No sign of progress, apocalypse nigh

With less than a week to go before America’s August second debt ceiling deadline, negotiations have broken down. Nonetheless, a deal will almost certainly be done. The markets seem convinced, and it’s inconceivable to most observers that the US would arbitrarily default on its obligations (whether to bondholders, pensioners, or employees). 

Inconceivable, however, is not the same thing as impossible. As in August 1914, rational decisions by reasonable actors can combine to create an unexpected and unintentional disaster.

Even if both Republican and Democrat parties as a whole agree on the importance of raising the ceiling, individual members have every reason to vote against it. The last time economic crisis was nigh many Republicans were dragooned into voting for TARP and subsequently lost primary challenges for their heresy. American political parties aren’t as disciplined as parties in Parliament, and many individual Congressmen and Senators will consider voting against the bill in the hope that others take the bullet — a collective action problem.

This compounded by jockeying among leaders in the Republican Party. Senate leader Mitch McConnell’s convoluted procedural scheme has been condemned by his own party in Congress, and the House has backed a rival plan from Speaker Boehner. Although House leader Eric Cantor has spoken in favour of this plan — having previously condemned Boehner’s secret negotiations with Obama — leading Republican groups like the Club for Growth and Heritage Foundation have criticised it. And Tea Party Republicans have proposed yet another plan, ‘Cut, cap and balance’.

Worse yet, it’s not clear that the general public and political activists share this seemingly self-evident assessment of the danger of inaction. About half of the general public opposes raising the ceiling — an improvement on previous weeks — and many Tea Party Republicans have suggested that the country could avoid a calamity by slashing domestic spending instead of raising the debt ceiling.

It’s a mess. But America has gone through this before and survived, and so it still seems hard to imagine that there won’t be some sort of last-minute deal. The real question then becomes whether that deal includes fiscal consolidation to ward off a ratings agency downgrade.