There has been a significant amount of discussion in the last few days about what is really occurring and what strategy is being implemented by all parties. Here is a rundown on the state of affairs.
As we barrel towards a final decision on a deal with the tea party caucus oblivious to reality, the adults in the room see the train on the horizon and they must feel like they have their foot stuck in the tracks.
Standard & Poor’s said late Thursday that it could downgrade the U.S. credit rating as soon as this month, and there is a 50 percent chance it will do so within three months, if Washington fails to come to an agreement over the nation’s debt.
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[S&P managing director John] Chambers added in the interview that even if the parties agree to raise the debt ceiling, it may not be enough to avert a downgrade. Chambers said the country must implement a plan to reduce the annual budget deficit by roughly $4 trillion over 10 years, which makes the debt manageable over the long term.
The White House and Congress have discussed a plan that big, but negotiations have more recently centered on a smaller deal, at $2 trillion or less.
“That could still lead to a downgrade,” Chambers said.
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But S&P says that if the government attempts to dramatically cut spending to stay under the debt ceiling while servicing the debt payments, “we think that the effect on consumer sentiment, market confidence, and, thus, economic growth will likely be detrimental and long lasting.”
That, S&P said, could also lead to a downgrade.
Let's be crystal clear. A downgrade would likely mean an automatic recession. Full Stop. And possibly worse.
The chances of a clean debt bill just got a lot of worse. One has to wonder if the visibility of the entire debate, with Republicans sounding so financially illiterate, has actually caused this entire process to be expedited.
With that information at hand, the President has placed the following final offers on the table.
Before bringing talks to a close Thursday, Obama gave Republicans three options: The far-reaching $4 trillion deal that includes taxes and cuts to entitlement programs; a $2 trillion package that would require each side to give only a little; and a much smaller package that would include no tax increases and no cuts to entitlement programs — and do much less to solve the nation’s financial problems.
I think it is safe to assume the other two packages included entitlement cuts, but there is currently limited reporting on what those entail. Either way, the S&P message certainly puts both of the larger deals in play, and may be playing a much larger role in the President's push for the bigger deal than commentators are assuming. In other words, it may not be a bluff or a strong hand. It may be a straight forward hand just being played.
Meanwhile, I suspect the Republican leaders are busy trying to give their caucus an emergency Econ 101 lesson.
House GOP leaders, meanwhile, have summoned rank-and-file lawmakers to an unusual Friday morning meeting to discuss the path forward, a few hours before Obama has scheduled a White House news conference.
Democrats also have a meeting in the morning.
On the other side of the Capitol, the Senate is frantically trying to figure how to work the ejection seat of the rocket our leaders have launched in an effort to do their best impression of Evel Knievel.
On Capitol Hill, leaders of both parties were focused increasingly on a proposal by the Senate Republican leader, Mitch McConnell of Kentucky, that could provide a way out of the stalemate on the debt limit.
“The White House talks are irrelevant, a sideshow,” said an aide to Senate Republicans involved in the negotiations, who spoke on the condition of anonymity to discuss the deliberations. “They have been overtaken by events.”
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Mr. Obama reiterated his refusal to sign a stopgap measure, a Democratic official said, but left the door open to Senator McConnell’s plan as a fallback option. The president told the leaders he still believed there could be a landmark deal with savings of about $2 trillion over a decade, the official said.
The problem...even if the middle deal is selected, the outcome would be inching us closer to an official recession, in the middle of an election year.
Almost as a footnote to the political maneuvering, the Congressional Budget Office released a little noticed analysis of what would be the impact of $2 trillion in deficit reduction over 10 years.
The findings show that that $2 trillion investment could ultimately yield a dividend of another $600 billion in savings over the decade — largely because of the impact on interest charges. But the report also included an ominous note that the immediate impact on a weak economy would be a drop in output.
The CBO built in some protests by beginning the deficit reduction at $100 billion the first year and then growing to $300 billion at the end of the decade. But even with that protection, it forecast a 0.4% drop in GNP in the first year which could be almost one-seventh reduction from the current projection of about 3% annual growth.
I am not sure that there is a win - win here for anyone. It is beginning to seem more like a no-win situation.
Finally, the team has finally figured out how to keep meetings on task and collegial.
“Cantor did not say one word” at Thursday’s meeting, two Democratic officials said. It is unclear why Cantor did not speak.
Aides described the meeting, which lasted about 80 minutes, as “composed and polite.”
As mentioned above, the President will be holding a press conference at 11am tomorrow. I suspect the pressure will be ratcheted up to maximum overdrive. If Republicans thought his casual mention of Social Security checks was unfair on Tuesday, they may not want to turn on the TV tomorrow.
Also, expect the results of the inner caucus meetings to leak relatively quickly in the morning.
Tomorrow will be interesting, to say the least.
Enjoy your evening.
6:17 AM PT: Morning Update:
The early word this morning from TV and newspapers is the McConnell/Reid Plan has continued to gain traction. Ezra Klein has a run down of the proposal as it stands and his opinion on how it plays out for Democrats if accepted.
This looks a lot more plausible than McConnell’s proposal, in part because it puts Democrats in a structurally worse position on two fronts:
1. It creates a fast-track process for spending cuts but not, as far as I know, tax increases. That is to say, it creates a new process in which it’s much easier to cut spending, but no easier to raise taxes. And process matters for outcomes.
2. A $2 trillion deal is not sufficient to get deficits down to manageable levels. In a year or two, we’ll need another $2 trillion, and if growth doesn’t pick up, even more than that. If this deal uses up most of the spending cuts that Democrats can accept, it means the next deal, which will also rely heavily on spending cuts because Republicans are better at refusing tax increases than Democrats are at refusing deals, will require spending cuts that go much deeper into the bone of Democratic priorities.
Think of it this way: The $4 trillion deal that the White House offered Boehner was 3:1 spending cuts to tax increases. If we move to a two-deal scenario in which the first deal is $2 trillion in spending cuts and then there’s a second $2 trillion deal that is, let’s say, 3:1 spending cuts to tax increases, the final deal is actually 7:1 spending cuts to tax increases, which means the spending cuts will have to go very, very deep.
The House Republican Caucus is expected to hold a press conference this hour, and we will quickly find out the if tea party has decided to step onto the financial roller coaster without shoulder or lap restraints, or if they have been convinced that discretion is the better part of valor.