdown off the table. This is some high quality college debate club ish.

After past shutdowns, Congress gave federal workers back pay. This time? Don’t count on it. "A government shutdown next week would jeopardize the paychecks of more than 800,000 federal workers who could be told to stay home. More than 2 million other employees who are deemed essential by the government — including the active military — would be entitled to their salaries but might not get paid on time. While there is no law requiring that nonessential employees be compensated if they are ordered off the job, Congress has in the past voted to reimburse their losses once shutdowns ended. But this go-round could be different. The bitterly divided Congress includes many lawmakers who are unsympathetic to the plight of federal workers and could be loath to help them recoup their money." Lisa Rein in The Washington Post.

Music recommendations interlude: The Black Keys, "Gold on the Ceiling."

Top opinion

SHILLER: The best. The brightest. The least productive? "In a survey of elite US universities, Catherine Rampell found that in 2006, just before the financial crisis, 25% of graduating seniors at Harvard University, 24% at Yale, and a whopping 46% at Princeton were starting their careers in financial services. Those percentages have fallen somewhat since, but this might be only a temporary effect of the crisis...[A] 2011 paper by Patrick Bolton, Tano Santos, and José Scheinkman argues that a significant amount of speculation and deal-making is pure rent-seeking. In other words, it is wasteful activity that achieves nothing more than enabling the collection of rents on items that might otherwise be free." Robert J. Shiller in Project Syndicate.

PONNURU: A serious Republican health care plan. "The plan, which is mostly the work of Representatives Phil Roe and Steve Scalise, repeals President Barack Obama’s health-care law. It replaces the unlimited tax break for employer-provided health insurance with a new tax deduction -- $7,500 for individuals or $20,000 for families -- to purchase health insurance, whether through an employer or on their own. It would let insurers sell policies across state lines. And it would put $25 billion into high-risk pools to help people who would still be unable to buy insurance." Ramesh Ponnuru in Bloomberg.

SUNSTEIN: The real meaning of American exceptionalism. "American exceptionalism can be understood in many ways. The insistence on “reflection and choice” rather than “accident and force” is reflected in a national commitment to equality of opportunity, originally signaled by the Constitution’s rejection of monarchy, its prohibition on “titles of nobility,” and its insistence that sovereignty lies in We the People. It is also reflected in a cultural commitment to freedom, individual rights and self-help...American exceptionalism is real. It began in 1787, with the Constitution’s effort to establish a large, self-governing republic, in which diverse views serve as both a safeguard and a creative force." Cass R. Sunstein in Bloomberg.

GALBRAITH: Inequality and the next crisis. "As economics, inequality is like blood pressure. There’s a healthy range. Within that range, lower is better but too low can be dangerous and zero puts you in the morgue. When inequality rises, the symptoms aren’t necessarily immediate. It may even feel pretty good; credit booms do. But rising inequality is a sign of crisis to come. We saw that in 1930, in 2000 and again in 2008. You can’t eliminate inequality, and we don’t want to. But it should be kept under control...What is key, though, is that innovation’s big prizes not fund dynasties. The second and third generations never replicate the genius (or luck or graft) of the first." James K. Galbraith in Bloomberg.

Oh this is so great interlude: What is your state worst at? NJ: Taxes.

2) Federal Reserve vs. too-low inflation?

Federal Reserve is considering new commitment against too-low inflation. "It is strongly considering adding a third prong to that promise: not to move if inflation is below a certain target...Bernanke said last week that low inflation allows the central bank to be “patient” in hiking rates. He called the addition of a minimum level for inflation a “sensible modification” to the Fed’s policy. “We should be very reluctant to raise rates if inflation remains persistently below target,” Bernanke said...Chicago Federal Reserve Bank President Charles Evans, also a voting member, said this month that he would be unlikely to support raising rates if inflation stood at 1.5 percent, even if unemployment fell to the Fed’s target." Ylan Q. Mui in The Washington Post.

