Three weeks ago, our country's leaders came within an hour of shutting down the federal government, fighting over relatively small cuts in this year's budget. Now comes the far harder task of securing votes to raise the federal debt limit by early July before the nation's borrowing ability expires.
The stakes are now vastly higher. Failure to pass it could damage the economy and hurt every American. But there should be a way out of this that meets the core requirements of both parties and, at the same time, reduces our future debt.
Avoiding a calamity will require something different and far more ambitious than what got us through the budget skirmish. This is because the debt limit cannot be trifled with like a budget resolution. When we approach the limit which is $14.3 trillion today it is either raised, and we continue to borrow, or it isn't, and the United States defaults, just like the Lehman Brothers or Enron.
Such a failure by the world's biggest borrower would deal a severe blow to the U.S. and global economy. Even pushing the U.S. to the edge would scare every nation and institution that lends to this country. Confidence would be weakened, interest rates would rise sharply and our fragile recovery would be threatened. Allowing this to happen would be destructive.
The simplest approach would be to separate the debt-limit vote from the fierce debate on long-term budget deficits and pass the former now. After all, our debt is a dollar-for-dollar product of past budget decisions, not future ones.
Alas, in today's Washington, this is politically unrealistic. Too many in Congress are now demanding another round of budget cuts, or budget process reforms, in exchange for raising the debt ceiling.
This linkage is unfortunate because Congress always stepped up to this vote in the past. Indeed, Republican and Democratic presidents alike have recommended and Congress has approved increases in the debt limit dozens of times. Ten times over the past decade alone.
But the politics have become fiendish. This is because the issue of soaring deficits and debt, at long last, has reached center stage in Washington and beyond. The public is fired up as last November's election results demonstrated.
Increasing the debt limit is now equated with favoring more debt. Not surprisingly, only 16 percent of respondents in the latest NBC News/Wall Street Journal poll wanted to raise it.
With those attitudes, it is now impossible to pass a no-strings-attached bill that increases the debt limit. That is why President Barack Obama appointed a new deficit commission, chaired by Vice President Joe Biden and including only members of Congress. It starts this week, with the aim of devising a long-term budget solution a so-called grand bargain by mid-June.
The idea is to reassure voters by raising the debt ceiling in the context of cutting deficits. But reaching agreement on a gigantic $4 trillion deficit reduction the number suggested by both Obama and House Budget Committee Chairman Paul Ryan (R-Wis.) can't be achieved in just two months.
The country faces three alternatives. One is to work toward a smaller budget deal a minibargain that is meaty enough to attract the necessary votes for the debt-limit bill, enough to reassure markets and achievable within this short time frame. The second is to suffer the same fate as this year's budget, namely, a last-minute, huge, Republican-driven package that guts discretionary spending in future budgets. The third is default.
A smaller budget deal is clearly preferable, given the enormous costs of default and the reality that much discretionary spending constitutes needed investment in this country's future.
Yet in the past week, many budget experts are describing this as unachievable, too. We disagree.
There can be a minibargain covering three categories: discretionary spending, including defense; entitlements, especially Medicare; and tax expenditures. Equal amounts could be cut from each category for a total $1.5 trillion deficit reduction over 10 years. This is 40 percent of what is eventually needed.
On the discretionary side, Congress just cut $40 billion from the 2011 budget alone and didn't touch defense. Just annualizing this reduction over the full period, and adding modest cuts in defense, would be enough for now. Indeed, a steady troop drawdown in Afghanistan which makes sense for any number of strategic reasons would yield far bigger numbers.
Regarding entitlements, Obama himself just proposed more than $400 billion in long-term Medicare cuts. That is a small figure in terms of Medicare spending. More can be done. But an annual figure of $50 billion is doable now especially if some Medicaid reform is included.
Tax expenditures are the myriad deductions, credits and other allowances that reduce individual and business taxes. Prominent examples include the mortgage interest and charitable giving deductions. The problem is that such deductions, by definition, are worth more to higher earners than lower earners.
That makes no sense. Modest limits on their deductibility could easily realize $500 billion over a decade without appreciably discouraging the constructive activities they were designed to encourage. It also wouldn't constitute a direct tax increase, which Republicans have sworn to oppose.
These are the outlines of a minibargain that might be achievable before the July deadline. The negotiators should pull out all the stops because relying only on massive discretionary spending cuts would be counterproductive and default is unthinkable.
The recovery is too fragile and our ability to lead in the world too essential for us to play a costly game of chicken. Or, worse yet, go over the edge.
Roger C. Altman, founder and chairman of Evercore Partners, served as deputy treasury secretary. Richard N. Haass is president of the Council on Foreign Relations and served as director of policy planning at the State Department.
This article appears in full on CFR.org by permission of its original publisher. It was originally available here.