I have been slow to grasp the significance of the Republicans’ new debt-ceiling plan. They are prepared to vote for a suspension of the debt ceiling for three months, which will be automatically lifted to cover the government’s expenditure over those three months when the period ends. This means that the US will be back at, or near, the ceiling in three months’ time, which will mean that Republicans continue to have a stick with which to beat Mr. Obama. But they will still have a weak hand in negotiations on the subject, as they do now (and as I have observed before). More significantly, by taking the debt-ceiling issue off the table, Republicans can end up with the stronger hand in negotiations over spending cuts. If no agreement is reached, the sequester will happen — the situation is the opposite of that faced by the Republicans over tax increases at the end of 2012.
What does this mean? Previously, I argued that the Republicans’ weak hand meant that there would be some spending cuts, but they would be closer to the amount favoured by Mr. Obama than the amount favoured by the Republicans. The Republicans have cleverly manoeuvred themselves into the stronger position, which means that the spending cuts may be closer to their objective.
It is worth noting that the measure has to be passed by the Senate; but I cannot see how Democrats there could oppose an increase in the debt ceiling and still manage to paint the Republicans as being responsible for any disaster. Perhaps they will find a way. But at present, I am increasing my expectation for spending cuts and therefore for the headwind to the economy that fiscal policy will represent.
Incidentally, I feel the need to mention that this whole debate is ridiculous. Spending should not be being cut at all, the Republicans have everything wrong, and the political right in the US long ago lost the intellectual high ground.
It isn’t market-moving, but I was interested in the results of the Israeli election. With most of the vote counted, it appears that Likud-Beiteinu will have 31 seats, down from 42. The second-biggest party will be the new Yesh Atid, a centrist group that favours a reduction in housing costs and the drafting of ultra-Orthodox Jews into the military, with 19 seats. The party also favours negotiations with the Palestinians, and might make such negotiations a condition of any coalition. Labor came in third with 15 seats, while the nutty right underperformed expectations, with Jewish Home and Shas both taking 11 seats. Overall, it appears that right-leaning parties will have 61 seats and left-leaning ones will have 59. I would like it if the result was a weakened and less intransigent Mr. Netanyahu, but I do not know whether that will be the case.
Economic indications for January have been weak in the US so far, with regional manufacturing surveys and Michigan sentiment disappointing expectations and falling. However, one should not be too quick to jump to a conclusion on the basis of the surveys: as mid-2011 showed, political theatre over the debt ceiling can depress sentiment rather more than it depresses the real economy. That said, markets did fall in mid-2011.