Two Fed officials want to delay the taper again. "Two Federal Reserve officials sounded doubtful about cutting back on the central bank's $85 billion-a-month bond-buying program at their next policy meeting next month, less than a week after surprising markets with a decision to keep the easy money flowing full bore. The two officials, Federal Reserve Bank of New York President William Dudley and Atlanta Fed leader Dennis Lockhart, spoke separately Monday in New York. Mr. Dudley is vice chairman of the Fed's policy-making committee and his positions are close to Mr. Bernanke's. Mr. Lockhart, meanwhile, is a centrist whose views tend to represent the Fed's consensus." Michael S. Derby in The Wall Street Journal.

Signs of the end: The NY Fed is testing a repurchase program to be used to raise rates. "The Federal Reserve Bank of New York on Monday began preparing operationally for a possible rise in interest rates, testing with money funds, banks and other investors a new overnight financing programme that is set to play a crucial role. With the Federal Reserve on course to expand its balance sheet beyond $4tn once it completes buying bonds under its present policy of quantitative easing, the central bank is focused on being able to control short-term interest rates against the backdrop of massive money reserves in the financial system. At the central bank’s July policy meeting, the New York Fed suggested deploying a fixed-rate overnight repurchase, or repo facility, to help in such a situation." Michael Mackenzie in The Financial Times.

Does the Fed have a communications problem or do markets have a listening problem? "The answer from the world of analysts and Fed watchers is resounding: The Fed blew it. In a Reuters poll, 33 of 48 forecasters described the Fed's communications as "unclear," with one of them anonymously describing it as "buried under a pile of horse dung."...[N]one of the seven Fed governors gave a speech between July 17 and Sept. 20, the longest period of such silence to be found in records that go back to 1996, the Wall Street Journal found." Neil Irwin in The Washington Post.

Manufacturing moving back to U.S. "A study by the Boston Consulting Group documents what many manufacturers have quietly discovered in recent years — bringing production back to the United States from overseas carries some advantages. More than half of executives at manufacturing companies with sales of more than $1 billion plan to return some production to the United States from China or are considering it, according to the report. That’s up from 37 percent in February 2012. And the number of respondents in the process of moving back also rose, with 21 percent engaged in returning work to the United States, or “reshoring,” compared with 10 percent in 2012." Nelson D. Schwartz in The New York Times.

Why are 47 million Americans on food stamps? It’s the recession — mostly. "There's a fairly basic question at the core of the current food-stamp debate in Congress. Why has the program grown so rapidly over the past few years — to the point where 47 million Americans, one-sixth of the country, now receive food stamps?...Most evidence suggests that food-stamp enrollment has mainly risen due to the recession — although policy changes have played a smaller role." Brad Plumer in The Washington Post.

Internet games interlude: Naya's Quest.

3) Ready or not, here Obamacare comes

Obamacare starts next week, whether the government shuts down or not. "While the health-care law is at the center of the government shutdown fight – Republicans want to defund the law, the White House, predictably, does not – the Affordable Care Act could actually function during a stoppage in federal funding remarkably well. The law's biggest programs, like the new online marketplaces and health insurance subsidies, would by-and-large move forward without much hindrance at all. That's the take from the Congressional Research Service, which looked into the issue last summer, when Republicans began talking about shutting down the government rather than funding Obamacare." Sarah Kliff in The Washington Post.

Insurers scramble to keep healthy on plans. "[C]ustomers may be able to find cheaper policies on the insurance exchanges launching under the new federal health law. In some cases, the regulators say, insurers aren't making it clear to consumers that they may switch carriers or shop on the new exchanges. At issue is a battle for healthy policyholders. Each company wants as many healthy people as possible on its books in hopes that their premiums will help offset an increase in costs from an expected wave of new customers who—with the help of the new health law—will be gaining insurance for the first time and may have health conditions to address." Timothy W. Martin in The Wall Street Journal

It's been one blow after another for Obamacare. "The Obamacare that consumers will finally be able to sign up for next week is a long way from the health plan President Barack Obama first pitched to the nation. Millions of low-income Americans won’t receive coverage. Many workers at small businesses won’t get a choice of insurance plans right away. Large employers won’t need to provide insurance for another year. Far more states than expected won’t run their own insurance marketplaces. And a growing number of workers won’t get to keep their employer-provided coverage. Every branch of the federal government played a role in weakening the law over the past three years, the casualty of a divisive legislative fight, a surprise Supreme Court ruling, a complex implementation and an unrelenting political opposition. The result has been a stark gap between the promise of Obamacare and the reality — one that has fueled a deep vein of skepticism about the law as it enters its most critical phase." Jennifer Haberkorn and Carrie Budoff Brown in Politico.

