(YURI GRIPAS – REUTERS) We don’t yet know what the final deal to raise the debt ceiling will be. But now that Harry Reid is developing a proposal with $2.7 trillion in cuts and nothing in revenues, it’s a safe bet that it won’t include any tax increases. Which means that whether Republicans realize it or not, they’ve won. The question now is whether they can stop.
Originally, the Democratic position was that we should simply raise the debt ceiling. Republicans said “no.” There would have to be a deal that reduced the deficit by at least $2.4 trillion — which is the size of the debt ceiling increase needed to get us into 2013.
Then the Democratic position was that we should raise the debt ceiling through a deal that reduced the deficit by about $2.4 trillion, with $2 trillion of that coming from spending cuts and $400 billion coming from taxes. Republicans said “no.” There would have to be a deal that disavowed taxes.
Then the Democratic position was that we should raise the debt ceiling through a deal brokered by Barack Obama that reduced the deficit by $4 trillion, with about $3 trillion of that coming from spending cuts and about $1 trillion coming from tax increases. Republicans said “no.” There would have to be a deal that disavowed taxes, and it would have to be cut between the congressional leadership of the two parties. Obama couldn’t have this as a win.
That brings us to where we are now. John Boehner is proposing a deal with about $1 trillion in spending cuts and a short-term increase in the debt ceiling and a bipartisan congressional committee charged with developing a large deficit reduction package that would be immune to amendments and filibusters and would be the price of the next increase in the debt ceiling. Harry Reid is developing a package of spending cuts that Democrats could accept and would reach Boehner’s $2.4 trillion mark.
If you take the Republicans’ goals as avoiding a deal in which they have to vote for tax increases and denying Obama a political victory, it looks like they have succeeded. That success has come with costs — they’ve done themselves political damage, are risking a crisis that could do the economy tremendous harm, and have left the Bush tax cuts unresolved, which means they might end up watching taxes rise much higher than if they’d taken Obama’s offer — but it’s still been a success.
The question is, what happens if they don’t stop pushing?
Late last week, pollster Mark Blumenthal summarized the “consistent findings” from the polling on the debt ceiling. First, he said, “Americans prefer a deal featuring a mix of tax hikes and spending cuts to a deal featuring just spending cuts.” Second, “most of the surveys find strong sentiment in favor of compromise, especially among Democrats and independents.” Finally, “the surveys all show Americans expressing significantly more confidence and trust in President Obama’s handling of the issue than of either the Republican or Democratic leadership in Congress.”
Republicans have leverage because the debt ceiling needs to be raised and it can’t be raised without their support. But they don’t have popular support behind their position or their leadership. They can push this up to the brink and win, because Democrats really, really, really don’t want a debt-ceiling crisis that could set back the economy. But if they push it over the brink, they’re likely to lose, as the public really, really doesn’t want Congress to create an economic crisis that will set back the economy, and they’re primed to blame the GOP if one does in fact come to pass.
Five in the morning
1) The House and Senate are preparing rival debt deals, reports Lori Montgomery: “House and Senate leaders were preparing separate backup plans Sunday to raise the federal debt limit after another day of intense negotiations failed to break a partisan impasse that threatens to throw the government into default next week…Reid said he would turn instead to an entirely new approach ‘that meets Republicans’ two major criteria,’ which are spending cuts designed to meet or exceed the amount of the debt-limit increase and no new taxes. Under Boehner’s rules, Reid said, the $2.7 trillion debt-reduction package he plans to unveil Monday should buy the Treasury sufficient borrowing authority to pay the nation’s bills through the end of next year.”
And the House plan: “[Boehner's] strategy calls for Congress to act first on a short-term extension of the debt limit that would give the Treasury about $900 billion in additional borrowing authority — enough to pay the nation’s bills only through early next year. That would be paired with about $1.2 trillion in cuts to government agencies, including the Pentagon, over the next decade. Under the plan, Congress would also create a 12-member committee staffed with lawmakers from both the House and Senate and tasked with identifying at least $1.6 trillion in additional savings by a deadline set for later this year. Those savings would be paired with a second debt-limit increase, meeting Boehner’s dollar-for-dollar condition.”
2) Asian markets are down — but not dramatically — in the absence of a debt deal, reports Cezary Podkul: “Asian financial markets slid in early trading Monday as investors watched closely to see whether the impasse in U.S. debt negotiations will prompt a dramatic sell-off on global exchanges. Japan’s Nikkei 225 index, which includes major Japanese companies, was down about 0.63 percent in early trading Monday. The Standard & Poor’s 500 /ASX 200 index, a measure of Australia’s blue-chip stocks, was down about 0.86 percent. South Korea’s benchmark KOSPI index was down about 0.7 percent. Hong Kong’s Hang Seng index slid about 0.63 percent in early trading, while Shanghai’s Stock Exchange Composite index was down about 0.73 percent.”
