Obama’s trying to tank the markets to win the budget fight. Problem is, that might not work -- and Republicans just don’t care.
- By Daniel W. Drezner
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and a senior editor at The National Interest. Prior to Fletcher, he taught at the University of Chicago and the University of Colorado at Boulder. Drezner has received fellowships from the German Marshall Fund of the United States, the Council on Foreign Relations, and Harvard University. He has previously held positions with Civic Education Project, the RAND Corporation, and the Treasury Department.
Since the Republican Party took over the U.S. House of Representatives in 2010, its battles with Barack Obama’s administration have taken on Wagnerian levels of grandiosity. Increasingly, the current political showdown over the federal budget and the debt ceiling looks less like a domestic policy disagreement and more like a militarized dispute between two enduring rivals in world politics. Both sides say they want a deal that raises the debt ceiling and funds the federal government — but their behavior suggests that they’re willing to risk a protracted conflict to get what they want. Indeed, at this point, both Republicans and Democrats seem to care more about politically crippling the other party than they do about, you know, promoting the general welfare of the United States. Ordinarily, relative gains concerns this extreme appear only in the fevered dreams of realist international relations scholars.
Over the past few weeks, both sides have articulated their tactics and strategies. Looking at their strategies to date, however, this international relations theorist reaches a disturbing conclusion: Obama seems far too clever for his own good, while the Republicans might just be stupid enough to claim victory.
Let’s start with the president. As a general rule, sitting American presidents don’t talk down the economy — but last week, Obama made an unusual exception. In an interview with CNBC, he said, "This time I think Wall Street should be concerned," concluding that "when you have a situation in which a faction is willing to default on U.S. obligations, then we are in trouble." It is certainly true that both public sector and numerous private sector analysts have warned about the calamitous consequences of a debt default (though not everyone is convinced). Although Obama was breaking with tradition, the president’s logic for trying to scare financial markets seems pretty clear. If markets start to panic, then both Wall Street and Main Street will start to pressure the GOP caucus in the House to acquiesce to what Obama wants: a clean debt-ceiling increase. In essence, the president wants the stock market to impose economic sanction on the Republican Party.
There are past examples of financial-market gyrations forcing politicians to do something they otherwise would not have. As the 2008 financial crisis started to snowball, Congress tried to pass the Troubled Asset Relief Program (TARP), only for it to founder in the House of Representatives. Expecting passage, markets were surprised: The Dow Jones industrial average experienced its largest single-day loss in history. The S&P 500 and Nasdaq both lost approximately 9 percent of their value. A week later, the House passed a revised TARP bill. A similar dynamic played out during the episode that most closely mirrors the current deadlock — the 2011 showdown over the debt ceiling.
It would seem that this is the sort of dynamic Obama wants to see play out. But there are two things getting in the way of the president’s "panic Wall Street" strategy: theory and practice.
Despite the president’s warnings, financial markets have not panicked so far. Part of the problem comes with the fact that traders don’t make money by acting as Obama’s messenger. In theory, Congress yields after markets tank — when Congress acquiesces, market rebound. But in a world that assumes traders possess rational expectations, there is not much individual incentive for them to heed Obama’s advice. No matter how a trader hedges the bet, Obama is in essence asking investors to bet on markets going down when, if the strategy works, they will not stay down. That’s not a great bet for traders to make. As Neil Irwin, economics editor of the Washington Post‘s Wonkblog, has pointed out, "you don’t become a hotshot hedge fund trader by making bets based on what ‘ought’ to happen or what seems to make sense on some academic level. You only make money if you guess the direction of markets correctly. And if this standoff ends not with a bang but a whimper … then the current prices in asset markets will look about right."
The practical problem is that it’s far from clear whether members of the House GOP will feel any particular pressure to budge. Over the past decade or so, the Republican Party’s voting coalition has shifted from business interests to more ideologically pure groups. Republican-friendly business interests have already been screaming bloody murder about GOP hard-line tactics — but to little avail. Indeed, House Rep. Dana Rohrabacher (R-Calif.) told the Associated Press that "it wouldn’t make any difference" if business interests started pressuring him. In recent years, the GOP caucus has successfully insulated itself from all outside pressures but their party’s ideological base — rendering Obama’s strategy impotent.
There’s an even bigger problem with the Republican Party, however: It might have no endgame for the current crisis. The architect of the current strategy, Sen. Ted Cruz, did not offer a way out when angry Senate Republicans confronted him behind closed doors last week. A surprising number of Republican representatives seem convinced that Obama will surrender his biggest domestic policy initiative, the Affordable Care Act, just to reopen the government. The interest groups that foisted the current strategy on House leaders thought the shutdown strategy would be politically popular, but polls suggest the opposite. Some members of the GOP caucus, like Ted Yoho of Florida, actually profess to believe that if the debt ceiling weren’t raised, "it would bring stability to the world markets." Economist and New York Times columnist Paul Krugman believes these sorts of political miscues reveal the outright stupidity of the Republican leadership.
The thing is, in this kind of showdown, true ignorance can yield a bargaining advantage. If Republicans truly believe that their cause is just, their strategy is popular, and nothing bad will happen, then it is impossible to pressure them to come to the bargaining table. In The Strategy of Conflict, economist Thomas Schelling observed that in a game of chicken, one driver could gain an advantage from throwing the steering wheel out the window. It appears that Republicans have come up with an even more extreme version of that gambit — insisting loudly that they are immune to car crashes.