LOOKS MATTER OCTOBER 12, 2013
It is very hard to keep up with developments on the Hill, but it appears that talks between the House of Representatives and the Obama administration have broken down. Focus is now shifting to the Senate, where perhaps Harry Reid and Mitch McConnell can come to some sort of deal. Since any agreement is almost certain to feature a compromise or fig leaf to ensure Republican support, attention will turn to the details of that compromise. Will there be a repeal of the medical device tax? Will there be entitlement cuts? What about the sequestration? But the contents of the deal are not as relevant as the perception about who won and who lost. Indeed, the single most important development of the next week--arguably more important than a potential economic calamity--will be whether Republican hostage taking is perceived to have worked.
What was so scary about the Republican position was not merely its substance; rather, it was the idea of holding the world economy hostage. Thus, a number of liberal writers have suggested that it would be better to default than to go along with Republican demands, which, admittedly, have changed. The idea of repealing Obamacare seems to have faded from even some of the Party's most fevered minds. Still, there will be some sort of compromise, and that's where things get tricky.
If Republicans are seen as having won a large ransom, the debt ceiling fight would become a new norm in American politics, with eventually catastrophic results. Hostage-taking would become a regular occurrence. That's why perception means everything. In some undeniable sense, if Democrats fold on the medical device tax, they will have played into the hands of the hostage-takers. The same goes for giving in on spending levels, or whatever bargain is reached. Does this mean any compromise is therefore worthy of grave concern? Not necessarily. If Republicans get a win on the medical device tax but are generally considered to have been routed by the president, future hostage-taking becomes less likely. If the GOP is despondent and depressed, and the media coverage plays up their falling poll numbers, this disaster is unlikely to repeat itself. But if concessions are seen as a GOP win, then expect more hostage scenarios. Remember, Clinton went along with spending cuts as a way of ending the government shutdown in 1995. But the perception was that he had won a major victory over Republicans, and, consequently, we did not witness five more years of shutdowns. Of course a debt ceiling crisis is much more serious than a shutdown (we can be proud to currently face both). But the principle still holds. The medical device tax and cuts to entitlement programs are important on the merits. But in this case, and going forward, perception trumps reality.