3) Obama still wants a big deal, reports Zachary Goldfarb: “Obama’s political advisers have long believed that securing such an agreement would provide an enormous boost to his 2012 campaign, according to people familiar with White House thinking. In particular, they want to preserve and improve the president’s standing among political independents, who abandoned Democrats in the 2010 midterm elections and who say reining in the nation’s debt is a high priority. In many ways, it has been a remarkable transformation for a Democratic president who had made the centerpiece of his first year in office a massive spending bill to boost the economy and the expansion of health insurance. The risk for Obama now is that his pursuit of a far-reaching package could deeply disappoint his Democratic allies who believe he may be giving away too much.”
4) Wall Street is getting ready for a downgrade in US debt, reports Zachary Goldfarb: “Wall Street’s top concern is no longer that the United States will fail to increase the federal limit on borrowing by Aug. 2 but that political leaders will fall short in their negotiations over an ambitious plan for taming the nation’s debt, according to financial analysts. If President Obama and Congress are unable to reach such an agreement for reducing the debt, credit-rating firms — in particular, Standard & Poor’s — could cut the top-notch U.S. debt rating, sending a shock across U.S. financial markets. S&P has said that raising the $14.3 trillion debt ceiling by the deadline, and thus avoiding a potential default, is not enough to avoid a downgrade…Wall Street bankers have begun discussing plans for responding to a downgrade of U.S. credit, according to people familiar with the talks.”
5) Passing a bill in time is logistically difficult, report Rosalind Helderman, David Fahrenthold and Lori Montgomery: “After a difficult weekend of negotiations between the White House and top congressional leaders, legislators return Monday to Washington with no clear way forward to raise the $14.3 trillion debt limit before the Aug. 2 deadline…In the House, Republicans who took charge last year promising a new era of transparency have said they will not force votes on legislation that has been public for less than three days. Unless they reverse themselves on this new rule, the earliest the House could pass a bill would be Wednesday. A bill approved by the House that day would then take at least four to six days to make its way through the Senate. That timeline would conceivably allow a bill to reach Obama by the deadline — but only if there were agreement in both chambers, and so far there is none.”
Radio session interlude: Toro y Moi play “Still Sound” live on KEXP.
Got tips, additions, or comments? E-mail me.
Still to come: Wall Street is preparing for a downgrade in US debt; key elements of health care reform were on the chopping block in the debt talks; farm subsidies are fading without legislators doing anything; the House again considered a proposal targeting fluorescent light bulbs; and a dog tries, fails to move his swimming pool indoors.
John Boehner proposed a “revenue ceiling” during debt talks, reports John McKinnon: “Last week’s grand-bargain discussions between House Speaker John Boehner and President Barack Obama included a highly unusual feature, according to two people familiar with the situation: a ceiling on future federal revenues, in order to limit the size of any future tax increase…The revenue ceiling being advanced by the speaker’s side would have capped future federal revenues at $36.2 trillion over the next decade, according to one person familiar with the discussions. That’s about $800 billion more than the amount that’s expected to be produced by current tax policies, including the Bush-era rates for individuals. But it’s far less than the amount that would be produced by returning as scheduled to pre-Bush rates after 2012.”
Tea Partiers in the House want to set Obama’s payment priorities if the debt ceiling is reached, reports Alexander Bolton: “Tea Party conservatives hope to make a push on the House floor to force President Obama to avoid a national default if Congress fails to raise the debt limit. Members of the Senate Tea Party Caucus have met with House freshmen to discuss a plan to pressure House Speaker John Boehner (R-Ohio) to bring the Full Faith and Credit Act to the floor. The legislation would direct Obama to prioritize federal payments to the nation’s creditors, Social Security recipients and soldiers serving in Afghanistan and Iraq. The bill has been revised since it was introduced earlier this year. The previous version simply required the Treasury Department to pay the principal and interest on the debt held by the public over other obligations incurred by the federal government.”
Obama’s economic policy is centered around reelection, reports Elizabeth Drew: “The speech Obama gave on April 13 marked his conversion to fiscal centrism; to being the fiscally responsible Democrat. In that speech he stated that he wanted to reduce the debt by $4 trillion…It was all about reelection politics, designed to appeal to this same group of independents. ‘And that’s why,’ I was told by the person familiar with the White House deliberations, ‘he went bigger in the deficit reduction talks; bringing in Social Security is consistent with that slice of the electorate they’re trying to reach.’…This all fits with another development in the Obama White House. According to another close observer, David Plouffe, the manager of Obama’s 2008 presidential campaign, who officially joined the White House staff in January 2011, has taken over.”
