The Guest Blog

Henes: The Debt Ceiling Debate is About the Future Role of Government

Jonathan S. Henes, P.C.|Kirkland HKSCKPVIamp; Ellis LLP

Imagine what it was like in the negotiating room in Minnesota. It was just before midnight on June 30th and Minnesota's Governor Mark Dayton and the Republican leadership glared at each other across a conference room table.

The Governor looked around the room and said, "so, we are going to let our government shut down over tax hikes on millionaires?"

The Republican leadership nodded their heads and Republican House Speaker Kurt Zeller said, "yep, we strongly believe that raising taxes is bad for the economy and we won't raise taxes on millionaires simply because it is politically expedient."

"I believe it would be immoral for the State of Minnesota to cut services and not ask the rich to pay more in taxes. So, I guess the government is shutting down until one of us blinks," said the Governor.

"Guess so," said Republican Senate majority leader Amy Koch.

Maybe this is not how it happened, but the ideological divide that led Minnesota to shut down its government was over the role of government and whether the government should be increasing taxes while cutting spending to balance its budget, especially in a time of slow economic growth. At the end of the day, two weeks after the government shut down, the Governor blinked and, subject to negotiations, the budget will be approved, spending cuts will be made and no new taxes will be levied on Minnesota’s millionaires.

The debate over the debt ceiling is eerily similar.

The Administration and many Republicans say they want big cuts - a “grand bargain” of up to $4 trillion. The Administration wants the cuts to be coupled with taxes. The Republicans will not vote in favor of raising the debt ceiling if taxes are included.

And, this is the ideological divide.

Will either side blink? Will a new, smaller spending cut plan without taxes be supported? Will the debt ceiling be raised? We don’t know.

If the debt ceiling is not raised, the public will know it is because each party held firm to its core ideological values. The Democrats believe that spending cuts need to be met with new revenue through the closing of loop holes and taxes on people who make $200,000 or more. The Republicans believe that the spending cuts need to be made - period, end of story - to reduce the nation’s debt and put it on a path to prosperity. And, Republicans believe taxes should be lowered, not raised. Both sides may be willing to go to the brink in defense of their position.

While it is clear that the failure to raise the debt ceiling will lead to uncertainty, drastic market declines and, potentially, a double dip recession, Democrats and Republicans may be willing to risk these results to see the voters’ reaction. For the political parties, this may be bigger than the debt ceiling. This may be about the future role of government in America.

is a partner in the restructuring group at Kirkland & Ellis LLP where he has led some of the most complex restructurings in the United States and abroad across a variety of industries, including media, chemicals, energy, manufacturing, real estate, retail and telecommunications. Jon has also frequently appeared on CNBC's "Worldwide Exchange" as a guest expert on various financial and economic topics, federal, state and local fiscal issues.