Budget Cap Settlement: A Bridge To Nowhere

President Obama has signaled that he may accept a “short term” solution to matters that have blocked Congress from raising the debt ceiling. The problems is that short term solutions often lead to more short term solutions, and more after that.

Obama may agree to a plan which would increase the debt cap by an amount which would push off a default on US paper by a few days. He will only do so, his lieutenants say, if there is an agreement on a much longer term budget deficit reduction program. The president insists that any legislation must include provisions that would determine the size of budget, both spending and taxes, for the next decade.

There is still no support to settle the disagreements between The White House and Republicans in Congress, particularly in the House of Representatives. Many Republicans have promised they will not vote for tax increases. Obama says new revenue combined with expense reductions is the only clear path to deficit reductions.

Given the direction that negotiations are going, it is highly likely that no decision will be made in the next week, which would make it difficult to have legislation in place for a presidential signature before August 3. That makes the short term solution almost certain, which will allow both side to tweak legislation as it moves toward final form. Tweaks can sometime be significant. Both sides will use the short term period to jockey for language that will favor their positions when the bill that covers the increase to the debt cap is final.

The negotiations may look like they have finished with a handshake on the design for finished legislation. It won’t be that simple. Each side has too much at stake. There will be disagreements until the day when Obama signs documents that increase the cap and decrease the deficit. If debate over the last several months has shown anything, it has shown that each side will negotiate down to the last word and detail. Those disagreements are likely to turn the short term into the “medium term” which could push an eventual solution until after Labor Day.

The worst thing that Congress and The White House can do to cripple capital markets is to do nothing between now and August 2.  The the next worst harm possible is nearly as bad–that is if “short term” is not “short term” at all.

Douglas A. McIntyre
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