A court struck down a new SEC rule on corporate boards, reports Davd Hilzenrath: “Business lobbies won a major victory over shareholders Friday in the battle for control of corporate boards. A federal appeals court struck down a Securities and Exchange Commission rule that would have made it easier for stockholders to throw out directors and put forward their own candidates for board seats. The U.S. Court of Appeals in Washington found that the SEC fumbled one of its biggest initiatives in recent years by failing to adequately assess the potential economic effects of the rule. The decision preserves a long-standing corporate voting system that gives powerful advantages to candidates nominated by incumbent directors.”
Financial reformers want Comptroller of the Currency John Walsh out, reports Binyamin Appelbaum: “John Walsh voiced the frustrations of many bankers when he warned in a speech last month that federal regulators were not paying attention to the cumulative impact of new rules and restrictions, jeopardizing the ability of banks to support economic growth. ‘I might have titled these remarks, ‘Beware of the Pendulum,” he said. ‘To put it plainly, my view is that we are in danger of trying to squeeze too much risk and complexity out of banking.’ What made the speech unusual was that Mr. Walsh is a federal regulator. In fact, he is responsible for overseeing most of the nation’s large banks. And as the text of his remarks ricocheted across the electronic landscape of official Washington, it drew a furious reaction from advocates of increased regulation, who called on the White House to replace him.”
Short-term debt limit increases are the norm, writes Keith Hennessey: “In his remarks to the press Friday, the President insisted that any debt limit extension be ‘through the next election, into 2013.’ That’s a bit more than seventeen months. He has threatened to veto a shorter term increase…Over the last twenty years Congress and the President have acted 44 times to increase the debt limit. Ten of those 44 times lasted more than a year. The other 34 were for less than a year. Over the past (roughly) 20 years, the U.S. government spent 18% of its time, or more than 3 and a half years, operating under a debt limit increase that lasted for less than a year. The average period between increases was 333 days (almost 11 months), and the median was 131 days (just over four months).”
The DC bubble is preventing clear thinking on the debt, writes Steven Pearlstein: “In Washington, the group think and paranoia now run so deep in both the Republican and Democratic cloakrooms on Capitol Hill that even the modest tax increases or benefit cuts required for politically achievable budget compromise are treated as earth-shaking political and economic calamities, totally out of proportion to their real-world impact. Figuring out how to break out of these insular bubbles and see the world as it really is may be the central challenge of modern leadership. Which is why Jonnie Marbles, the British pie-throwing comedian, gets my nomination for Man of the Week…Now if someone could only figure out how to deliver a similar reality-check to the political leaders managing the world’s debt crises…”
You can do fiscal stimulus without increasing the deficit, writes Robert Shiller: “In December, I wrote about the concept of the balanced-budget multiplier and of raising taxes and government expenditure by the same amount, dollar for dollar. These ideas were first put on the national stage in 1943 by Paul Samuelson, the Nobel laureate. He argued that such a policy would be one-for-one expansionary: each dollar spent is a dollar of new national income. As long as interest rates are near zero — as they were then and are now — there should be no ‘crowding out’ of private expenditures by government ones. We can restore some worthwhile projects that have already been cut significantly…Beyond that, we should create major new programs, all paid for by additional taxes…This is an expansionary change in fiscal policy that won’t require additional increases in the national debt.”
Obama can and should raise the debt ceiling on his own, write Eric Posner and Adrian Vermeule: “President Obama should announce that he will raise the debt ceiling unilaterally if he cannot reach a deal with Congress. Constitutionally, he would be on solid ground. Politically, he can’t lose…Our argument is not based on some obscure provision of the 14th amendment, but on the necessities of state, and on the president’s role as the ultimate guardian of the constitutional order, charged with taking care that the laws be faithfully executed. When Abraham Lincoln suspended habeas corpus during the Civil War, he said that it was necessary to violate one law, lest all the laws but one fall into ruin. So too here: the president may need to violate the debt ceiling to prevent a catastrophe.”
Adorable children talkin’ flight safety interlude: Pegasus Airlines’ kindergartener-starring safety announcement video.
The idea of using health reform changes as a “trigger” was raised, rejected, report Jake Sherman and Carrie Budoff Brown: “The two sides are tens of billions of dollars apart on Medicaid cuts, and they differ on principles of tax reform and on changes to Social Security. Not to mention the so-called ‘trigger’ that would force Congress to find additional savings: Republicans want to repeal the individual health care mandate and the Independent Payments Advisory Board, both integral pieces of the Democrats’ health care law President Barack Obama has already rejected using changes to the health care law as a trigger.”
