Debt Ceiling Talks Dissolve into Dueling Partisan Plans
Policy + Politics

Debt Ceiling Talks Dissolve into Dueling Partisan Plans


With efforts at a grand compromise on a long-term deficit reduction plan in shambles, Republicans and Democrats on Sunday began working on dueling short-term plans for resolving the contentious debt-ceiling debate, each designed to bolster their 2012 political campaign strategies.

House Speaker John Boehner, R-Ohio, told Republican House members he plans to press ahead this week with a short-run plan to raise the debt ceiling by $1 trillion – a move that would guarantee another showdown early next year  when the presidency, the entire House  and a third of the Senate is up for re-election.

“It’s not physically possible to do all of this in one step,” Boehner said on Fox News Sunday. “I know the president is worried about the next election. But shouldn’t we be worried about the country?”

Administration officials, meanwhile, are insisting that any deal be sufficiently large to push the next debt ceiling debate beyond November 2012. “Tonight, talks broke down over Republicans’ continued insistence on a short-term raise of the debt ceiling,” Senate Majority Leader Harry Reid, D-Nev., said in a prepared statement after emerging from an hour long meeting with President Obama and House Minority Leader Nancy Pelosi, D-Calif.

“A short-term extension would not provide the certainty the markets are looking for and risks many of the same dire economic consequences that would be triggered by default itself,” he said. He said Democrats would soon unveil a $2.7 trillion deficit reduction package.  

That plan would be designed to meet House Republican demands that every dollar of debt ceiling increase be matched by a dollar in deficit reduction without raising taxes.  Adopting such a plan would push the next debt ceiling deadline beyond the 2012 election. “We hope Speaker Boehner will abandon his ‘my way or the highway’ approach, and join us in forging a bipartisan compromise along these lines,” Reid said.

Hopes of the two parties negotiating a major deficit reduction package as part of legislation to increase the Treasury’s borrowing authority collapsed late Friday after Boehner for the second time in a month pulled out of talks with Obama.  Boehner said the president had upped his demand for increased tax revenues beyond what the Republicans were willing to do. Since then, the Speaker has tried to move ahead with a two-step deficit reduction plan to appeal to his conservative base.

Putting Politics before Solutions
As they took to the airwaves Sunday, representatives from both sides seemed more intent on bolstering their political strategies than finding an immediate solution to the debt crisis. “If there is two steps fine,” White House chief of staff Bill Daley said on ABC’s This Week. But he signaled that the president wouldn’t sign any bill that didn’t extend the debt ceiling deadline for at least 16 months. “Don’t have a second step that shows once again the political system’s dysfunction. . . The markets don’t want to watch this show again in six months,” he said.

The administration has said the U.S. will run out of cash to pay all its bills by August 2 unless it receives the authority to exceed the $14.3 trillion currently owed to foreign and domestic creditors. Economists and Federal Reserve Board Chairman Ben Bernanke said failure to increase the debt ceiling would result in economic “catastrophe,” ranging from spikes in interest rates for homes, cars and credit cards; delayed payments to government contractors; layoffs of government employees, and the possibility of delayed payments to Social Security beneficiaries and Medicare and Medicaid suppliers.

With only a week left until the deadline, markets in Asia reacted calmly to the weekend’s news that the U.S. was no closer to a debt-ceiling deal. Japanese stocks fell slightly in early trading Monday, while Hong Kong’s Hang Seng index, a barometer of sentiment in China, which is the U.S.’s largest foreign creditor, soared 2 percent in early trading.
The Republicans offered few clues Sunday as to where they would cut the budget over the next decade to match their proposed $1 trillion increase in the debt ceiling. Any short-term deal is likely to avoid politically risky cuts to entitlement programs, including Social Security and Medicare, thus leaving the cuts largely concentrated in discretionary spending covering the day-to-day operations of the government, salaries, contracts and programs.

Such a plan could gain some Democratic support if it included the $400 billion in Pentagon spending cuts that Obama called for in his April speech at George Washington University. That speech, a major shift to the right for the administration, marked the first time Obama endorsed the goal of reducing the deficit by $4 trillion over the coming dozen years.

But that move hasn’t enabled the administration to reach a “grand bargain”with the Republicans on how to achieve the broader $4 trillion in savings.  Nor has the administration spelled out its approach in a detailed plan, as Republicans repeatedly note. Taxes remain the major stumbling block as the administration seeks higher levies on the well-to-do in the name of “shared sacrifice,” while Republicans claim any tax increase on “job creators” would hinder the economic recovery.

That left the administration to seek its own version of a short-term deal: a $2.7 trillion plan that would move the next debt-ceiling deadline beyond November 2012. According to the Washington Post, this latest offer will include $1.2 trillion in cuts to government agencies including the Pentagon, and will not include tax increases. The other half of the package would come from elsewhere, including reductions in spending on the wars in Afghanistan and Iraq. A spokesman for Reid said that entitlement cuts and revenue increases would not be part of the package.

Budget analysts lamented the ebbing prospect of using the debt-ceiling deadline to enact a long-term deficit reduction plan. Expressing confidence that a default will be averted, former Congressional Budget Office chief Alice Rivlin, a centrist Democrat, said on ABC’s This Week that “they will come up with something. I am not sure what they will come up with. They should come up with a grand bargain.” Most of the plans offered over the last 9 months, including one authored by Congressional Budget Office chief Alice Rivlin, a centrist Democrat Rivlin and former Republican Senate Budget Committee Chairman Pete  V. Domenici of New Mexico,  have targeted $4 trillion as the appropriate level of deficit reduction needed over the next decade to put the nation on a sustainable fiscal path. That would stabilize the debt-to-gross domestic product ratio at about 70 percent.

The only way to reach that level of deficit reduction without cutting Medicare and Medicaid would be to either let all the Bush era tax cuts expire, including those on the middle class, or enact draconian cuts in domestic and military programs.  A balanced budget plan enacted by the House last week would take the latter approach, and, according to economists and budget analysts, would likely lead to an immediate recession.

Hopes for a long-term deal – the grand bargain – brightened momentarily last week when Speaker Boehner edged closer to endorsing a tax reform agenda that would increase revenues by $800 million over the next decade by eliminating some loopholes and tax deductions and making a “flatter, fairer” tax system. But he said the president repeatedly sought more revenue from tax reform, and the possibility of the deal collapsed.

“Their willingness to make fundamental entitlement reform, real cuts in spending, they continue to resist at every turn,” he said. “That’s when I decided it was time to say no.”

Treasury Secretary Timothy Geithner, speaking on CNN, said the administration was primarily concerned with the structure of the tax reform. “We want to make sure the deal is balanced so we don’t put too much of the burden on average households,” he said. Yet he added that $800 billion was a workable number. “It’s something we’ll have to look at in the context of the rest of the deal,” he said.

In his conference call to House Republicans Sunday, Boehner expressed confidence that some short-term deal would be reached to avert a default, according to the New York Times.