Chairman of the Federal Reserve Board Ben Bernanke told the Senate that failure to extend the federal authority to borrow would be a “calamitous outcome.”  Both Moody’s and Standard and Poors said they were more likely to lower the U.S. credit rating if a deal to raise the debt ceiling was not reached – an act that would cost taxpayers hundreds of billions of dollars in higher interest payments.  But although the Obama Administration has agreed to huge cuts in spending over the next ten years, including reductions in benefits in Medicare, Medicaid, and Social Security, that deal is not good enough for the Congressional Republican leadership to agree to raise the debt ceiling.  Why not?  President Obama and Democrats in Congress have insisted on including corporate and upper income revenue increases as part of a deficit reduction plan.
The Republican leadership in both the House and Senate has been unyielding in rejecting revenue increases as part of this package.  House Majority Leader Eric Cantor (R-VA) walked out of talks with Vice President Biden because he would not consider revenues.  House Speaker John Boehner (R-OH) called for less deficit reduction by proposing about $2.5 trillion in spending cuts and leaving out the revenue increases in the Obama Administration’s $4 trillion plan.  Senate Minority Leader Mitch McConnell (R-KY) predicted no deficit reduction deal was possible because the President was insisting on increased revenues.  While opponents of revenues stress concern about the weak economy, the Administration has pointed out that it does not favor increasing taxes now; the increase would not be sooner than 2013.  Further, opponents of revenue increases seem immune to concerns about the impact of drastic reductions in services or benefits, although most economists recognize that government spending plays an important role in boosting the economy as well as in alleviating hardship.

After a tense week of negotiations between Congressional leaders and the White House, President Obama is reported to have presented the leaders with three options to take back to their members:  10-year deficit reduction targets of $4 trillion, $2 trillion, or $1.5 trillion, with the smallest one lacking both revenue increases and broad cuts to Medicaid and Medicare.  The President has asked for a report back within 24 to 36 hours (sometime Saturday, July 16).  If the description of the $1.5 trillion option is accurate, it would show more clearly than past public stances that the President would be willing to give up on increased revenues under certain circumstances.  Such a deal would emphasize cuts in annually appropriated programs, which include education, job training, low-income housing and home energy aid, community development, environmental protection, certain services for children and seniors, some nutrition, public health and medical research programs, and military and veterans’ spending.  Few hints have emerged about what the cuts would be, and, in fact, it is not likely that details would be spelled out.  Instead, there would be spending targets that would have to be worked out in annual appropriations bills or through legislation changing the rules under which programs like Medicaid or Medicare operate.  But even without details, $1 trillion or more in spending cuts could not be achieved without reducing services needed by low/moderate income people.  To the extent that cuts were shared among military and domestic programs, the hardships for vulnerable people would be lessened.

Moving to Plan B?  As the testy negotiators edged closer to the brink, Senate Minority Leader McConnell proposed a fall-back position.  His plan would require the President to submit three separate increases in the debt ceiling to Congress between now and June 2012, adding up to $2.4 trillion (enough additional borrowing authority to get past the 2012 election).  Congress could vote to disapprove those increases, but the President could veto, and therefore would prevail as long as both House and Senate could not muster two-thirds majorities to override.  At the same time, the President would be required to submit plans to cut spending.  Although the first version of the McConnell plan did not require Congress to agree to those or any other spending cuts, discussions with Majority Leader Harry Reid (D-NV) are said to be modifying that to expedite votes on spending reductions, and/or to establish a legislative committee that would recommend entitlement cuts that Congress would have to take up.  Although McConnell included only spending cuts in his initial plan, other ongoing bipartisan Senate negotiations have supported revenue increases as well as spending cuts; it is not clear whether further modifications in this back-up proposal would allow consideration of increased revenues.

Senator McConnell was explicit in making the case for his plan on partisan political grounds.  He said on the Laura Ingraham Show* on July 13, “The reason default is no better idea today than when Newt Gingrich tried it in 1995, is it destroys your brand and would give the president opportunity to blame Republicans for (a) bad economy.  Look, he owns the economy.  He’s been in office almost three years now and we refuse to let him entice us into co-ownership of a bad economy.”   Requiring the President to request three rounds of debt ceiling increases would either give him “ownership” of something unpopular while a majority in Congress could vote no or show him to be a responsible leader, depending on one’s point of view.

Recent polls show large majorities of Americans support increased taxes on upper-income people and corporations as part of a deficit reduction plan.  In a Quinnipiac University Poll conducted from July 5-11, 67 percent agreed that a deal to raise the debt ceiling should include both spending cuts and an increase in taxes for the wealthy and corporations; only 25 percent supported only spending cuts.

Whatever the politics, the tentative McConnell-Reid plan would result in raising the debt ceiling and avoid the calamity predicted by Ben Bernanke.  Interest in this approach is growing because other alternatives do not seem to be near agreement.

*As cited on The Daily Show with Jon Stewart, July 14, 2011

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