With President Barack Obama's deadline for a deal to raise the nation's $14.3 trillion debt ceiling five days away, congressional Republicans and the White House remain locked in a bitter stalemate (NYT) over a deficit-reduction package. Republicans want any increase in the debt limit--which needs to be lifted by August 2 to avoid default--matched by equal budget cuts. Obama has agreed to steep spending cuts to entitlement programs like Social Security and Medicare but insists any deficit-reduction plan include an increase in tax revenues. Markets are falling in response to the deadlock, and leading credit rating agencies warn that failure to reach an agreement could result in a downgrade (Bloomberg) from the United States' long-held AAA rating.
Attention is now focused on two plans. One, put forward by Senate Minority Leader Mitch McConnell (CBS), working with Senate Majority Leader Harry Reid, would empower the president to raise the debt ceiling in the short term without an agreement on equal spending cuts. It would enable Obama to unilaterally raise the debt ceiling in tranches without a legislative mandate from Congress. This congressional maneuvering (NYT) would be coupled with a complementary agreement to implement budget savings (Reuters) of around $1.5 trillion (agreed upon by Republicans and Democrats during bipartisan talks last month) and would create a new, bipartisan congressional committee to draft a long-term deficit-reduction plan. On Tuesday, Obama announced his support for a bipartisan package crafted by a group of six senators whose plan (NYT) would lead to a roughly $4 trillion deficit reduction over the next decade, along the lines of a comprehensive "grand bargain" previously blocked by House Republicans, including Majority leader Eric Cantor (The Hill).
Meanwhile, the McConnell proposal highlights divisions between seasoned Senate Republicans and the majority of relatively young House Republicans, many elected in November on an anti-government Tea Party platform. In addition to opposing McConnell's plan, some House Republicans, including presidential candidate Michele Bachmann (DesMoinesRegister), scorn predictions that a failure to raise the debt ceiling by August 2 would result in an economic catastrophe.
Still, according to William Galston, a senior fellow at the Brookings Institution, most congressional leaders will not risk a default. "Virtually all responsible voices at home and abroad disagree with the assessment that default is not catastrophic," argues Galston. "There is past evidence that if we did go into a technical default that interest rates would rise substantially for quite some time, potentially [pushing] the United States back into recession," he explains. Marc Goldwein, policy director of the Committee for Responsible Federal Budget at the New America Foundation, warns of a possible "fiscal crisis" and says the United States could risk its status as an economic safe haven.
But even if the debt ceiling is raised, kicking a more comprehensive deficit-reduction package further down the road has global risks."There's a limit as to how long we can go without such an agreement between the parties before foreign markets begin to lose confidence in the ability of our political system to manage our economy," explains Galston. That perception could raise interest rates and undermine the United States' international standing, he says. The Congressional Budget Office warned last month that without a full overhaul of the budget, federal debt could be equivalent to more than 100 percent of the annual size of the economy as soon as 2021, sending a sobering message to a world that looks to the United States for economic and political leadership (FT).
Former IMF chief economist Simon Johnson (Reuters) stresses the importance of tackling U.S. debt and deficit issues so that the country remains a haven for international investors. As a recent report by the Debt Reduction Task Force at the Bipartisan Policy Center explains, "A comprehensive debt-reduction package will assure investors worldwide that America is back on track, with a solid plan and a stable economic future . . . without action, growing deficits and debt will create serious problems for our economy, our prosperity, and our leadership role in the world."
Moreover, experts are skeptical of the efficacy of yet another budget commission. The proposals put forward by the Debt Reduction Task Force late last year, for example, have been largely ignored in the current debate. "We don't need another commission to tell us what to do . . . as a matter of policy, we don't need to spend more time deliberating," says Goldwein, who nonetheless acknowledges that, politically, it may be the only solution. By contrast, Galston argues it could be the only opportunity to "bring in the grand bargain through the backdoor."
A solid chunk of House Republicans have yet to accept the reality that a failure to strike a deal on raising the debt ceiling would be an unprecedented disaster, writes TIME's Alex Altman.
In a Politico column, Joe Scarborough outlines ten underplayed truths about the debt crisis: the first two being that neither President Obama nor Congress want to reach a debt deal.
The worst-case consequence of a U.S. credit-rating downgrade would be a fundamental downgrade to the status of the dollar as the world's reserve currency, write the Financial Times' Robin Harding and Nicole Bullock.