That famous line from Yogi Berra “it’s déjà vu all over again” applies this week after House Speaker, John Boehner vowed to block any debt ceiling increase unless it were offset by spending cuts. Democrats argue that increasing tax revenues have to be considered as part of the solution so that social programs like education, Medicare and Social Security aren’t cut too far. Republicans are adamantly opposed to any new tax increases.
So here we are again. Our political leaders are already starting to position themselves so they can claim they are being reasonable and everything would be okay if the other side would just come around to seeing things their way. But how far are they willing to take this tough talk? This same situation last year turned out pretty badly all around. Our debt was downgraded from its previously unblemished AAA rating for the first time in our nation’s history, the stock market sold off almost 20% and confidence was shaken throughout our country.
However, let’s take a look at what is different this time. For starters this is a Presidential election year and both sides remember what happened last year. There is certain to be some finger pointing, but there is also likely to be some caution as neither party wants to bring too much attention to its role in what went wrong last year. Secondly, at least on paper, it seems there is some room for compromise as the disparity between federal receipts and outlays remains historically wide.
However, we feel that a gradual narrowing of the revenue and spending gap, similar to the pattern beginning in the early ‘80s through the mid ‘90s, is the best case for the country as unemployment is still too high. Moving too quickly to reduce the deficit either by being overly aggressive in spending cuts or raising taxes too much or both could disrupt the economy and hurt job growth. So actually, maybe the best situation is for grudging compromise on both sides which may mean the gap will be closed a bit at a time.
There is a possibility that our country will again be held hostage by political grandstanding and we’ll see a repeat of last year. However, there also may be enough incentive for both sides to find some common ground.