Only repealing the individual mandate is a horrible idea, writes Avik Roy: “While the individual mandate is one of the very worst features of Obamacare, repealing it while leaving the rest of the law intact would be disastrous. First, it would totally destabilize the private insurance market. The Obamacare individual mandate is relatively weak, as mandates go; but repealing it, while maintaining the law’s requirements that insurers take all comers regardless of age or health, will drive insurers out of business, in what economists call the ‘adverse selection death spiral.’ Second, the aforementioned destruction of the private insurance market will rightly be blamed on Republicans, who will no longer be able to entirely pin insurance disruptions on the other side.”
Obama’s prepared Medicare changes are terrible policy, writes Paul Krugman: “According to many reports, the president offered both means-testing of Medicare benefits and a rise in the age of Medicare eligibility. The first would be bad policy; the second would be terrible policy. And it would almost surely be terrible politics, too…Medicare, with all its flaws, works better than private insurance…It’s true that Medicare expenses could be reduced by requiring high-income Americans to pay higher premiums, higher co-payments, etc. But why not simply raise taxes on high incomes instead?..What’s the difference between means-testing Medicare and raising taxes? Well, the truly rich would prefer means-testing, since they would end up sacrificing no more than the merely well-off. But everyone else should prefer a tax-based solution.”
High crop prices are already cutting farm subsidies, reports Scott Kilman: “Payments from America’s primary farm-subsidy program, dating from the 1930s, have stopped here. Grain prices are far too high to trigger payouts under the program’s ‘price support’ formula. The market, in other words, has done what decades of political wrangling couldn’t: slash farm subsidies. Though the subsidy payments always ebbed and flowed with crop prices, many economists are convinced that what is happening now is different. A fundamental upward shift in crop prices is creating the real possibility that Midwestern farmers won’t ever again qualify for the primary form of farm subsidy. There remain other types of subsidies, which continue to pay out because they aren’t linked to market prices. But high prices are undermining political support for those programs.”
States will suffer if the debt ceiling isn’t raised, writes Tracy Gordon: “State and local governments are already feeling the brunt of ‘extraordinary measures’ undertaken when the federal government hit its debt limit in May. Back then, the U.S. government stopped issuing State and Local Government Securities. Affectionately known as SLUGs, these securities allow state and local governments (much like mortgage holders) to refinance their debt without violating federal rules against arbitrage, or profiting from their tax-exempt bond authority. This is a headache, although hardly the end of the world. State and local borrowers can still refinance, but they have to do it by assembling the right bundle of regular U.S. Treasuries, usually with the help of a paid financial advisor. Now, if U.S. Treasuries were downgraded, all state and local debt refinanced in this manner would fall with it.”
We should tax junk food, writes Mark Bittman: “Rather than subsidizing the production of unhealthful foods, we should turn the tables and tax things like soda, French fries, doughnuts and hyperprocessed snacks. The resulting income should be earmarked for a program that encourages a sound diet for Americans by making healthy food more affordable and widely available…Simply put: taxes would reduce consumption of unhealthful foods and generate billions of dollars annually…Some advocates for the poor say taxes like these are unfair because low-income people pay a higher percentage of their income for food and would find it more difficult to buy soda or junk. But since poor people suffer disproportionately from the cost of high-quality, fresh foods, subsidizing those foods would be particularly beneficial to them.”
Adorable animals achieving their dreams interlude: A dog tries to bring his pool inside.
The House held yet another vote on fluorescent light bulbs, reports Dan Berman: “The House isn’t ready to give up compact fluorescent light bulbs just yet. Lawmakers rejected, 130-283, an amendment to the legislative branch spending bill that would have blocked Congress from buying or installing the energy-efficient light bulbs. Amendment sponsor Rep. Glenn Thompson (R-Pa.) said the purpose of the rider is to support American jobs, such as those making halogen incandescent light bulbs…Thompson also said the small amount of mercury in the CFLs would require lawmakers to flee if one breaks…Friday’s action was the third light bulb-related vote in the House this month.”
California can and should lead on emissions, write William Reilly and George Mitchell: “The Obama administration is reportedly looking at ambitious new targets for 2017-2025 that could increase the fuel standard significantly. The greatest consumer and environment benefits would occur with a standard of 62 mpg, or as much as a 6 percent improvement annually…Like many rules promising environmental benefits, this one is mired in controversy…The last time California set new vehicle emissions standards, 13 other states and the District of Columbia followed. This covers nearly half the nation’s vehicle market. Eventually, the nation was transformed by California’s lead…If the federal government cannot agree to strong new mileage and emissions standards, California should again lead the way.”
Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams.
For more coverage of the U.S. debt-limit debate, visit Post Business.