GOP playing with fire on debt limit

In the negotiations to avoid a year-end fiscal crisis, Republicans may be playing with fire.

The GOP's biggest piece of leverage -- whether to increase the limit on how much money the nation can borrow -- is also one fraught with political and economic risk, experts and analysts say. If they don’t tread carefully, Republicans risk alienating allies on Wall Street or, worse, hurting the nation's credit rating and economy.

“This is potentially the neutron bomb in the whole picture,” said Joe Minarik, senior vice president and director of research for the Committee for Economic Development and the former chief economist of the Office of Management and Budget during the Clinton administration. “In the end, it’s going to hurt everybody.”

But Republicans have few bargaining chips in the talks to prevent the $500 billion in year-end tax hikes and spending cuts that constitute the fiscal cliff, experts said.

The country is expected to reach its borrowing limit by the end of the month. The Treasury Department has tools at its disposal to stave off a default until sometime in mid-February or early March, according to a recent report from the nonpartisan Congressional Budget Office. If lawmakers don’t raise the ceiling by then, economists expect the recovery will be derailed and the country will endure its first major default since the Great Depression. It “would be a bigger shock than going over the cliff,” the co-head of Global Economics Research at Bank of America Merrill Lynch wrote in a recent analyst note.

For a number of reasons, the GOP doesn’t enjoy the same negotiating position it held during the last debt-ceiling fight in the summer of 2011, says Norman Ornstein, a resident scholar at the American Enterprise Institute and longtime congressional expert. The business community is more involved this time around and adamant that the ceiling be raised, the president doesn’t have a reelection to worry about, and House Republicans are more divided.

“You’re going to have a lot of people saying ‘Come on, let’s just cut some deal, take our losses and move on to fight other battles,’ ” Ornstein said. “Those who said that in 2011 were intimidated pretty much out of the conversation, and that’s not what’s happening now.”

Even if Republicans in the House were unified, the composition of the Senate has changed, too, said Stan Collender, a national director of financial communications at public-relations agency Qorvis and a former Democratic aide to the House and Senate Budget committees. “They’re going to be dealing with a Senate that’s going to be more Democratic and more liberal,” Collender said.

To avert a debt-ceiling crisis, the Obama administration wants to see an extension of what it calls the “McConnell provision,” a temporary proposal offered by Republican Senate Leader Mitch McConnell, R-Ky., during the 2011 debt-ceiling fight. Such a plan would invert the typical process, allowing the president to raise the debt limit, subject only to congressional disapproval. McConnell himself filibustered a vote on such a proposal on Thursday.

And if the fiscal-cliff talks lead nowhere? The GOP has what ABC News’ Jon Karl called a “doomsday plan”: agree only to extend current tax cuts for the middle class. But that would leave much of the cliff — such as the sequester's blunt, automatic spending cuts and the expiration of emergency unemployment assistance — intact and only spook already-jittery markets. It would also leave the debt-limit issue unresolved.

“This would avoid the largest single source of fiscal restraint scheduled for 2013, but it would lead to more fiscal restraint than we expect,” economists at Goldman Sachs wrote in a recent research note. “Moreover, failure to increase the debt limit would create a second source of uncertainty in early 2013.”

And if they were to to go through with the so-called doomsday plan and try to use the debt limit as leverage to pressure the White House to make spending cuts, GOP lawmakers could face a public backlash. President Obama has said he has no intention of allowing the debt ceiling to be used as a bargaining chip as it was in 2011 and will use the bully puplpit to make his case.

“The lesson we learned is that Republicans in Congress are not going to make these decisions because they are suddenly persuaded by the president. They are going to make these decisions because they’ve decided it’s in their political interests to do so,” a White House aide said. "That’s why you reach out to the public and put pressure on Congress.”

Despite the cards being stacked against Republicans on the debt ceiling, House Speaker John Boehner, R-Ohio, isn’t necessarily going to cave. In fact, he may not be able to, said Qorvis’s Collender. If Boehner gives in both on tax increases for the wealthy -- a hard-line administration demand -- and on the debt limit, “that may be more than the right wing can take,” Collender said. “It’s not the kind of thing you can give in on easily.”

And Republicans aren’t exactly powerless, either, AEI’s Ornstein said. They still control the House, and the president would likely rather cut a deal and move on to other priorities than endure a long drawn-out fight.

“You put those two pieces together, and he’s got reason to work with them and to answer some of the real concern that Boehner has,” Ornstein said.