With Clock Ticking, Washington Debt Talks Move Beyond a Grand Bargain

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Joshua Roberts / Bloomberg via Getty Images

President Obama and congressional leaders met again on Sunday night for 75 minutes at the White House as they tried to hash out an agreement on a deficit reduction deal tied to the impending deadline to raise the federal debt limit. No deal was reached except to agree to meet again on Monday.

Obama and the Democrats in the room — House Minority Leader Nancy Pelosi, House Minority Whip Steny Hoyer, Senate Majority Leader Harry Reid and Senate Majority Whip Dick Durbin – continued to push for a grand bargain that would achieve some $4.5 trillion in savings. They also insisted that entitlement reforms — changes to Medicare and Social Security — remain on the table. “We came into this weekend with the prospect that we could achieve a grand bargain,” Pelosi said in a statement. “We are still hopeful for a large bipartisan agreement, which means more stability for our economy, more growth and jobs, and more deficit reduction over a longer period of time.”

House Speaker John Boehner, who had pushed for a bigger deal when negotiators convened last Thursday, reversed course on Saturday night, announcing he would seek a smaller package of just over $2 trillion in cuts. In Sunday’s meeting, House Majority Leader Eric Cantor did most of the talking for the GOP, insisting that all revenue increases in any deal be offset by tax cuts. Also present at Sunday’s gathering were Senate Minority Leader Mitch McConnell and Senate Minority Whip Jon Kyl. “It’s baffling that the President and his party continue to insist on massive tax hikes in the middle of a jobs crisis while refusing to take significant action on spending reductions at a time of record deficits,” said Don Stewart, a McConnell spokesman. “Sen. McConnell believes we need to reduce Washington spending, reform and strengthen entitlement programs, and prevent the more than trillion dollars in tax hikes that Democrats want to add at a time of rising unemployment.”

Before the grand bargain broke down, Democrats had demanded that $1 trillion in revenue increases be coupled with $3.5 trillion in spending cuts. About $300 billion of that would have come from ending corporate tax breaks and another $700 billion would’ve come from letting some of the Bush tax cuts for the wealthiest Americans expire. Boehner had argued the Bush tax cuts, along with other issues, should be left to a comprehensive tax reform package that could be taken up immediately following the deficit reduction deal. Obama had insisted that the Republicans should have to share in the sacrifice for a larger deficit reduction package. And, indeed, on Sunday night, Democrats argued that any package would have to include some concessions from Republicans.

But Republicans say Democrats are not really backing entitlement reform. The GOP is seeking cuts to Medicare and Social Security benefits as part of the package – not just for policy reasons, but for political ones: Bipartisan entitlement cuts would soften the blow of the unpopular Paul Ryan budget, which sought to voucherize Medicare. Pelosi and House Democrats have been loath to give up what they perceive as an advantage at the polls next November and have lobbied the President to take such cuts off the table. “This package must do no harm to the middle class or to economic growth,” Pelosi said following Sunday’s meeting. “It must also protect Medicare and Social Security beneficiaries, and we continue to have serious concerns about shifting billions in Medicaid costs to the states.” McConnell responded, “It’s disappointing that the President is unable to bring his own party around to the entitlement reform that he put on the table.”

President Obama and congressional leaders will reconvene at the White House at 11 a.m. on Monday to review the compromises worked out by Vice President Joe Biden and his group over the last couple of months. “The Speaker told the group that he believes a package based on the work of the Biden group is the most viable option at this time for moving forward,” Boehner’s office said in a statement following the Sunday meeting. But time is short. Negotiators will likely have to strike a deal by Friday so that drafters can write a bill, and the Congressional Budget Office can score it, with enough time left for both chambers of Congress to pass it before Aug. 2, when the Treasury Department says the U.S. will begin to default on its credit obligations.

The advantage of a smaller package is that it would take less time to draft and would be less controversial. The Biden group identified upwards of $3.5 trillion in possible spending cuts and revenue increases. A smaller package would likely consist of  $1 trillion to $1.3 trillion in cuts, including $400 billion from the Pentagon; $200 billion to $400 billion in cuts to Medicare providers – not cuts in benefits, an important distinction — $325 billion to $350 billion in saved interest; $150 billion to $275 billion in increased worker contributions to the federal pension plan, broadcast frequency auctions and trimmed farm subsidies; $150 billion in savings from ending tax breaks for ethanol, oil and gas companies, and corporate jets. That’s $1.85 trillion to $2.45 trillion in sum. In order to make the package revenue neutral, a permanent fix to the Alternative Minimum tax would also likely be included. Boehner has insisted that debt ceiling not be raised more than the total amount cut.  Obama is calling for a $2.4 trillion increase to the borrowing limit, enough to get the government through the end of 2012 by the Treasury Department’s estimates.

With the wings of both parties riled up at the prospect of a deal, it’s now hard to imagine negotiators finding a center large enough to pass a grand bargain. The awful June jobs report released Friday convinced many Republicans that they have a real shot at the White House in 2012. “Why throw Obama a lifeline with a grand bargain that he can brag about? In the end, voters are mainly going to blame a sitting President for a bad economy and partisan deadlock,” says Larry Sabato, director of the University of Virginia’s Center for Politics. “After the election, victorious Republicans can then design their own debt-reduction program exactly as they wish. That’s their hope anyway.”

But in rejecting a grand bargain, Republicans may be sacrificing the best deal they could have hoped for in a generation. “This was a great missed opportunity; if we indeed could have gotten a 4 to 1 or better ratio of real cuts to [tax increases],” lamented Mike Murphy, a GOP strategist. The chances of a grand bargain “have evaporated, all because the GOP is caught in a combination of a need to feed its lunatic fringe, and a monomaniacal, War of the Roses desire to keep Obama from having any kind of victory,” said Norm Ornstein, a conservative scholar at the American Enterprise Institute. Still, a $2.4 trillion package is nothing to sneeze at. It would still be the single largest deficit reduction legislation in U.S. history.

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