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McConnell’s Gamble: Give ‘Em What They Asked For

Senate Republican leader Mitch McConnell gave Democrats a way out of financial Armageddon yesterday, offering them what they said they wanted: a way to raise the national debt ceiling on a “clean” vote.

Will they take it?

Let’s settle in with our snacks and beverages and watch the action unfold. With pro football and basketball officially on lockout, and with all due respect to last night’s All-Stars and the rest of Major League Baseball, the big game is getting underway on C-SPAN and the cable news networks.

McConnell’s move was as stunning — and some would say as risky — as the onside kick that New Orleans used to strip the ball from Indianapolis at the start of the second half of Super Bowl XLIV. Let’s set the scene. With the clock ticking down toward the Aug. 2 deadline at which the Treasury expects to run out of borrowed cash, President Obama and the Democrats were grinding out political yardage by accusing Republicans of risking national default rather than raise taxes on corporations and the wealthy. Democrats pointed to their own willingness to cut spending — though the spending cuts offered were both ephemeral and years in the future — while they said Republicans were stuck in take-it-or-leave-it mode.

These same Democrats have long argued that the national debt ceiling should be raised on its own merits. The nation has already borrowed more than $14 trillion, and it needs to continue borrowing so it can refinance and pay interest on that debt, as well as fund this year’s $1.5 trillion of red ink. The White House spent the first quarter of the year calling for a pure debt limit vote. So did Senate Majority Leader Harry Reid. Both Obama and Reid declared that their own votes against raising the debt ceiling in 2006, when George W. Bush was in the White House and Republicans controlled the Senate, were mistaken.

Yet when the Republican-controlled House of Representatives held just such a vote last month, Democrats denounced the maneuver as a stunt. House Democratic Whip Steny Hoyer said he wanted a clean debt limit increase but still urged Democrats to reject it as an “irresponsible piece of legislation that should have been handled in a bipartisan fashion.” Reid said it “sends a terrible message to the international community.” Apparently that message was that it is important to increase the debt ceiling, but it is more important to diffuse responsibility so that Democrats won’t have to face irate voters alone.

The bill died on a 318-97 vote. Every Republican voted against it, while 97 Democrats voted for it, 82 voted against, and seven courageous souls pronounced themselves “present.”

McConnell’s proposal would revive the clean debt ceiling increase, with a couple of twists. It would come in three stages: $700 billion, $900 billion and $900 billion, totaling $2.5 trillion. That would cover new borrowing past the 2012 elections and into the next Congress. Obama would be required to propose offsetting spending cuts, but the debt limit increases would take effect regardless of whether the spending cuts were enacted, unless a two-thirds vote in each chamber blocked the scheduled increase. There would be no tax increase.

Default would be averted. Obama and his fellow Democrats could choose whatever spending cuts they wanted to propose, and they would not even be obliged to pass such cuts into law. The federal debt mountain would grow, but that is inevitable under any form of debt limit increase. The debate is about how fast the mountain will grow, how big it will get, and who will ultimately pay more in taxes or receive less in federal spending to keep it from getting even bigger.

This is pretty disappointing to many Republicans. They hoped to use the impending debt limit to force major cuts in federal outlays. The problem is that they do not have the votes to force that outcome unless, on the eve of a default, Democrats simply cave. That is possible, but it is not a prospect that is very soothing to financial markets already preoccupied with fiscal turmoil in Europe. McConnell called his own proposal a “last-choice option,” acceptable only because he is convinced that the “first choice” of deep spending cuts without major tax increases is unattainable while Obama occupies the White House.

A lot of Republicans, especially House freshmen who arrived with strong Tea Party backing, are going to reject McConnell’s idea outright. House Speaker John Boehner and Majority Leader Eric Cantor did not immediately weigh in, but I think they could deliver enough GOP votes to get it passed — if Democrats say “yes” this time to the debt ceiling increase they themselves demanded. On the Senate side, Reid and McConnell likewise ought to be able to deliver enough votes to put a deal on the president’s desk.

Once that happens, it remains to be seen whether Obama still wants the clean increase he once called for. The real brilliance of McConnell’s plan is that it places full responsibility for additional debt and spending in the remainder of Obama’s current term squarely on the president’s shoulders. This is not a president who typically relishes carrying such burdens.

If you are not a football fan, an onside kick is a trick play in which one team deliberately kicks the ball only 10 yards or so, rather than toward the other end of the field. The risk is that if the receiving team grabs the ball, it is much closer to the kicking team’s goal and a potential touchdown. But if the receiving team is taken by surprise or fails to grab the loose ball, the kicking team can recover it and try to keep its own touchdown hopes alive.

It is usually a desperate move, tried by teams that are losing late in the game. The New Orleans Saints shocked everyone when they did it with half a game still to play and only a 10-6 deficit against the Colts. It worked. The Saints recovered the ball, drove for a touchdown that gave them the lead, and won the Super Bowl handily.

Big gambles can bring big payoffs. McConnell’s gutsy call shows he knows how to play.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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