In any negotiation, you first want to prepare the ground so that failing to make an agreement creates a situation that your counterparty absolutely hates--that even what is from their perspective a bad deal is better from their standpoint than no deal--and so that failing to make an agreement creates a situation that you rather like--so that only what is from your perspective a very good deal is better than no deal.
With respect to the "fiscal cliff", the ground is prepared: no deal means that the long-run finances of the U.S. government are automatically rebalanced and the tax system becomes more progressive--major wins--at the cost of some risk of a small recession in 2013--a significant loss, but not an overwhelming one given the long-run stakes.
With respect to the debt ceiling, however, no effort has been made to prepare the ground at all: no steps have been taken to signal what actions the administration will take after the debt ceiling has been reached that will make the situation one that Republican politicians will hate and that Democratic politicians can live with. And without such a strategy in place, the Obama administration has no bargaining power on the debt ceiling.
As the federal government closes in on its legal debt limit, the U.S. Treasury is dusting off its book of so-called extraordinary measures…. Treasury expects to bump up against the cap, which is set by Congress, very near the end of this month…. So, perhaps a week or two before it would go over the top, Treasury is likely to start taking steps that will hold off default until about mid-February or early March. The play book includes:
- Suspending sales of State and Local Government Series Treasury securities….
- Redemption of existing and suspension of new investments in the Civil Service Retirement and Disability Fund….
- Suspending reinvestment in the Government Securities Investment Fund, or G Fund, a money-market defined-contribution retirement fund for federal employees….
- Limiting investments in the exchange-stabilization fund, a reserve account related to foreign-exchange holdings. The government has about $23 billion in securities in the fund.
Once these steps have been taken, no remaining legal and prudent measures would be available to create additional headroom under the debt limit, and the United States would begin to default on its obligations
Treasury Secretary Timothy Geithner told lawmakers last year.
Treasury never has said exactly what it would do if it breaches the limit.
Treasury’s Office of the Inspector General this summer reported that the department considered asset sales, across-the-board payment reductions, prioritizing payments and delaying payments–and concluded that none would “protect the full faith and credit of the U.S., the American economy, or individual citizens from very serious harm.”
As a last resort, Treasury officials concluded that delaying payments would be the least harmful option, the report said.