In June, I compiled a guide of nine things to know about the debt ceiling. Back then, Congress and the White House had eight weeks to reach an agreement before the Aug. 2 federal-government-defaults-on-its-loans deadline, a stretch that seems luxurious by today's standards. Now we're one week away from so-called Debt Armageddon!
After House Speaker John Boehner walked out on talks with the White House on Friday, determined to strike a deal with congressional Democrats instead, there's no resolution in sight. In turn, the House and Senate have prepared separate backup plans.
Boehner has proposed that Congress pass two short-term extensions of the federal debt limit — a strategy that President Barack Obama and congressional Democrats reject — paired with about $1.2 trillion in cuts to government agencies over the next 10 years, and nothing in tax revenues.
Senate Majority Leader Harry Reid's approach involves raising the debt limit by $2.4 trillion while cutting the same amount from the budget over the next decade. Having apparently given up on increasing taxes for now, Reid also does not include revenues in his plan. President Obama has endorsed Reid's proposal, despite his preferred "big deal" method of combining cuts to federal spending with increased revenue by closing tax loopholes for the wealthiest Americans and corporations.
But in a televised speech to the nation on Monday, Obama still made a last-ditch appeal for his mixed approach, weighing it against the Republicans' cuts-only method. "Most Americans, regardless of political party, don't understand how we can ask a senior citizen to pay more for her Medicare before we ask a corporate-jet owner or the oil companies to give up tax breaks that other companies don't get," he said. "How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries?"
Meanwhile, as political negotiations continue to prove unsuccessful, Wall Street is bracing itself for the inevitable downgrade in U.S. credit. Is the nation really about to default, or does the White House have a trick up its sleeve? Here's a look at the latest on contingency plans, political fallout and what's potentially coming up this week.
1. At this stage in the game, a short-term extension of the debt limit isn't enough.
On top of cutting $1.2 trillion from the federal budget, Boehner's plan involves raising the debt limit by $900 billion — enough to pay the bills just until the end of this year. A new congressional committee would then be tasked with finding at least an additional $1.6 trillion in savings in order to raise the debt limit again through 2012. But Obama and congressional Democrats argue that kicking the can a few feet down the road won't do — and the bond market agrees.
"It doesn't solve the problem that there is real political risk, and that political risk only intensifies as we move closer to the 2012 presidential election," Andrew Fieldhouse, federal-budget-policy analyst for the Economic Policy Institute, told The Root. "Standard & Poor's recently warned that there's a 50-50 chance of a credit downgrade, and that raising the debt ceiling is insufficient without a 10-year deficit deal. Just because you set up a commission to do some larger deal doesn't mean it's going to pass."
In his Monday-evening speech, Obama also warned of political ramifications. "Based on what we've seen these past few weeks, we know what to expect six months from now. The House of Representatives will once again refuse to prevent default unless the rest of us accept their cuts-only approach," he said. "Once again, the economy will be held captive unless they get their way. This is no way to run the greatest country on Earth. It's a dangerous game that we've never played before, and we can't afford to play it now."
2. Democrats may benefit from doing what the GOP wants.
We don't know what the final deal will look like, but given Harry Reid's latest White House-approved plan, the deal won't include tax hikes on the wealthy and corporations. "I think that's a much better approach, although serious deficit reduction would still require us to tackle the tough challenges of entitlement and tax reform," the president said on Monday.
Fieldhouse, however, says that Democrats stand to benefit from this tactic. "This will be a hard thing for some House Republicans to vote against because it meets their initial framework," he said, adding that since a healthy share of Reid's budget cuts come from winding down the wars in Iraq and Afghanistan, it helps protect the nonsecurity budget from being raided. He further claims that revenues aren't completely off the table, with Bush tax cuts scheduled to expire at the end of 2012 — during the postelection lame duck session. "At that point, the Republicans have very little power. If the president vetoes a full extension from the House of Representatives, in order to only pass it for 98 percent of the population, then he's going to get what he wants."
3. There's no constitutional backup plan, but President Obama may have other ideas.
Last week President Bill Clinton boasted that if he were in the White House now, he would just raise the debt ceiling himself under the 14th Amendment and "force the courts to stop me." According to the Congressional Research Service, among others, that amendment doesn't grant the president such authority — not to mention that Obama himself rejected the idea.
Still, he may have a contingency plan if things don't come together this week. "It's probably something like stopping Social Security payments. That would light a fire under just about any member of Congress," offered Fieldhouse, pointing out that in the '90s, when Clinton's treasury secretary did just that, soon enough a debt-ceiling deal passed.
4. As Republicans make gains in the policy fight, Democrats are faring better politically.
Last week, both Obama and Boehner held irritated press conferences, blaming the other for the breakdown in negotiations. Recent polls trend toward Obama, with most Americans favoring his compromise measure, which the government has historically taken — a combination of budget cuts and revenue increases. "Boehner looks increasing intransigent and out of touch, not only with the American population as a whole, but increasingly among independents and Republicans," said Fieldhouse, citing a recent ABC/Washington Post poll that found that 62 percent of Americans want a deficit deal that includes a mix of spending cuts and tax increases. Similarly, a new Gallup poll fond that two-thirds of Americans want a compromise even if they dislike the deal.
5. Aug. 2 may not exactly be Debt Armageddon, but the date still matters.
Some in the Republican caucus have accused Democrats of engaging in scare tactics about the debt-ceiling deadline, saying nothing will necessarily change come Aug. 2 if the limit isn't raised. Fieldhouse argues that the unpredictability of the bond markets and rating agencies, and not knowing exactly how they're going to respond, is precisely why getting this done is so important.
"And if you cut government spending by roughly $130 billion for the month of August, regardless of what happens in the bond market, you're looking at huge economic consequences," he said. "That would translate to easily 1 percent of GDP shaved off. As a rule of thumb, that's between 1 and 1.2 million job losses right there. You're talking about a huge shock to a weak economy."
In his Monday remarks, President Obama took a broader view with the American public. "When these Americans come home at night, bone tired, and turn on the news, all they see is the same partisan three-ring circus here in Washington," he said. "They see leaders who can't seem to come together and do what it takes to make life just a little bit better for ordinary Americans. They're offended by that. And they should be."
Finally, he called on ordinary Americans to take action. "If you want a balanced approach to reducing the deficit, let your member of Congress know," he said. "If you believe we can solve this problem through compromise, send that message."
What do you think of the latest ideas on the table — and which one is most likely to pass?
Cynthia Gordy is The Root's Washington reporter.