The Government Shutdown: How This Ends?

It’s day one, and there is agreement that we don’t know where we are headed or how we get there.  Both sides are playing a long game and seem unified in their brinkmanship.  If current market and political realities are any indicator, we’re a long way off from there being enough pressure on either side to deal.  Indeed, as my colleague Ted Alden emphasizes, the areas of government hit the hardest by the shutdown don’t provide services that the hardliners value, making compromise more difficult.  This could go on for a while (the on-line betting odds look about even for the shutdown to go more than 7 days), but when we do get to making a deal, here is one idea on the way forward.

There is an agreement on

  1. A clean two or three month Continuing Resolution (CR).
  2. A conference committee would be created to agree on funding for the remainder of the fiscal year. The committee is given a deadline of end-year to report.
  3. The committee would have scope to address improvements in Obamacare (there does appear to be bipartisan support for repeal of the medical tax as long as it doesn’t have to be “paid for”), as well as easing of the FY14 spending caps in return for future cuts (such as changing the price index, the so called “chained CPI” rule) and longer-term budget enforcement reforms.  Anything passing out of the committee by majority vote gets an up or down vote in each house, with limited or no amendments (call it “budget promotion authority”).
  4. There would be a short-term extension of the debt limit until January to allow the committee time to negotiate, and an extension of the debt limit automatically through 2014 following passage of a conference report funding the government for FY14.  This saves House Republicans from having to take a direct vote on the debt limit.

The net effect of a committee of this sort is to create two tracks: the first is the negotiation of a reform that allows Republicans out of the box they are in, a ““shiny bright object” that would not have to be paid for with cuts elsewhere.  The second track combines a negotiation over easing the sequester and a debt ceiling increase with strengthened budget enforcement rules.  It may be that agreement on chained CPI is not enough for House Republicans to agree to an automatic debt limit extension, but should be the starting point for negotiations.

Skeptics will note that this approach mirrors the failed 2011-12 “super committee” that gave us the sequester.  They are right.  As then, the challenge is choosing the appropriate ”sticks” to provide the correct incentives for both sides to agree.  For Democrats, the threat could be to set spending for the remaining of the year at the sequester level.  For Republicans, it could be a clean debt limit increase without conditions or reforms.  No doubt, if we fail, we will be soon back in the brinkmanship of the current situation.  If we succeed, we have used the shutdown to overcome the really scary problem of the debt limit.


This piece is cross-posted from Macro and Markets with permission.