One week away, Obamacare’s small business insurance exchanges not all ready for launch. "New health insurance marketplaces for small businesses are scheduled to open across the country next week, and while most states are ready to begin enrollment, others have fallen behind, delaying some of the savings employers were promised under Obamacare." J.D. Harrison in The Washington Post.

Health-care push brings Bill Clinton, Obama together, with political benefits for both. "[I]n Manhattan on Tuesday, Clinton will welcome Obama on stage at his annual celebrity-sprinkled charitable gathering. The two presidents, in a conversation led by Clinton, will discuss the merits of the health-care law...For Obama and Clinton, whose relationship has been tense and sometimes hostile, selling health care gives them a chance to nurse old wounds while also helping each other politically. Whether this fall’s high-stakes rollout of Obamacare is successful could define both Obama’s legacy and the contours of the 2016 presidential contest, which Clinton’s wife, Hillary Rodham Clinton, is considering entering" Philip Rucker in The Washington Post

Brilliant, brilliant ads interlude: Mercedes, chickens, and stabilizers. Yes, all in one.

4) Congress should pass emigration reform so they can all get lost

Illegal immigration may be rising again — after years of decline. "Since 2007, the number of unauthorized immigrants in the United States has shrunk considerably, likely due to the combination of a weak economy and stepped-up border enforcement. But according to the latest tally from the Pew Research Center’s Hispanic Trends Project, that trend may now be reversing. The unauthorized immigrant population appears to be growing again:" Brad Plumer in The Washington Post.

Nancy Pelosi plans to introduce immigration reform bill. "House Minority Leader Nancy Pelosi is spearheading a plan to advance comprehensive immigration reform in the chamber. The California Democrat’s strategy includes introducing legislation combining the comprehensive bill that passed the Senate Judiciary Committee in May with a bipartisan border-security bill from the House Homeland Security Committee, according to sources familiar with the plans." Seung Min Kim and Jonathan Allen in Politico.

Not how it's supposed to be done interlude: Playing guitar with your feet.

5) IRS shows Lois Lerner the door, at last

Lerning the hard way. "Lois Lerner, a key official in the IRS’s tea party controversy, resigned Monday morning as an internal-review board was preparing to call for her removal on the basis of “neglect of duties,” according to congressional aides from the House Ways and Means Committee. It is unclear whether Lerner will is eligible for a federal pension and other federal-retiree benefits. The IRS, which described her departure as a “retirement,” said it could not comment further on the matter due to federal privacy rules, and her attorney did not immediately respond to requests for comment Monday." Josh Hicks in The Washington Post.

IRS sticks with plan to halt $70 million in bonuses. "A third-party mediator has upheld the Internal Revenue Service’s plan to withhold employee bonuses this year despite a challenge from the union that represents most of the agency’s workers. Acting IRS director Daniel Werfel announced in a memo to employees last week that he would stick with his earlier decision to forego performance awards, also noting that the agency would be able to avoid furlough days it postponed in August." Josh Hicks in The Washington Post.

Reading material interlude: The best sentences Wonkblog read today.

Wonkblog Roundup

Terrorism and revolution have already chilled investment in North AfricaLydia DePillis.

Well at least the horse racing industry is recovering. Lydia DePillis.

There’s much less time to avoid a government shutdown than you thinkEzra Klein.

A government shutdown will cost us billionsEzra Klein.

Obamacare starts next week, whether the government shuts down or notSarah Kliff.

Does the Fed have a communication problem, or do markets have a listening problemNeil Irwin.

Illegal immigration may be rising again — after years of declineBrad Plumer.

Why are 47 million Americans on food stamps? It’s the recession — mostly. Brad Plumer.

Et Cetera

The story you would have missed today: Senators call for surveillance inquiryCharlie Savage in The New York Times.

EPA rules on existing coal-plant emissions might give states leewayMatthew L. Wald in The New York Times.

State reliance on federal dollars near all-time highReid Wilson in The Washington Post.

Got tips, additions, or comments? E-mail me.

Wonkbook is produced with help from Michelle Williams.

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Sarah Kliff · September 23, 2013