US Fiscal: Post CR, Debt Ceiling Fight Still Looms

Published on September 30, 2013

There has been no small amount of speculation in the media and market commentary that the now almost inevitable shutdown of the government tonight may alter the political dynamics enough to lessen the risk of the far more threatening showdown over the debt ceiling. But nothing could be further from the reality of how the trench warfare on Capitol Hill is likely to play out in the next day or days.

*** The partial shutdown — and we stress partial because the truly political damaging elements of a shutdown such as military pay, getting the social security and Medicare checks out, air traffic controllers still working, etc., are all exempt — will only serve to heighten, not lessen, the intensity and stakes in a coming political showdown over a bill to authorize an increase in the federal debt limit before mid-October. ***

*** House Speaker John Boehner and the House Republican leadership have decided a willingness to let the government shutdown for a few hours or even days may be the near term political price to be paid in order to peel away enough Tea Party dissidents to support the leadership plans for a short-dated CR. That relatively clean CR, with only two likely amendments, would then be ping-ponged back to the Senate late tonight or in the next few days, and they believe that will be hard for the Senate not to pass. That, in turn would then move the battlefront back to the debt ceiling where they have always seen their maximum leverage to be. ***

Still Moving Towards Short-Dated CR

The sequence of tactical moves today will start when Senate Majority Leader Harry Reid reconvenes the Senate this afternoon to strip out the offensive House amendments (to the Senate amendments to the original H.JR. 59), which can be done quickly since it only requires a simple 51 vote majority rather than the filibuster proof 60 votes (we forget why exactly, but just take our word on it.) It will then be ping-ponged back to the House yet again with just a few hours left before the midnight deadline tonight to the partial shutdown, or defunding of all federal workers deemed “non-essential.”

The Republican leadership had originally built its fiscal strategy around avoiding just such a shutdown, fearing that a shutdown is where the maximum political damage would be but for the least amount of negotiating leverage. The (yet another) revolt by the Tea Party faction within the House Republican Conference — the caucus of all 232 House Republicans — derailed that plan, and Boehner was forced to take up defunding Obamacare and the GOP’s Light Brigade style charge right into the dream outcome for Democrats of looking justifiably extremist.

But as of last night, the mood was clearly shifting on the Hill, with the feedback beyond the Beltway indicating far less political damage than feared, it seems (who knew?) that the public and the markets both are showing little signs of alarm beyond still more weariness and disdain.

The calculation in the light of the morning a few hours ago was that it may still therefore work out to their tactical advantage to take a near term political hit of a shutdown with all the hugely negative publicity and giving the Democrats their attack talking points, if it helps the leadership’s case to prod enough of the Tea Party rebels to support the original plan to focus on the debt ceiling before it was hijacked by renegade Texas Senator Ted Cruz and his handful of allies.

Boehner and the leadership — including the so far largely absent Budget Committee Chairman Paul Ryan — have been methodically working behind the scenes through one by one meetings these last few days with the larger two groups of Tea Party supporters to isolate Cruz, as well as with the hard core of the House Conference Tea Party faction who number no more than a dozen or so out of the Republican majority of the 232 member House conference  (see our previous report on the three sub-groups within the Tea Party House faction, SGH 9/27/13, “US Fiscal: Short Dated CR Looms”).

Then, the thinking goes, whether it is tonight before midnight, or Tuesday, or even later in the week, the House Republican leadership will be confident enough of their whip counts to ensure a healthy cushion of 220-222 Republican votes over the 217 threshold needed to pass with the so-called “majority of the Majority” that they will put a short-dated CR to a floor vote that would then be ping-ponged back yet again to the Senate.

Only this time the CR will be relatively clean, stripped down to just two amendments they reckon will be difficult if not impossible for Senate Majority Reid not to give in with a motion to proceed and, at long last, a CR that has finally passed both chambers on the Hill.

The CR, however, will only be for a week or perhaps two weeks. The two amendments wrapped together would include a provision repealing the tax on medical service devices — the medical device companies that benefit the most are in two key blue states of Massachusetts and Minnesota — along with a repeal of the exemption congressional staff get from how they pay their premiums in participating in the Obamacare insurance plans.

Where the Leverage Is

Just how this coming hugely high stakes battle over what has to be a House-initiated bill authorizing an increase in the federal debt ceiling plays out over the next two weeks is unclear for now except that it is coming and cannot be avoided, and it is where the toughest of the Republican “asks” will be added.

It also means that President Obama, who has so far steered clear of the battles on Capitol Hill, largely at the insistence of Senate Majority Leader Reid, is likely at that point to be finally drawn into the negotiations simply because the stakes of failure are too high. No one, whether in the Democratic or Republican leadership wants a default or an “accident” in the flow of federal financing, but for Speaker Boehner, only by pushing the legislative wars to the very last edge of the last brink is there any chance of creating a compromise of some kind that gives the Republicans, House or Senate, a political victory of some kind.

So the fiscal wars will get worse in intensity with even scarier headlines invariably stoking market volatility before they get any better.

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