Real Clear Markets

The Costs of Debt Default Are Sobering

The Treasury Department's report of the consequences of default should be sobering: a credit market freeze, a plunging stock market, and a falling dollar. Worse, unlike past fiscal crises, this one doesn't seem to have a resolution. Democrats and the president are insisting that they will not negotiate. Their view is simple and understandable: if you negotiate with hostage takers you just encourage more hostage taking. No party can govern if the opposition party in one house can regularly get their way by threatening economic calamity. Indeed, institutionalizing such a practice would prevent Republicans from governing should they take over the Senate in 2014 and the White House in 2016. Put another way, this is not your usual partisan bickering. This is behavior that undermines democracy itself.

I believe some leaders in the Republican party recognize this essential truth, but at the moment their views are not having much influence. Thus, Congressional Republicans, especially the few dozen in the House who are the source of our current impasse, do not appear ready to bend much if at all on their demand to end or delay Obamacare despite the fact that it is now the law of the land, upheld by the Supreme Court, and beginning to enroll millions of Americans.

There are a number of possible compromises that could, in the end, save us from going off the cliff, although the willingness of the recalcitrant House Republicans to go along is in doubt. Instead, the Speaker will need to allow a vote on these issues that includes Democrats as well as moderate Republicans, something he now seems prepared to do. However, a "clean" bill to refund the government and raise the debt limit seems unlikely. What might Republicans and Democrats agree to that might save face for both in the process?

One possibility is a lower level of discretionary spending than that currently supported by Democrats. A second is a binding commitment to reduce tax expenditures across the board and change the indexing of entitlements and the tax law, unless a substitute package of equal value is agreed to by a date certain. A third is a one-year delay in the individual mandate for Obamacare. A fourth is the appointment of a new bipartisan commission that would be charged with reexamining Obamacare and coming up with binding recommendations to improve it based, in part, on an examination of how the law worked in its first year of full implementation.

One can only hope that such discussions or something like them are going on in a backroom behind closed doors. So far these backrooms seem to be empty. If a solution can't be found we may be faced with either an economic catastrophe or a constitutional crisis. The sooner a solution can be found the better. Delay is sure to rattle the markets and retard the recovery, even if we don't dive over the cliff.