1/22/13 – They Didn’t Blink

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jan 22, 2013 10:04:26 AM

and tagged Fiscal Cliff, Yesterday's News

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I hope everyone enjoyed the long weekend as much as I did. My son, Jackson, and I built a small working wooden catapult and a fire-dog house using his cardboard blocks. And he went skating and to a SteveSongs concert with his mom.

Oh yes, some other stuff happened as well. The most important event, from an economic perspective, was the GOP’s decision to step back from the brink and extend the debt ceiling. I have to say, I find this both encouraging and, from a political perspective, very smart. Good for them.

The proposal calls for a three-month extension of the debt limit, with the requirement that both the House and the Senate pass formal budgets by mid-April. The part I like most is the stipulation that, if a budget isn’t passed, members of Congress won’t get paid. The Republicans, like good private-sector people, feel that incentives work—a feeling that will probably be shared by the general public.

From an economic perspective, this moves us away from an unpredictable disaster and toward more of the horse-trading and bickering that has been politics as usual, which is real progress. From a political perspective, I think the Republicans will fare better asking the Senate Democrats to do their job—that is, to pass a budget—rather than threatening the economy. The Senate has not passed a budget in the past four years, so requiring one doesn’t actually seem unreasonable.

This move also takes the Republicans away from an absolutist approach, which didn’t account for the fact that they control one-half of one-third of the government, and back toward something that may begin to accomplish what the country needs. Limiting the Democrats’ ability to demonize fiscal responsibility will allow Republicans to more easily and effectively impose the needed spending cuts.

The media in many cases has characterized this as “blinking.” I don’t think so. The Republicans have attempted to make their case one way—trying to use the leverage from the fiscal cliff, for example—and, frankly, it did not work. They weren’t getting what they wanted economically, and they were taking political damage. I see this as an intelligent shift of strategy that could lay the groundwork for the spending cuts we need.

It also changes the narrative, per my post the other day, away from “Will the Republicans blow up the country?” to a mix of “Why won’t the Senate Democrats pass a budget?” and “Why should Congress get paid if they can’t do their jobs?” I suspect the Republicans will be much happier with the new narrative.

A story in Monday’s New York Times, “Senate Democrats to Draft Budget in Push for Broad Overhaul of Tax Code,” suggests that we’re already starting to see the effects of the Republican shift in strategy. Would this have happened anyway? Who knows, but it did come the day after the Republicans changed course.

Overall, this is a very positive step by the GOP, one that opens the door for some real and much-needed progress on our budget problems.

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Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

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