Solution to debt standoff: Give a little, get a little

Robert Samuelson

WASHINGTON – Here’s a way out. President Obama, House Speaker John Boehner and other congressional leaders meet at the White House. After the meeting, the president announces that the administration commits to negotiations with Congress over spending reductions that will explicitly include Social Security and Medicare. Also on the agenda would be proposals to eliminate or drastically reduce obsolete, ineffective and marginal programs. These savings would be used to replace the “sequester” – the automatic and mindless cuts to many discretionary programs. But negotiations will not start, Obama adds, until Congress raises the debt ceiling and passes a “clean” continuing resolution to end the government’s partial “shutdown.” Boehner then steps to the microphone and thanks the president for agreeing to negotiations that cover Social Security and Medicare. All House Republicans ever really wanted, he says, was a genuine negotiation tied to ending the shutdown and raising the debt ceiling. Obama pats Boehner on the back and says he’s always been eager to negotiate but refused to do so when threatened by shutdown or default. With bipartisan support, the House and Senate quickly pass the needed legislation, and thousands of words are written and spoken analyzing who “won” the budget showdown. Actually, everyone wins, because the country avoids the uncertainty, possible chaos and profound embarrassment of not paying all its bills – a once-unthinkable eventuality that would mark the United States as a financial rogue state. The consequences for the U.S. and world economies and for public opinion here and abroad would be incalculable. The dollar, after all, is not just America’s currency; it’s also the main currency used for international trade and investment. It’s worth remembering that financial markets – for stocks, bonds, foreign exchange, commodities – exhibit crowd psychology. They don’t just react to events; they react to how they think others will react. If investors and traders think other investors will sell, they will try to sell first. A fearsome outcome would be a stampede from the dollar, which (a Treasury study argues) could cause interest rates to “skyrocket,” stocks to plunge, and credit markets to “freeze.” The weak economy would weaken further and possibly fall into recession. Some observers are more sanguine. Harvard economist Martin Feldstein says failure to raise the debt ceiling need not “threaten our credit standing,” because the government collects ample taxes to pay the interest on the debt. Though technically true, this misses the larger point. If the government doesn’t pay some bills now, it might decide – sometime in the future – to miss debt payments. Who can tell? Fiscal management would be more unpredictable, resulting (probably) in higher interest rates on Treasury debt. Even Feldstein concedes that a sustained inability to borrow “would have serious economic consequences.” The key to a successful compromise is that each side surrenders something meaningful to the other. The White House acknowledges that Social Security and Medicare are crucial for true spending control. Republicans abandon their opposition to a “clean” debt-ceiling increase and continuing resolution. Although the subsequent negotiations might fail, the compromise would be vastly preferable to today’s stalemate, which is a bipartisan suicide pact leading to national disgrace.

Robert Samuelson’s column is distributed by The Washington Post Writers Group.