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It’s Time to Roll Back Big Government: Rep. Ron Paul Says ‘No’ to Debt Ceiling Increase

Is Washington throwing in the towel on tying spending cuts to a debt-reduction ceiling? Given the tentative embrace in the Senate of Minority Leader Mitch McConnell's convoluted plan to let President Obama increase the debt ceiling without formal approval of the Congress, that seems to be the case.

And the establishment is slowly coming to grips with the notion that such a plan may be the only hope of avoiding default and a downgrade in August. For as we've noted, the long-running game of "Deal or No Deal" continues to tilt in the direction of "No Deal." Rep. Ron Paul, the presidential candidate who was our guest on The Daily Ticker, tells me he isn't planning to vote for any increase in the debt ceiling because he didn't support many of the spending programs that caused the debt in the first place — from the wars in Afghanistan and Iraq. Many Republicans, even those who voted enthusiastically for every Bush budget, for the expansion of the Medicare prescription drug benefit, and for the massive increase of defense spending we've had in recent years, feel the same way. The dynamic in the House of Representatives and Senate remains is what it has been for the last couple of years: anything that is desired or even tolerable to President Obama is likely to be opposed by virtually every elected Republican.

McConnell's plan would hang responsibility for the debt, the spending, and the prospect of tax increases on President Obama and the Democrats.

But you have to wonder if McConnell, who is a shrewd political operator, may be outsmarting himself. Consider: Obama already owns the economy and the higher debt levels. Were he to agree to $1 trillion or $2 trillion in cuts, the Republicans would still run hard against his fiscal record next year.

What's more, Obama's re-election will depend in large measure on the economy. Incumbency brings huge advantages, in fundraising, name recognition and the ability to dominate the national conversation. While his approval rating is under 50 percent, he remains personally popular. None of the Republican candidates for president as yet is lighting up the campaign trail. The greatest Republican hope for 2012 lies in an undperforming economy. And, while many in the GOP refuse to believe it, the reality is that a large package of spending cuts and tax increases would depress economic activity next year. Contractionary fiscal policy is contractionary. Increasing the debt ceiling without spending cuts may actually strengthen President Obama's reelection prospects.

There's a second potential problem with the GOP's all-cuts-or-nothing stance. Over the past two decades, Republican anti-tax orthodoxy has hardened. President George H.W. Bush's agreement to raise taxes in the early 1990s helped inspire a damaging primary challenge, and led to his defeat. For many Republicans, the key division between the two parties lies in their attitude toward taxes, especially on the rich. But the reality is that the public seems to care a little bit less than elected GOP officials about high taxes, especially when taxes are on the highest earners, and especially when the choice is between cutting middle-class entitlements or raising taxes on the wealthy. Poll after poll shows that raising taxes on the wealthy is in fact a highly popular move and that cutting entitlement spending is highly unpopular.

Consider. In each of the last five elections, taxes (and especially higher taxes on the wealthy) have loomed large in the campaign season. But in four of the last five elections, the Democratic candidate won more votes than the Republican. (President George W. Bush managed to win in 2000 while getting fewer votes). And in each of these campaigns, to varying degrees, Republicans screamed loudly that voting for a Democrat would mean higher taxes, especially on the rich. In 1992, in fact, it did. Bill Clinton raised taxes on the wealthy as part of his budget-cutting 1993 budget. Three years later, he crushed challenger Bob Dole in a landslide. In 2008, President Obama campaigned in part on letting the Bush tax cuts on high earners expire. (Its' a campaign pledge he has yet to keep). And he beat his Republican opponent handily. One might conclude from this that the charge that Democrats are for higher taxes on the rich doesn't resonate broadly.

Now consider how things set up if Congress goes the McConnell route. The country will face large deficits in 2012, 2013 and beyond. The Bush-era tax cuts extended earlier this year are slated to expire at the end of 2012. If Congress and the White House can't agree on a compromise, they'll all expire. So in the absence of a big deficit deal, the question about the debt next year will be this: should we reduce the debt exclusively through unpopular spending cuts (the GOP opposition), or through a combination of unpopular spending cuts and popular higher taxes on the rich and companies (the Democratic position)? Further, lets assume the GOP nominee is multi-millionaire Mitt Romney. And lets further assume that he endorses huge benefit cuts while charging that President Obama, if re-elected, will raise taxes on the rich. That may win Romney some votes on Wall Street. But the polls, and history, suggests that that alone won't do the trick.

And so the mystery in Washington isn't the inability thus far to get a deal. The makeup of the House GOP caucus, which makes Rep. Paul increasingly sound like a moderate, the presence of a large "Hell, No" caucus, and the fact that many actors have plenty to gain from *not* striking a deal, helps explain that. The mystery is why Republicans think that not striking a deal, and simply letting the debt ceiling rise without any major cuts, will help their candidates (especially their Presidential candidate) in 2012.

Daniel Gross is economics editor at Yahoo! Finance

email him at grossdaniel11@yahoo.com; follow him on Twitter @grossdm

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