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Brooks Wilson's Economics Blog: Political Chicken and the Debt Ceiling

Thursday, June 16, 2011

Political Chicken and the Debt Ceiling

Congress is engaged in a game of political chicken.  Instead of two cars racing toward each other in a single lane, our two parties are screaming at each other across the aisle about conditions that they will require to raise the federal debt ceiling.  Democrats and Republicans alike acknowledge that the ceiling must be raised or the government will not be able to use debt to meet its financial obligations and both sides know that the government could not simply cut more than a trillion dollars from this year’s budget.  

This is where the game of chicken begins.  Both parties are attempting to use the current crisis as a fulcrum to leverage future budget negotiations over a bigger looming crisis caused by unfunded entitlement programs, the big three being Social Security, Medicare and Medicaid.  To greatly simplify arguments, the Republicans want to cut spending and reduce the federal government’s size and scope through reform of entitlement programs.  Democrats want the federal government to retain its size and scope and would rather close deficits with increased taxes; their reforms to entitlements would attempt to cut expenditures through government reform.  It is beyond the scope of this blog post to comment on the merit of their agendas.  

Incumbents in both parties are wooing voters through political theater and both parties will gain are lose support depending on the actions of the other party.  If both parties stay the course causing a financial meltdown, incumbents in both parties will lose support (say 10 million national).  If Democrats stay the course and Republicans capitulate, Democrats will gain votes and Republicans will lose votes (say Democrats gain 2 million and Republicans lose 2 million).  If Republicans stay the course and Democrats swerve, the opposite outcome occurs (Democrats lose 2 million votes and Republicans gain 2 million).  If the parties compromise neither party gains or loses votes. 

Pick one side or the other.  I would like to see smaller government so on this issue I tend to support the Republicans.  I want Democrats to swerve.  Federal Reserve Chairman Ben Bernanke wants Republicans to swerve.  Yesterday, he urged Republicans to not block legislation tying deeper cuts in spending to passage of legislation raising the debt ceiling (“Bernanke urges GOP to support raising debt ceiling”).  On this issue, he prefers the Democrat’s position.  I believe that we would both prefer a quick compromise.  Let’s just be honest and admit that both Republicans and Democrats are playing chicken and that the stakes are high.Replace this text with...

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