Having failed in broad negotiations for a long-term fiscal framework (an attempt that Barack Obama made out of extreme necessity in order to gain an extension of the $14.3 trillion U.S. debt ceiling by Tuesday), the president went on prime-time television Monday night to warn of the risk of a “profound economic crisis.” After this, Republican John Boehner, Speaker of the House of Representatives and Obama’s interlocutor during the previous days of frustrated negotiations, also appeared on TV to accuse the democratic leader of wanting a “blank check.”
In an editorial, The New York Times noticed astutely that Boehner’s statement was prepared before Obama’s speech and also broadcast live. This suggestive detail contaminates the issue — which is important not just for the American economy — with the upcoming electoral showdown of 2012, when the president will try to get reelected, something inconceivable to the radical conservative wing of the Republican Party. For the Republicans, it does not much matter what Obama says; it will be attacked.
The Democrats’ intention is to leverage a vital new debt ceiling, negotiate long-term tax reform with Republicans and establish spending cuts and new sources of revenue in order to get U.S. public accounts back on track. These accounts — like those of almost the entire world — have been thrown into disequilibrium by the financial crisis. Until yesterday, the impasse seemed almost insurmountable. The last proposal made by Boehner was to cut $3 trillion and raise the debt by $2.6 trillion.* This would occur in two phases, the second one before November of next year. The visible intention is to bring an explosive debate about this issue to the 2012 campaign, which is expected to be an aggressive one. The Democrats clearly reject this and insist on an increase that would remain in place until after the election.
One cause of discord — already predicted — between the two parties is suspending tax incentives for high-income families. Obama does not want to extend them, as has been done once before, and Republicans not only disagree with this, but propose cuts in social spending, a sensitive issue for Democrats. Obama, by agreeing to some reductions in some programs, has even received criticism from the left of his own party (liberals, in American parlance).
Until yesterday afternoon, the proposal of Harry Reid, leader of the Senate Democrats (where Obama’s party is the majority), was still on the table. Unlike the House bill, Reid’s debt ceiling increase would be effective until after the 2012 elections, with savings of $2.7 trillion, including social spending. Even without an increased tax burden, there are large concessions to the Republicans.
But since the influence of the elections on the debate is great, the tug of war is undefined. There is still hope that good sense will prevail in the end, and that Republicans will withdraw their plan to wall up Obama at the expense of an American recession, with known reflexes in the world. This is what will happen if, next Tuesday, the U.S. Treasury stops paying bills and is unable to issue bonds.
*Translator’s Note: The original article noted $2.6 trillion Brazilian Reals and has been changed to reflect USD.